Trade Secret Rights Lost Because of Defective Employment Agreement

In May, 2016, the Defend Trade Secrets Act took effect, which nationalized the enforcement of trade secret violations by allowing parties to sue in Federal Court.   Before the Act was passed, each State in the nation had its own trade secret law.  The federal law requires that employment agreements at your company be modified if you want to receive the full benefit of the law.  If you do not make your employment agreement DTSA compliant, the you will lose your right to claim punitive damages and attorney fees if you ever need to to sue to enforce your trade secret rights.

In May, 2016, the Defend Trade Secrets Act took effect, which nationalized the enforcement of trade secret violations by allowing parties to sue in Federal Court.   Before the Act was passed, each State in the nation had its own trade secret law.  The federal law requires that employment agreements at your company be modified if you want to receive the full benefit of the law.  If you do not make your employment agreement DTSA compliant, then you will lose your right to claim punitive damages and attorney fees if you ever need to to sue to enforce your trade secret rights.

Here is the type of situation in which you could be seriously hurt if your employment agreements are not DTSA compliant:

A key employee has left your company to work for a major competitor.   You discover that he forwarded key documents to his private e-mail that contain a secret chemical formula for one of your key products called SEA FREE for a plastic that biodegrades in sea water into harmless components.  The employee also transferred business plans for your next generation of products, and he took customer lists that include detailed information about each customers needs, ordering patterns, and pricing for each customer.  This is a theft of your trade secrets and a violation of his employment agreement.  You are rightly furious.

You send a letter to the former employee demanding that he immediately provide proof that he has destroyed the information and demand a list of everyone to whom he has sent the materials.  You also send a cease and desist letter to the competitor demanding that they destroy any of your company’s documents that they received from your former employee and not use any of the information.   They claim they did not receive anything, but you soon start seeing a migration of customers to the competitor and see a press release that the competitor is about to come out with a product that competes with SEA FREE.   You sue the employee and the competitor under the Defend Trade Secrets Act.

At trial, the evidence proves that the competitor had specifically solicited your former employee to provide them with the trade secrets in exchange for a huge hiring bonus.  The judge and jury rightly find this conduct to be reprehensible.  You receive an award of your actual damages.   The Defend Trade Secrets Act also provides for punitive damages and attorney fees in cases such as this, which the judge and jury would love to award to you.  But the defendants file a motion to exclude such damages.  The judge has no choice but to grant the motion, depriving you of millions of dollars in punitive damages and denying your attorney fees request.  This happened because the employee’s June, 2016 employment agreement with you did not have an immunity provision in it required by the Defend Trade Secrets Act.  See 18 U.S.C. § 1833.

The Defend Trade Secrets Act requires that any new or updated employment agreements, consulting agreements, or independent contractor agreements entered into after May 11, 2016 must contain the following notice:

“An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that — (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

“An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual — (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.”

The penalty for failing to include this notice is the loss of the right to punitive damages and attorney fees.   Adding this language to your employment agreements is an easy fix.  Do it today before it is too late.