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New Approaches to Drafting U.S. Confidentiality Agreements

February 1, 2017 | by Leslie Mark Greenbaum, Esq.
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Prior to May 2016, the protection of trade secrets and proprietary information in the U.S. was a matter governed largely by the laws of the individual states and subject to significant variation. 

With the passage of the “Defend Trade Secrets Act of 2016” (DTSA), companies doing business in the U.S. receive nationwide protections for trade secrets and proprietary information, as well as access to the federal courts to seek redress for misappropriation of this valuable intellectual property. In addition to injunctions against use or disclosure of trade secrets, a company can, under certain circumstances, obtain an ex parte order of seizure and recover damages, including punitive damages and attorneys' fees, in cases of willful misappropriation.

When pursuing claims under DTSA, companies retain the right to simultaneously pursue claims of misappropriation of trade secrets and proprietary information  that arise under state law.

Consequently, if the misappropriation of a trade secret also implicates the confidentiality provisions in a non-disclosure agreement, or a covenant not to compete or solicit employees and customers, those claims can be pursued in the same proceeding, in a federal court, with claims arising under DTSA. How the confidentiality provisions of these types of contracts are drafted, however, may require re-examination. 

DTSA requires agreements with an employee that govern the use of a trade secret or other confidential information to incorporate a “whistle blower notice”. The whistle blower notice required must indicate that the employee is immune from liability for disclosing a trade secret to the government, an attorney, or in a court filing made under seal, when the disclosure is made for the purpose of reporting suspected violations of law. For agreements entered into after DTSA was signed into law in May of 2016, the failure to include a whistle blower notice will prohibit a company seeking legal recourse from recovering either its legal fees or punitive damages. In addition, under DTSA, the whistle blower notice requirement is not limited to agreements with employees, but also extends to confidentiality agreements with persons working as contractors or consultants.

The terms used in confidentiality agreements can also create further difficulties if they attract the attention of one or more federal agencies. 

  • The National Labor Relations Board (NLRB) has invalidated a number of confidentiality provisions found to infringe upon an employee’s right to discuss wages and conditions of employment with co-workers. 

  • The Equal Employment Opportunity Commission (EEOC) has questioned the lawfulness of confidentiality agreements that may discourage employees from reporting suspected discriminatory practices. 

  • The Securities and Exchange Commission (SEC) has sought to invalidate provisions of confidentiality agreements that may impede employees or others from reporting possible securities law violations.

 

Conclusion

Although the protection of trade secrets and proprietary information is well recognized in the U.S. and now strengthened with DTSA, the specific terms of confidentiality provisions incorporated in non-disclosure agreements, covenants not to compete and restrictions on solicitation, can set a trap for the unwary. In light of the recent enactment of DTSA, and the whistle blower notice requirement, a comprehensive review of confidentiality provisions incorporated in employment agreements, consulting agreements and collaboration agreements for conformance with U.S. laws should be considered.   

For further information contact Les Greenbaum — lgreenbaum@gross-shuman.com or 716-854-4300, x230.

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