Defend Trade Secrets Act (DTSA) of 2016

Trade Secret Misappropriation Recourse and Whistleblower Protection

New Legislation Impacting Business

All businesses have intellectual property and trade secrets.  A company is in business because it is offering something of “value” which can be a number of things from product to process to promotion.  For example, proprietary software, product systems, new product generation, or even client lists.  The loss or misappropriation of such can be devastating to the success and profitability of a company.

In a measure to further protect businesses, the Defend Trade Secrets Act (DTSA) of 2016 was signed into law on May 11, 2016 after being unanimously passed in the Senate and ratified in the House. It creates a federal cause of action for trade secret misappropriation.  The central provision of the DTSA will be codified as 18 U.S.C. § 1836(b) and reads:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

What this Means

A “trade secret” means “all forms and types of financial, business, scientific, technical, economic, or engineering information …  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 another person who can obtain economic value from the disclosure or use of the information.”

Misappropriation includes: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret with knowledge that either (1) it is a trade secret or (2) it was obtained through improper means. The “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”

The DTSA also creates an ex parte seizure procedure for use in extraordinary circumstances where the party against whom the seizure is ordered would “destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person….”

Protection for Whistleblowers Under DTSA

The DTSA seeks to protect whistleblowers from criminal or civil liability for disclosing a trade secret if the disclosure is made for purpose of reporting a violation of law. Employers have an affirmative duty to provide employees notice of the new immunity provision in “any contract or agreement with employee that governs the use of a trade secret or other confidential information.” Failure to comply means that the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA for theft of trade secrets against an employee.  The definition of “employee” is drafted broadly to include contractor and consultant work performed by an individual for an employer.

What Companies Should Do Next

Companies should update their employment manuals, employment agreements and confidentiality agreement to disclose the whistleblower immunity provisions in the DTSA. Otherwise the company is not eligible to recover double damages or attorney fees in trade secret litigation.

Trade Secrets

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So You Are Presented with a Form Contract?

What About It?

When you or your company is presented with a form contract prepared by the other side in a transaction, red flags should go up. This is because the other side in the transaction has had its lawyers draft the form contract in order to maximize the interest of that party – that is what lawyers usually do for their clients.

Maximizing interest can take the form of setting forth only the obligations of the opposing party without setting performance obligations for the drafting party. Or a form contract often limits the damages that may be pursued against the drafting party without setting similar limitations for the opposing party.

Here are some additional items to be on the lookout for:

Indemnity and Hold Harmless Provisions in a Form Contract

The other side will often insert language that you or your company will be responsible for any and all claims that arise out of the contractual arrangement. Don’t agree to it. It is certainly appropriate for you to agree to be responsible for any claims that arise out of your errors or omissions, but you do not want to be in the situation of agreeing to hold harmless or indemnify some other party for its shortcomings.

Venue and Jurisdiction in a Form Contract

Many times a form contract will state that any dispute about the contract or its performance shall be brought exclusively in the home courts of the other party. Don’t agree to it. You never want to agree that you can be hauled into court in some distant place where the cost of litigation and inconvenience is far greater than would otherwise be the case. The best rule is for the contract to be silent on courts and venue as there are general principles of law that allow either party to bring a claim in a court that has significant contacts with the subject matter of the dispute and where the parties are registered or have done business. At the worst, try to compromise so that any claims against you must be brought in your home county, and any claims against the other party to the contract will be brought in its home county.

Arbitration Clauses in a Form Contract

Arbitration is another way for disputes to be resolved privately rather than in a court. One of the main drawbacks of arbitration is that the parties have to pay the fees of the arbitration company and for the arbitrator(s). Except for a relatively modest filing fee, the courts and judges are free – subsidized by all taxpayers. Also, if arbitration is agreed to, it is much more economical to conduct arbitration under the arbitration code of the state where the matter will be heard rather than to use the American Arbitration Association or some other arbitration group which charges stiff up-front fees and significant hourly rates for the one or three arbitrators who preside. Arbitration under the law of the state gives the same protection as arbitration in general, but administration fees to an outside company are avoided and the parties together can select the arbitrator or have one appointed by a local court.

These are not the only items of concern that might be found in a form contract, but they are three that often arise.

form contract

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Witnesses in the Making: Opposing Counsel Communicating to Employees

Navigating a workplace incident can be a company’s nightmare. Claims of workplace injury, harassment, hostile work environment, OSHA violations, or the like put employers on pause as to the manner of properly handling legal proceedings. This is compounded when opposing attorneys interview company employees about the workplace incident without the presence and/or permission from the company’s counsel to interview such employees (commonly referred to as ex parte communications).

Ex parte communications can result in more than a few harmless comments. The interviewing attorneys may call upon these employees as liability witnesses at trial—often on cross examination. Under Georgia agency law, the statements and actions of employees regarding incidents for which an employer may be liable can be attributed to the employer. And, statements made by these employees are admissible at trial if it concerns a matter within the scope of the employment and is made during the time of employment. Thus, employees may make statements during ex parte communications with attorneys without the presence of defense counsel that could potentially be damaging to the company in a subsequent trial.          

Know the Ethical Violations of Ex Parte Communications

Lawyers must subscribe to ethical standards, and pursuant to Georgia Rule of Professional Conduct 4.2(a), “[a] lawyer who is representing a client in a matter shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or court order.” Comment 4A to this rule clarifies that a lawyer cannot have ex parte communications with:

  • Officers, directors, managers, and supervisors.
  • Employees who have the authority to obligate the organization with respect to the matter.
  • Employees who regularly consult with the organization’s lawyer concerning the matter.
  • Employees whose act or omission in connection with the matter may be attributed to the organization for purposes of civil or criminal liability.

The above parties are protected as clients under the counsel of the company. It is a violation of ethics, therefore, for an attorney to have ex parte communications with a company’s current employees regarding a dispute without the presence and/or permission from defense counsel if the employee falls within one of these categories.

There Are Always Exceptions

1.    Georgia Rule of Professional Conduct 4.2 requires that opposing counsel must know that the employer is represented by counsel at the time of the communications. Documentation will prove knowledge! Thus, a company should have its counsel send a letter of representation to the opposing attorney immediately upon receipt of information that the complainant has retained representation. Without such a letter, the opposing attorney will likely be able to participate in ex parte communications with employees by disclaiming knowledge of representation of the company.

2.    An attorney is allowed to have ex parte communications with employees who do not fit the descriptions listed in Comment 4A including:

  • Employees who do not hold positions with responsibilities related to directing, managing, or supervising;
  • Employees whose acts or omissions cannot be ascribed to the company; and
  • Former employees.

An employer’s counsel should, therefore, encourage employees to refer any questions related to incidents to counsel to prevent such ex parte communications.

3.    Georgia case law allows an attorney to call co-workers of the plaintiff for cross-examination in suits against a company. In order to prevent this, defense counsel should argue to the trial judge that if the opposing attorney can interview a party’s co-workers without the presence and/or permission from defense counsel, then the attorney should not also be permitted to cross-examine the employee.

What To Do If Ex Parte Communication Has Taken Place

It is critical for an employer to protect itself in that event that ex parte communications occur between an employee and opposing counsel. If such communications do transpire, an employer and/or its counsel should do the following:

  • Confirm with the employee-witness the timing and substance of the communications.
  • Depose any investigators that have conducted interviews in the case.
  • Request copies of all interview statements with witnesses in discovery.
  • Require opposing attorney early in litigation to seek a court order prior to speaking directly with employees.
  • Seek the appropriate remedy based on the facts of your case.

What Remedies Can an Employer Seek?

The primary remedy for a company in this situation is the disqualification of the offending opposing counsel. This is quite helpful when the case is nearing trial because another attorney (who is likely less familiar with the case) must assume the responsibilities of the case from the offending counsel. Additionally, other remedies are available. A court may exclude the employee-witness with whom counsel had ex parte communications, a court may issue sanctions, or the attorneys could enter into an agreement to stipulate to a jury instruction that the acts or omissions of the employee-witness with whom the offending counsel had ex parte communications cannot be used for the basis of any liability against the defendant employer. Finally, defense counsel could request a mistrial, but this is rarely granted.

If your company finds itself with a notice of lawsuit or investigation by an attorney for a workplace incident, converse with your lawyer, educate your employees about communication, and make sure opposing counsel has documentation that your company is represented.

ex parte communications

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