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New Federal trade secrets law conditions attorney fees and exemplary damages on notice of whistleblower immunity.

Posted on May 12, 2016

The new Federal law protecting trade secrets is the first in the nation to require notice of the existence and scope of whistleblower immunity as a condition for certain remedies.  While whistleblower protections are common in state trade secret laws, with various consequences for employer retaliation, the linking of exemplary damages and attorney fees to employee notice of whistleblower protection is new.

Under the new Defend Trade Secrets Act (DTSA), employees and independent contractors that reveal trade secrets or confidential information in violation of their duty of nondisclosure are immune from liability if the disclosure:

(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.

Employees may also disclose trade secrets to their attorneys in connection with any lawsuit claiming retaliation for the employee reporting suspected violations of the law, and may use the trade secrets in such lawsuits provided that any document containing the trade secret is filed under seal, and the trade secret is not otherwise disclosed except pursuant to court order.  Notably, the immunity precludes the employee from being “criminally or civilly liable under any Federal or State trade secret law.”  The immunity is also limited to trade secrets and confidential information actually disclosed by the employer to the employee, explicitly excluding immunity for acts that are otherwise prohibited such as the unlawful access by unauthorized means. 

Pioneered in California, notice requirements such as that adopted in the new law require employers to inform employees of whistleblower immunity.  Under the DTSA, the whistleblower immunity notice is required “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  However, compliance only requires that the agreement include “a cross-reference to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law.”  Moreover, the notice is only required prospectively, in “contracts and agreements that are entered into or updated after the date of enactment” of the DTSA.  No small business exception for the whistleblower immunity notice provisions is contained in the DTSA. 

The penalties for failure to provide whistleblower immunity notice are the novel aspect of the DTSA:  the employer cannot recover exemplary damages or attorney fees in an action against an employee that did not receive notice.  Importantly, the penalties are not linked to any requirement that the employee have disclosed the trade secrets as part of a whistleblowing action.  Remedy in any action under the DTSA for theft of trade secrets by an employee is therefore limited to only actual damages, if the employer cannot establish that the whistleblower immunity notice was provided to the employee in the agreement contracting for non-disclosure, either directly or in a referenced policy document that the employer can show was provided to the employee. 

While the novel remedies limitation applies only to actions under the DTSA, which does not pre-empt state trade secret laws, the DTSA is arguably more favorable to employers than many applicable state trade secrets laws.  Moreover, this new ground broken by the DTSA tying remedies to whistleblower immunity notice is likely to attract state attention, serving as a model for future state law revisions.  Companies relying on trade secret protections should therefore prioritize review of their agreements before any new hires are made, or any existing agreements are updated.