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Company Confidential

The new federal trade secrets law has major ramifications for intellectual property and employment disputes.

Company Confidential

Employers everywhere need to know that it’s time to update employment agreements and contracts that outline the treatment of sensitive company information. Businesses that don’t revise those agreements face losing out on some potential legal damages if the company finds itself in a court case wrangling over the alleged theft of trade secrets by a former employee. That’s all due to the new federal Defend Trade Secrets Act (DTSA), which was signed into law by President Barack Obama on May 11.

The law clears the way for companies to pursue trade secret claims in federal court, but does not preclude businesses from filing cases in state court if companies and their counsel see that as a better venue for a specific case. Yet for many companies the most pressing issue under the new law will be the seemingly routine business of updating some paperwork.

“Employers who wish to comply with the law need to revise their standard form agreements, to include the magic language that’s required,” says Dan Oberdorfer, a partner with the Stinson Leonard Street law firm, which has co-headquarters in Minneapolis and Kansas City, Mo. He says the revisions include “anything that has a confidentiality or trade secret provision and is with your employee, contractor or consultant.”

Even business owners who think that the chances of being embroiled in trade secret litigation are remote need to be aware of a key provision of the new federal law, according to attorneys who specialize in intellectual property and employment cases.

The DTSA specifically provides immunity for whistleblowers sharing trade secrets with government agencies or an attorney in connection with suspected illegal activity by a company. Employers who fail to include notification of the immunity provision in employment contracts and agreements that reference handling confidential information would forfeit the ability to be awarded “exemplary damages or attorney fees” under the law.

Broad ‘employee’ definition

The portion of the DTSA dealing with immunity states “the term ‘employee’ includes any individual performing work as a contractor or consultant for an employer.” In other words, businesses need to pay attention to agreements with people who don’t work directly for the company.

“If the employer is following the law, it should have a reference to the immunity that’s provided under the statute,” says Oberdorfer. “It’s something that companies should be thinking about and doing today.”

Nearly all U.S. states, including Minnesota, previously had adopted the Uniform Trade Secrets Act, which was meant to provide consistent standards from state to state. The UTSA defines a trade secret as information that has an economic value and is not “readily ascertainable by proper means.”

Trade secret owners also need to be able to demonstrate that they have taken steps to keep the information secret. While the new federal law generally parallels the UTSA, it is prompting many attorneys to recommend that businesses review employment, non-compete and non-disclosure agreements to ensure that the documents clearly outline the handling of sensitive company information and the types of information that are considered trade secrets.

Dean LeDoux, a principal with Minneapolis-based Gray Plant Mooty law firm, notes that how a company handles its confidential information will be relevant if the business lands in court to defend its trade secrets.

“You can call something a ‘trade secret,’ ” says LeDoux. “But if you don’t treat it like it really is, then it’s going to be pretty difficult to get relief on it.”

The legal challenges highlight the intersection between intellectual property and employment law that are often at the center of such disputes. The most common legal fights over the misappropriation of trade secrets usually have nothing to do with international cyber-thieves. The issue generally revolves around a company that charges that a former employee took trade secrets as he or she was walking off the job.

“Your archetypal case is an employee who leaves the business to start his or her own business or go to a competitor, and as they are exiting, downloads a bunch of data,” says Oberdorfer.

“We see a lot of cases along those lines, and I think they multiplied with the way technology has developed,” says Oberdorfer, noting that today large amounts of data can be transferred quickly.

But technology also allows companies and their lawyers to do forensics on a former employee’s actions.

Digital fingerprints

“There are ‘fingerprints’ that get left in the computer systems,” says Oberdorfer. “You can actually follow along and see what somebody did.”

For businesses, the downside of proliferating technology is the creation of potential minefields on the road to safeguarding company trade secrets.

“The technology that we have now is making protecting trade secrets very, very challenging,” says V. John Ella, an attorney with Minneapolis-based Trepanier MacGillis Battina. “It’s not like you have documents in a file cabinet.”

At many companies it’s become commonplace for employees to access company documents through their own personal phones and devices, a practice that’s often referred to as BYOD, short for “bring your own device.”

While BYOD programs may be convenient for companies and employees alike, Ella notes that it can create a host of problems if a company finds itself at odds with a former employee over sensitive data.

“For companies trying to protect their information, it’s a complete headache,” says Ella. “If you allow your employees access to company data on a non-company device, then arguably you haven’t taken appropriate steps to maintain confidentiality. If it’s outside your system, it’s out of your control.”

In the current complicated landscape, Ella says, companies likely need to involve several different internal departments—information technology, human resources, legal/compliance—to deal with cyber-security issues and concerns.

“It is a more challenging environment in that respect than ever before,” says Ella.

Acting fast

One local attorney says that the new federal law may offer some advantages for companies that are trying to move quickly to protect purloined digital trade secrets.

“This is significant for high-tech companies particularly, but really any companies looking to protect trade secrets across state lines,” says Randy Kahnke, a partner with Faegre Baker Daniels, a law firm with its largest office in Minneapolis.

“You can very quickly get a federal court order that can be enforced in another state. Many times in trade secret cases, time is of the essence.”

While company insiders may be more common suspects in trade secret theft cases, businesses need to remember that outside contractors and consultants may also have access to sensitive company information.

“There are a lot of perpetrators or trade secret thieves. It could be employees, it could be contractors, it could be vendors,” says Kerry Bundy, also a partner with Faegre Baker Daniels. She adds that other potential threats could include individuals or groups that may have licensed a company’s technology, or even potential joint venture partners.

“There are threats all around,” says Bundy.

Even so, the greatest risk for most companies is not some hacker on the other side of the world.

“The majority and biggest threat is the insider,” says Bundy.

Attorneys note that sometimes companies will try to claim that nearly every piece of company information is a trade secret. But that will be a tough sell in court. Companies often claim that customer lists are trade secrets. But attorneys say that in many cases, such information is not difficult to find through public sources.

“I think those customer list cases really boil down to specific facts,” says Oberdorfer. He explains that the court might look at how the client list was maintained and how detailed the information was that’s included.

For example, was it simply a list of names and phone numbers or did the list include very specific customer and pricing information?

Attorneys say that if it comes down to a court fight, companies will have to be very specific about what makes certain information a trade secret.

Overplaying your hand

“A lot of trade secrets claims fail,” says Ella. “It’s a very strict test.”

Larger companies may see more potential benefit to the new DTSA law than small businesses do.

“If you’re a major company, a national company, then it does provide a significant benefit of being able to get into the federal court system,” says LeDoux. “I do think that there will be a significant number of cases around the country that do get filed in federal court under this statute.”

Overall, LeDoux says that business litigation is on the decline. Trade secret cases, in contrast, are increasing.

But some lawyers contend the new law won’t mean big changes for most Minnesota companies.

“With respect to businesses in Minnesota, this is not going to have a dramatic impact,” says Joe Hammell, a partner with Minneapolis-based Dorsey & Whitney. “For the most part, it parallels existing state law.”

Non-lawyers may wonder what the difference is between bringing a case to federal court instead of state court. Attorneys say that there can be key distinctions.

“If somebody’s thinking that they may take a case all the way to trial, they may prefer to go to state court,” says Hammell. He points out that federal cases require a unanimous jury verdict, but state cases do not. In some states, he adds, attorneys believe that standards are higher in federal court than in state court.

“There are some states where there is a real difference in quality between the federal judiciary and the state judiciary,” says Hammell.

The new law also offers the potentially dramatic remedy of getting a court order to seize the purported trade secrets.

“The court can order the U.S. marshals to go out, on a temporary basis, and seize the servers, laptops, USB drives, whatever contains the alleged trade secrets,” says Oberdorfer.

But he indicates that a plaintiff has to make the case that such a seizure is imperative to protect the trade secrets.

Even the new DTSA law notes that the seizure option should only be considered in “extraordinary circumstances.” He thinks that it’s going to be a tough standard for many companies to meet.

Given that the law is brand-new, there’s little guidance so far about how the federal courts will interpret some of the provisions of the DTSA. Consequently, there remain a host of legal unknowns.

“We’ll have to see how the courts interpret it,” says Oberdorfer of the statute’s seizure language.

The DTSA is prompting many companies to take a fresh look at defining and protecting trade secrets. Local attorneys say that doing so now could prevent future legal headaches.

“I think it’s important for employers to identify what their trade secrets are so the employees can know that’s information that needs to be protected,” says Bridget Hayden, a patent attorney with Dorsey & Whitney.

“This is an opportunity for companies to protect their information by using the really quite significant power of the federal court system,” says Kahnke. “But in order to take advantage of that, they really need to be tuned into what their trade secrets are and they really need to be tuned into what they need to do to protect those trade secrets, before they find themselves in an emergency situation.”

Burl Gilyard is TCB’s senior writer.

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