Protecting Critical Company Assets – Part 2: DTSA and Employment Agreements
One important new feature of the Defend Trade Secrets Act of 2016 (DTSA) is the duty imposed on employers to notify “employees” of the whistleblower and anti-retaliation protection provisions of the DTSA.
In 18 U.S.C. § 1833(b)(3)(A), any agreement entered into or updated after May 11, 2016 with an “employee” that includes a provision that governs the use of confidential information must include a provision that explains the new criminal and civil liability immunity provisions provided to whistleblowers and the provision that expressly allows employees to use trade secret information in anti-retaliation lawsuits. This provision makes it clear that “any” agreement with an “employee” that includes a provision that “governs the use” of “confidential information,” and not just information that qualifies as a “trade secret,” is covered.
This new notice requirement has given rise to a number of questions:
No Retroactive Effect. The DTSA does not require employers to amend contracts with employees that contain a provision that protects confidential information and trade secrets where the contract was entered into before May 11, 2016.[1]
Any agreement entered into with a new employee after May 11, 2016 that includes a provision governing the use of trade secrets or confidential information needs to include this DTSA notice provision. The DTSA also indicates that when pre-existing agreements are “updated,” the notice provision needs to be included. The DTSA provides no guidance as to what constitutes an “updating” of a contract, but to be safe, anytime a written agreement with an employee is amended in any way, the conservative approach will be to include the newly required notice language.
Who Is An Employee? The DTSA broadly defines who must get this notice. In 18 U.S.C. § 1833(b)(4), the term “employee” is defined to include not only a traditional employee who gets a W-2, but “any individual performing work as a contractor or consultant for the employer.” As a result, if you have contracts with third parties who provide services and you require them to sign a non-disclosure agreement, this new DTSA notice language will need to be incorporated into all such agreements going forward.[2]
What Types of Contracts Are Covered? The DTSA notice provisions apply to “any” agreement with an employee that governs the use of trade secrets or confidential information. This provision makes it clear that the DTSA notice obligation is not limited just to a traditional employment agreement. Companies use a broad range of agreements to protect and regulate the use of confidential information with the various individuals who meet the DTSA’s definition of “employee.” Examples of these types of agreements are: work-for-hire agreements, technology/invention assignment agreements, non-disclosure agreements, and consulting agreements.
In addition to these agreements which are often signed at the commencement of employment, employers also need to consider the impact of the DTSA when entering into a separation agreement with a departing employee, or negotiating a settlement agreement with a former employee who has filed a claim or threatened to file a claim against the company. If these “back-end” agreements contain provisions that seek to govern the use of trade secrets or confidential information (or incorporate earlier such agreements by reference), then the DTSA notice provisions will need to be incorporated into those agreements.
What Type of Notice Is Required? The DTSA requires the immunity provisions and protected disclosures made as part of anti-retaliation litigation provision be described in detail as part of this notice duty. The DTSA expressly allows an employer to provide the required notice by making reference in the agreement to a separate policy document where the employer sets forth its policies on whistleblower protections, including the new DTSA provisions, so long as a copy of the policy is provided to the affected employees. Some companies may opt to develop a policy rather than incorporate detailed language in the agreement itself. Either approach is fine.
Consequences of Non-Compliance. If a contract does not contain the required DTSA notice provisions and no compliant whistleblower policy has been developed and referenced in the agreement, then the DTSA imposes a penalty that limits the employer’s available remedies in subsequent trade secret litigation.
The good news is that a noncompliant agreement continues to be enforceable in full force against the former employee, but the trade secret owner will not be able to recover the exemplary damages (two times the actual damages awarded) nor will it be able to recover its attorneys’ fees and litigation costs, even if it proves willful misconduct.
Since most cases filed against a disloyal employee will include multiple claims, in addition to one under the DTSA, e.g., a violation of the Virginia Uniform Trade Secrets Act or a breach of contract claim, it is possible that attorneys’ fees may be recoverable by the employer under one of those other claims. As a consequence, the only real “penalty” to an employer who does not include the DTSA notice provision as required may only be the loss of a double-damage recovery.
Concluding Remarks
At this point, employers should examine all contracts that the company uses to protect or govern the disclosure or use of confidential information, as well as their supporting policies. The review must include all agreements and policies, not just those applicable to your own employees, but also those used with independent contractors, consultants and other vendors who are granted access to or help develop the company’s confidential information and trade secrets.
Each employer must evaluate whether the notice language under the DTSA whistleblower and retaliation claimant protections needs to be incorporated into agreements to preserve the full scope of remedies available if a misappropriation occurs. This includes a review of termination agreements and exit processing procedures to ensure that appropriate protocols are in place not only to secure the return of confidential and trade secret information but to make sure that any agreements entered into at that juncture, even if they merely incorporate by reference earlier non-disclosure agreements, incorporate the use of the notice language needed to safeguard rights provided by the DTSA.
It is important when drafting changes to your employee agreements that close attention is given to the full details of the immunity and anti-retaliation provisions of the DTSA in order that the disclosure made will be fully compliant. Employers desiring assistance with developing and implementing that language may contact David Paxton or any member of Gentry Locke’s Employment Law Team for assistance.
[1] 18 U.S.C. §1833(b)(3)(D) (“This paragraph shall apply to contracts and agreements that are entered into or updated after the date of enactment of this section.”)
[2] Notably, the DTSA notice provisions only apply to agreements entered into with an “employee” which is defined as an “individual.” In today’s world, many “individuals” form an entity, e.g., LLC or PLLC, through which they provide consulting services. On its face, an agreement with a LLC that limits or governs the use of trade secrets and confidential information would not technically be covered by the DTSA notice requirement since the LLC is not an “individual.” However, the business realities and prudence strongly suggest that even if the non-disclosure agreement is with a LLC or other business entity where there is one key individual from that entity who will be performing most of the services, the DTSA notice provisions should be included.
