For many entrepreneurs, it is their greatest nightmare: a disgruntled former employee, a jilted contractor, or an unscrupulous contractor walks away with a thumb drive full of the business's trade secrets, ready to sell them to the highest bidder, or worse, use them to jump-start a competing business.
The non-disclosure agreement (NDA) was long seen as the only effective hedge against the risk of leaked trade secrets. The only applicable federal law, the Economic Espionage Act of 1996, only provided protections that could be enforced by the government, and its many state-law imitators were similarly clumsy, or worse, inapplicable to whichever jurisdiction to which the trade secrets thief had escaped. So, employers turned to the NDA, which at least provided a contract-based private right of action to protect entrepreneurs' trade secrets. It has since become a standard part of many employee onboarding packets, vendor agreements, and even sales contracts.
But earlier this year, the Obama administration signed into law the Defend Trade Secrets Act of 2016, which, among its many provisions, corrected the most notable deficiency of the Economic Espionage Act of 1996: namely, it creates a federal private right of action for the protection of trade secrets. This added trade secrets to the pantheon of privately-enforceable intellectual property rights that already included patents, copyrights, and trademarks.
So, can you just cut the NDA out entirely? Can your new business save on its outside counsel fees by just skipping the NDA altogether? Not so fast.
Firstly, the Defend Trade Secrets Act explicitly only applies to the articles of "interstate commerce." This is a legal term-of-art of admittedly limited applicability, since the judicial reading of whether or not a product or service affects or is sold "interstate" is typically expansive, but applying a contractual NDA preserves the right to enforce contract remedies in state courts and forbids an employee from asserting any kind of defense based on a lack of diversity jurisdiction.
Secondly, a contract right under an NDA may simply be easier to enforce than a federal right of action in a federal court. A contract action in state courts may be less expensive and faster than a suit based in federal courts.
Thirdly, there is as yet no caselaw generally forbidding the applicability of an arbitration clause to an NDA. The business owner can choose through an NDA to protect their rights through private arbitration, which is often cheaper and almost universally faster than a federal case, and which still does not prevent a business owner from going out and getting a quick injunctive order forbidding the trade secrets thief from disseminating those secrets in the crucial first hours and days of the risk arising.
Finally, perhaps the most important value of an NDA even in new federal actions under the Defend Trade Secrets Act lies in actually defining "trade secrets." Providing clarity as to what the employer values as a trade secret for the well-meaning employee who may otherwise just not know that, say, an org chart, or a clever assembly line design, or an innovative sales deck constitutes a "trade secret" can head off litigation altogether, and helps the employee understand her or his own role in the business. And of course, it forbids the unscrupulous bearer of stolen trade secrets from confusing a jury or a judge by asserting what is or is not a "real" trade secret.
The Defend Trade Secrets Act is a clever piece of bipartisan legislation (sponsored by Republican Orrin Hatch) that provides an important new kind of protection to your business's trade secrets. This doesn't mean you should cut corners on your NDAs - they still have a vital role to play in keeping your business safe from the unwary and the unscrupulous.
If you'd like help preparing your NDA, click here to contact us today.
The non-disclosure agreement (NDA) was long seen as the only effective hedge against the risk of leaked trade secrets. The only applicable federal law, the Economic Espionage Act of 1996, only provided protections that could be enforced by the government, and its many state-law imitators were similarly clumsy, or worse, inapplicable to whichever jurisdiction to which the trade secrets thief had escaped. So, employers turned to the NDA, which at least provided a contract-based private right of action to protect entrepreneurs' trade secrets. It has since become a standard part of many employee onboarding packets, vendor agreements, and even sales contracts.
But earlier this year, the Obama administration signed into law the Defend Trade Secrets Act of 2016, which, among its many provisions, corrected the most notable deficiency of the Economic Espionage Act of 1996: namely, it creates a federal private right of action for the protection of trade secrets. This added trade secrets to the pantheon of privately-enforceable intellectual property rights that already included patents, copyrights, and trademarks.
So, can you just cut the NDA out entirely? Can your new business save on its outside counsel fees by just skipping the NDA altogether? Not so fast.
Firstly, the Defend Trade Secrets Act explicitly only applies to the articles of "interstate commerce." This is a legal term-of-art of admittedly limited applicability, since the judicial reading of whether or not a product or service affects or is sold "interstate" is typically expansive, but applying a contractual NDA preserves the right to enforce contract remedies in state courts and forbids an employee from asserting any kind of defense based on a lack of diversity jurisdiction.
Secondly, a contract right under an NDA may simply be easier to enforce than a federal right of action in a federal court. A contract action in state courts may be less expensive and faster than a suit based in federal courts.
Thirdly, there is as yet no caselaw generally forbidding the applicability of an arbitration clause to an NDA. The business owner can choose through an NDA to protect their rights through private arbitration, which is often cheaper and almost universally faster than a federal case, and which still does not prevent a business owner from going out and getting a quick injunctive order forbidding the trade secrets thief from disseminating those secrets in the crucial first hours and days of the risk arising.
Finally, perhaps the most important value of an NDA even in new federal actions under the Defend Trade Secrets Act lies in actually defining "trade secrets." Providing clarity as to what the employer values as a trade secret for the well-meaning employee who may otherwise just not know that, say, an org chart, or a clever assembly line design, or an innovative sales deck constitutes a "trade secret" can head off litigation altogether, and helps the employee understand her or his own role in the business. And of course, it forbids the unscrupulous bearer of stolen trade secrets from confusing a jury or a judge by asserting what is or is not a "real" trade secret.
The Defend Trade Secrets Act is a clever piece of bipartisan legislation (sponsored by Republican Orrin Hatch) that provides an important new kind of protection to your business's trade secrets. This doesn't mean you should cut corners on your NDAs - they still have a vital role to play in keeping your business safe from the unwary and the unscrupulous.
If you'd like help preparing your NDA, click here to contact us today.
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