Trade Secrets Now Protected by Federal Law

Until now, trade secret protection has exclusively been a matter of state law, with differences between those laws posing challenges for many businesses. In May 2016, President Obama signed the Defend Trade Secrets Act (DTSA), which creates a new federal cause of action for trade secret misappropriation. The DTSA is significant for several reasons:

• First, by creating a federal cause of action for trade secret theft, it provides businesses with access to federal courts, not just for DTSA claims, but also for tag-along state law claims, such as breach of confidentiality or non-compete agreements.
• Second, the DTSA provides some unique remedies not available under state law, including immediate recovery of trade secret materials without notice – before the misappropriator can destroy or disseminate them.
• Third, the DTSA requires employers to modify their trade secret agreements – in order to obtain certain statutory remedies, companies must provide specific disclosures to their employees.

The following sections provide a summary of Minnesota’s trade secret act, identify some key differences between the Minnesota law and the DTSA, and discuss the practical and strategic issues for businesses to consider in the wake of the DTSA.

I. State and Federal Trade Secrets Laws

a. The Minnesota Uniform Trade Secrets Act.

The Minnesota Uniform Trade Secret Act allows businesses to protect “trade secrets” from “misappropriation.”

Under Minnesota law, a “trade secret” is information, including “a formula, pattern, compilation, program, device, method, technique, or process,” that a company: (i) reasonably tries to keep secret; and (ii) is valuable because the company keeps it secret. Classic examples include the recipe for Coca-Cola or the formula for WD-40. To be considered a trade secret, the owner must take steps to protect it – for example, by requiring employees to sign confidentiality agreements, storing secret data in password-protected files, or safeguarding manufacturing processes behind locked doors.

“Misappropriation” occurs when someone improperly acquires a trade secret or discloses a trade secret that was acquired without its owner’s consent. Minnesota law permits companies to seek injunctive relief against and damages for misappropriation, plus attorneys’ fees and special damages if the misappropriation was “willful and malicious.”

b. The Federal Defend Trade Secrets Act.

The DTSA generally defines “trade secret” and “misappropriation” similarly to Minnesota trade secrets act, although arguably it employs a broader definition of “trade secret.” However, the DTSA differs from the Minnesota statute in several important respects.

First, the DTSA permits a trade secret owner to seek an emergency order without notice to the target which, if granted, results in a federal officer physically seizing the allegedly-stolen property until the court holds a hearing (which it must do within seven days). The court may grant this relief in “extraordinary circumstances” when “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Conversely, however, if the court improperly grants an order that harms the alleged misappropriator, that party may seek damages and attorneys’ fees from the party who sought the emergency order.

Second, the DTSA forbids injunctive relief that prevents an individual from “entering into an employment relationship,” and requires that any conditions the injunction places on future employment “be based on evidence of threatened misappropriation and not merely on the information the person knows.” This prevents companies from morphing trade secret claims into more severe non-compete restrictions through a legal argument called the “inevitable disclosure” doctrine (the status of which is somewhat unclear in Minnesota). However, the DTSA does not pre-empt state law, so in states that accept the inevitable disclosure doctrine the owner may still bring such a claim separately.

Finally, the DTSA immunizes individuals from liability for disclosing trade secrets in connection with whistleblowing activities and requires employers to disclose this immunity “in any contract or agreement . . . that governs the use of a trade secret or other confidential information.” An employer may comply with this requirement by including certain language or cross-referencing a whistleblower policy containing such language in its confidentiality agreements. If it does not, it cannot recover exemplary damages, punitive damages, or attorneys’ fees in a DTSA claim.

II. Strategic and Practical Considerations

The DTSA likely will have immediate strategic impacts on trade secret litigation. First, it will enable companies to bring related claims (such as for breaches of confidentiality or non-compete agreements) in federal court, where judges often are more adept at addressing them. Second, its seizure remedy offers immense protection against “worst case” scenarios, such as where a departing employee threatens to immediately disclose confidential information to a competitor.

In the wake of the DTSA, employers should take the following practical steps:

• Add the necessary whistleblowing disclaimers to your confidentiality agreements – and implement confidentiality agreements, if you haven’t already done so.
• Consider auditing your policies and procedures protecting confidential information, to ensure they adequately protect your trade secrets and are being followed.
• Audit your confidentiality, non-compete, non-solicit, and similar agreements to ensure they comply with applicable law and are being used and enforced properly.

If your business needs assistance auditing or updating its confidentiality agreements and restrictive covenants, or if you would like further information on post-employment restrictions, please contact Daniel Lowin, at (952) 921-4623 or dlowin@seatonlaw.com, or any other attorney at Peters, Revnew, Kappenman & Anderson, P.A.