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New law protects trade secrets

President Obama has signed a new federal law that expands the ability of companies to sue when someone steals or misuses a trade secret.

The law also contains new requirements for employment contracts that refer to trade secrets – which means that many such agreements should now be revised.

The “Defend Trade Secrets Act,” or DTSA, will change the legal landscape by making misuse of trade secrets a federal issue, comparable to patent, trademark and copyright infringement.

In the past, each state has had its own rules for trade secrets. In all but three states (Massachusetts, New York and North Carolina), these rules were based on something called the “Uniform Trade Secrets Act.” But while the act has the word “uniform” in the title, it really isn’t all that uniform because each state has adopted a number of variations on it.

The new DTSA doesn’t replace the current state laws, but it does give companies an alternative way to take action if an employee, a former employee, or a competitor misuses confidential business information.

There are two big advantages to DTSA. One is that it allows a company to sue in federal court, regardless of where the parties live and how much money is at stake. This is new, and federal court can provide a number of advantages. For instance, a federal suit eliminates the extended squabbling that can often happen in these lawsuits over which state’s law should apply.

The other advantage to suing under DTSA is that a business can, in some cases, get a court to authorize the immediate seizure of property necessary to prevent a trade secret from being divulged or exploited – without first informing the other side.

To do this, a business must (1) show that it’s likely a trade secret is being misused, (2) specifically describe the property and where it’s located, and (3) show that if the other side were tipped off in advance, there’s a good chance it would destroy, move or hide the property.

After a seizure, there must be a hearing within a week. If it turns out the seizure was invalid, the other side can sue for any damages.

These kinds of “secret” or “gotcha” seizures are currently available in cases involving trademarks and copyrights, but this is the first time they have been allowed in trade secret cases.

DTSA doesn’t specifically say what kinds of property can be seized. In trademark and copyright cases, it’s the infringing goods or evidence of infringement. In DTSA cases, presumably, it could include documents, cell phones, computers, e-mail servers, or even products created using a trade secret.

The law applies to any trade secret misappropriation that occurs after May 11, 2016.

A separate part of DTSA says that people can’t be sued under the law for revealing a trade secret if they do so (1) as a “whistleblower,” when reporting a suspected violation of the law to the government, or (2) as part of a lawsuit against their employer, if they reveal the secret to the court but not the public at large.

Further, businesses must notify employees, consultants and contractors of their right to reveal trade secrets in these two situations as part of any employment agreement that refers to trade secrets and that’s entered into after May 11. This includes hiring agreements, separation and severance contracts, non-compete agreements, and some parts of employee handbooks.

There’s no monetary penalty for not including this notification, but a company that doesn’t include it and then sues someone under DTSA won’t be allowed to collect punitive damages or force the other side to pay its attorney fees. This deprives a business of significant leverage it could use to settle a case, so it’s a good idea to make sure the language is included.

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