Revise Nondisclosure Agreements to Comply with New Law

By Allen Smith, J.D. May 16, 2016
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Compliance can be a matter of degrees. The new Defend Trade Secrets Act (DTSA) provides employers with a range of options to comply with their notice requirement for whistle-blowers.

Enacted May 11, the law requires notice in new and revised nondisclosure agreements about a whistle-blower’s right to disclose trade secret information to federal enforcement authorities. How employers go about complying with the act will vary depending on their risk tolerance, said Robert Milligan, an attorney with Seyfarth Shaw in Los Angeles and Century City, Calif.

Employers aren’t wasting any time exploring how to proceed, according to Thomas Muccifori, an attorney with Archer & Greiner in Haddonfield, N.J. “We are being inundated with calls from employers already asking what they need to do regarding what revisions they need to make to their nondisclosure, confidentiality and noncompete agreements in order to comply with DTSA,” he said. “DTSA will have an immediate practical impact requiring employers to immediately change their agreements governing trade secrets.”

Language from the Statute

Plug in the language from the statute if you want foolproof compliance, Milligan said. That language states:

“Immunity from Liability for Confidential Disclosure of a Trade Secret to the Government or in a Court Filing:
(1) Immunity—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.

(2) Use of Trade Secret Information in Anti-Retaliation Lawsuit—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.”

Other Options

That’s a mouthful, though, and some employers want to be more concise. So paraphrasing is another option, Milligan noted. Or an employer might choose to include either the law or the paraphrased language in its whistle-blower policy and merely refer to the policy in a nondisclosure agreement.

It remains to be seen if courts will take a stringent approach and rule that if an employer deviates from the statute’s language, then the whistle-blower immunity language will be deemed invalid.

Another consideration: The law provides a great opportunity for businesses to review their nondisclosure agreements and think about what they want to accomplish, Milligan added. Are things identified in the agreement as confidential really confidential? If not, they should be taken out. Are some parts of the agreement ambiguous? If so, they should be clarified.

Lawsuits in Federal Court

Though the whistle-blower immunity provisions will have the most immediate impact on HR, they actually were last-minute add-ons to the law, Milligan said.

The act’s main goal was to permit trade secret owners to bring private rights of action in federal court against those misappropriating trade secrets.

“With a more robust staff and greater experience on the bench, including with respect to having original jurisdiction over intellectual property matters, federal judges are generally better equipped to efficiently, consistently and fairly deal with the complexities of trade secret claims, particularly at the temporary restraining order and preliminary injunction stage,” said Tobias Schlueter, an attorney with Ogletree Deakins in Chicago. By suing in federal court, employers will be able to bypass all of the differences in trade secret litigation at the state level.

A new ex parte—meaning without notice or an answer from the accused party—seizure provision will give would-be domestic thieves significant pause, Schlueter added. “The Economic Espionage Act provides seizure rights if there is evidence that the trade secrets are being taken out of the country,” he noted. “But it does not apply to domestic misappropriation. This left companies with almost no ability to achieve early seizure of property to prevent the dissemination of their trade secrets. The DTSA fixes that limitation.”

He noted that any property that could disseminate trade secrets can be seized, including smartphones, computers, hard drives, flash drives, cloud storage, e-mail accounts, or Internet sites or contents.

Critical Role

“HR will remain the front-line defenses for the protection of trade secrets,” said Peter Steinmeyer, an attorney with Epstein Becker Green in Chicago. He said that whether through confidentiality clauses or agreements, employee training or exit interviews, HR plays a critical role as it:

  • Educates employees about what constitutes a trade secret and how trade secrets are protected.
  • Reminds departing employees of their continuing duties to protect trade secrets.
  • Has ever-vigilant eyes and ears open for any signs of trade secret theft.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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