President Barack Obama recently signed into law the Defend Trade Secrets Act (DTSA), which went into effect at signing. With the passage of this law, trade secrets, which have historically been protected only at the state level, will have some more federal protections.
Defining Trade Secrets
What a trade secret is, is partly determined by state law. However, there are a few generic definitions we can discuss, as well as the definition used by the new federal law.
For starters, trade secrets are generally defined by the World Intellectual Property Organization (WIPO) as “any confidential business information which provides an enterprise a competitive edge.”
This might include sales lists, consumer profiles, company methodologies, or advertising strategies. However, that is just a short list. What constitutes a trade secret can actually be quite broad.
The Uniform Trade Secrets Act (UTSA), which I will talk more about in the next section, defines the term as “information, including a formula, pattern, compilation, program, device, method, technique, or process,” that derives economic value from being kept secret and which the company actually does try to take reasonable steps to keep secret.
Finally, the new federal law – the DTSA – uses the definition from section 18 U.S. Code § 1839, which defines trade secrets as, “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.”
Basically, no matter how you define it, if you use it to conduct your business, its financial benefit is in part due to your competition not knowing it, and you take steps to keep it a secret, then it will likely be constituted as a trade secret.
The Past State of Protections
As mentioned above, there is a Uniform Trade Secrets Act (UTSA). However, this is not an actual law – only a suggested way to handle the law. Despite this, in one way or another, the UTSA is applicable in a wide amount of companies throughout the country.
This is because almost every state has adopted the uniform law in some form or the other. While some changes may have been made to the basics of the law, there is a good chance that the UTSA should be the guiding light for your trade secrets policy.
Determining if a Trade Secret Exists
One of the most important factors listed in the UTSA might be where they suggest six factors courts can use to determine if a trade secret exists.
If you think you have a trade secret – especially if you think that trade secret is being misappropriated – then ask yourself the following:
- How well is the information known outside of your business?
- How widely known is the information within your business? (E.g., does everyone use it or is it only given to employees with NDAs, etc.)
- What have you been doing to protect the information?
- If your competitors were to get the information, would it be valuable to them?
- How much would it cost your competitors to get the information on their own?
- How hard would it be for your competition to get this information?
The answers to these questions will help a court determine whether what you have is protected under trade secret laws that might be in place in your state. For example, if you have a customer list that is not widely known to anyone else (and would be of great value to your competition if they could get it) nor would it be easy to get, plus, you keep it pretty well locked with only those employees with a need-to-know given access to it, then it is likely a trade secret will be found.
However, if a detailed internet search could get that same list – or a substantially similar one – or you have, up to now, been pretty lax with your protection of the list, then it is a lot less likely to be protected.
How a Trade Secret Is Protected
When a trade secret is found under state law – when such a law exists – then there are lots of ways it might be protected if it is wrongfully acquired by anyone else or is used by someone in an unauthorized manner (i.e., there was a breach of confidence).
For example, an injunction against the person using the trade secret is likely, as well as any monetary damages gained by the one unlawfully using the trade secret or lost by the company whose trade secret is illegally being used.
What the New Law Says
As I said, most states – though admittedly not all – had adopted the UTSA in some variation or the other. While what specially constituted a trade secret might have varied slightly or what constituted a violation of the act or how the trade secret was protected might have depended on the state, you probably already had some type of protection in place.
So what is new?
For starters, creating a federal law makes the process more standard – which is especially helpful if you were in one of those few places (most notably New York) that has not adopted the UTSA. However, it is also useful when the violation is more widespread.
For example, let’s say you have a trade secret you are trying to protect that you use in your businesses across the country. It is subsequently taken by a former employee – who had signed an NDA – when they leave you to work for your biggest competitor, who operates in several of the states in which you do business plus several more in which you have not yet expanded.
A federal law makes handling this situation a lot easier.
So what exactly does the new law do, though?
Well, for starters, it is not meant to preempt state law. Instead, it is meant to supplement state law. That means you have more freedom to choose the law that is most beneficial to you when you are making a claim.
The big thing the federal law provides (other than a whistleblower provision, which I will talk more about in the next section) is several different remedies you can have enforced to protect your trade secret should it be unlawfully misappropriated.
- You will probably be able to get an injunction. It should be noted, though, that an injunction against a former employee working for the competition will not be given under federal law just because the employee knows the trade secret information. However, if the employee threatened to or did use the information, an injunction may be granted.
- In very detailed and limited circumstances, you could potentially have a court seize any property needed to fully protect your trade secret. This is not a common remedy and will only be used in the most extreme situations – such as if there is a flight risk.
- As is the case in most trade secret laws, you can recover your damages from the other party.
- In some cases, you might be able to receive royalties in lieu of damages.
- If the trade secret use was willful or malicious, you might be able to receive exemplary damages and recover your attorney’s fees.
What the New Law Means for You
For starters, the creation of this new federal law is a good time for you to review your current trade secrets.
- How are they being protected?
- Are you monitoring to make sure they are not being improperly used?
- If you do suspect that they are being improperly used, are you taking the proper steps to shut down that misappropriation as soon as possible?
Use this new law as a way to evaluate any policies that might be effected.
In addition to double checking the current state of trade secret protection within your company, you might want to take an additional step to make sure you are fully protected by the federal law.
Under its whistleblower provision, the federal law requires that the employer provide notice to employees about a specific immunity from this law. If, while reporting a potential violation of another law, a trade secret is revealed, the employee, consultant, or independent contractor has immunity from the remedies listed in the last section.
Employers must actively give notice of this immunity, or at least cross-reference it to another section discussing the immunity, anywhere they discuss trade secrets or confidential information. Otherwise, they could lose their right to sue for exemplary damages or attorney’s fees.
That being said, while you are looking at all of your policies just as a double check, make sure you are also actively adding information about this immunity to any employment agreement, handbook, or contract.
Also, as you should do anytime you change any of these documents, make sure you communicate this change with your employees in the manner you usually make such announcements.
As usual, it is always a good idea to review your policies both periodically and any time an applicable law is created or revised that could affect you. You should also take some time to update your policies with the new information on whistleblower immunities. If you have any questions or want to verify that you are in compliance, make sure you seek help from an experienced employment law team.