In the best of economic times, some courts can be reluctant to grant immediate injunctive relief and enjoin an employee from working in order to enforce employee post-employment restrictive covenants. Now that we are in the midst of a global pandemic and an economic recession, that challenge has grown. Current economic considerations are causing some courts to weigh the “balance of harms” on injunctive relief applications in favor of employee defendants who are faced with the difficulty of finding other work in an economic downturn with high unemployment. Nevertheless, our review of recent decisions from around the country indicates that courts remain willing to consider injunction motions on an emergent basis to enforce restrictive covenants, particularly where there is a threat of trade secret misappropriation.
Los Angeles partner Mark Terman and associates Sujata Wiese and Shamar Toms-Anthony updated their article in Practical Law titled “Confidentiality and Nondisclosure Agreements (CA).” In their article, Mark, Sujata and Shamar discuss how companies can protect their information, including the use of confidentiality agreements and related practices, under California law. They also outline practical tips on developing internal systems and contract provisions designed to protect a company’s sensitive information, including its business assets and relationships, data security and trade secrets.
Los Angeles partner Mark Terman recently authored an article for the Daily Journal titled, “Developing a Trade Secret Protection Program to Reduce Risk and Increase Court Enforcement.”
Mark Terman, Sujata Wiese and Shamar Toms-Anthony updated their article authored with Practical Law titled “Confidentiality and Nondisclosure Agreements (CA).” In their article, Mark, Sujata and Shamar discuss how companies can protect their information, including the use of confidentiality agreements and related practices, under California law.
Mark Terman and Sujata Wiese authored a practice note for Practical Law titled “Confidentiality and Nondisclosure Agreements (CA).” In their note, Mark and Sujata discuss how companies can protect their information, including the use of confidentiality agreements, under California law.
Mark and Sujata address considerations involved in safeguarding a company’s confidential information, and substantive provisions and issues common to many commercial confidentiality agreements. They state that “having effective confidentiality agreements in place with other parties is necessary but not sufficient to protect an organization’s confidential information and data. Comprehensive protection requires the participation and coordination of management and staff at all levels across all functions, from finance and administration to marketing and sales. It often falls to the legal department, working closely with the information technology (IT) function and with the support of senior executives, to lead the company-wide information management and protection program.”
Topics addressed in the note include: company-wide information and data security policies; compliance with contractual obligations governing others’ confidential information; trade secrets; privacy and data security laws and regulations; and form, structure and key provisions of confidentiality agreements.
It’s an employer’s worst nightmare: you discover that a former employee has stolen a company trade secret. You know you must act immediately to keep this extremely important and sensitive information from being disseminated or risk losing important intellectual property protection. However, protecting a misappropriated trade secret is very difficult, particularly in situations where the suspected misappropriator is unlikely to follow a court order. Thankfully, the recently passed Defend Trade Secrets Act (“DTSA”) includes helpful seizure provisions an employer may use to recover and prevent dissemination of trade secrets from suspected misappropriators.
What Is The Defend Trade Secrets Act?
President Obama signed the DTSA into law on May 11, 2016. This new law is effective immediately and provides a nation-wide civil cause of action for misappropriation of trade secrets. Although companies may still pursue trade secret litigation under state causes of action, the DTSA permits companies to prosecute their claims in federal court, thus allowing them to avoid the complexity and cost of pursuing trade secret claims in multiple jurisdictions simultaneously.
What Are The DTSA’s Seizure Provisions?
Significantly, the DTSA includes an ex parte seizure provision allowing “the seizure of property necessary to prevent the propagation or dissemination” of trade secrets, meaning the employer may seize property through court order without providing notice to the other party. See DTSA § 2(b)(2). To receive a court order allowing such seizure, the employer must:
• Allege specific facts showing that the suspected misappropriator would “evade, avoid, or otherwise not comply with” other extraordinary relief, such as a temporary restraining order, and would “destroy, move, hide, or otherwise make [the property to be seized] inaccessible to court” if notified of the seizure proceedings;
• Be able to show that the employer would suffer “immediate and irreparable injury” if the requested seizure were not occur, and that such injury would be greater than any to be suffered by the suspected misappropriator or any third parties if the seizure request is granted;
• Be able to show that the suspected misappropriator has actual possession of the trade secret and either misappropriated or conspired to use improper means to misappropriate that trade secret;
• Describe, with reasonable particularity and to the extent reasonable, what is to be seized and where it is located; and
• Not have publicized the requested seizure.
See id. § 2(b)(2)(A)(ii). Orders of seizure are executed by a Federal law enforcement officer. The employer may not participate in the seizure, although the law enforcement officer may request to be accompanied by an unaffiliated technical expert. Any materials seized will be held in court custody until a hearing can be held, although a motion to encrypt seized material may be made at any time. See id. § 2(b)(B), (D), and (H).
What Does This Mean For Employers?
The good news is that now if a trade secret is misappropriated, employers may be able seize it and halt its dissemination before irreparable harm has occurred. In our modern world where information can be copied and transported across state lines (or international boarders) in mere moments, this is very important. However, there are a number of cautions employers should be aware of:
• Seizure under the DTSA is extraordinary relief only. The DTSA’s drafters contemplated it would be used in instances such as when “a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately or not otherwise amendable to…the court’s orders.” Rep. No. 114-220 at 9 (2016). Accordingly, seizure will be permitted only in the most extreme situations.
• The DTSA requires an employer seeking seizure to provide security “determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure.” DTSA 2(b)(B)(vi). This security will not act as a cap on damages if it is later determined that property was wrongfully seized.
• The DTSA’s drafters struggled with handling misappropriated trade secrets contained in electronic files. If, for example, an employee downloaded files containing trade secrets from her company computer onto a flash drive, the court could seize that flash drive. The situation becomes more murky, however, when an employee transmits files containing trade secrets to himself via his personal email (thus leaving a copy on the server of the email provider), or uploads company files to a third party cloud service. In order to protect these unintended recipients, the DTSA’s drafters included carve outs prohibiting seizure from innocent third parties (although injunctions prohibiting disclosure are permitted). Accordingly, until the employer can obtain other relief, the trade secret will remain on the third party’s server, potentially vulnerable to misappropriation from bad actors engaged in cyberespionage.
On balance, the DTSA is a helpful piece of legislation that will greatly assist employers in protecting trade secrets under certain circumstances. However, as with any new piece of legislation, it is unclear how these provisions, particularly those concerning electronic information, will be applied in practice.
If you would like to discuss best practices for keeping trade secrets secure or need help dealing with potentially misappropriated trade secrets, please contact the author or any member of our Labor and Employment Practice Group.