What Employers Need to Know About the New Defend Trade Secrets Act

Trade secret issues arise daily in the workplace with nearly every employment decision, from employee hiring and firing, to every contract that contains a non-disclosure or confidentiality provision. President Obama today signed the Defend Trade Secrets Act (“DTSA” or the “Act”), with huge implications for employers, companies, and other trade secret owners. For the first time, the Act offers trade secret owners greater access to federal court, as well as broadly impacts employee whistleblower rights. The law is designed to go into effect on the day it is enacted and will apply to any misappropriation that occurs on or after that date. Since this new law is right around the corner, it is important to be aware of its various key provisions.


Access to Federal Court

First, the DTSA extends the current Economic Espionage Act, which criminalizes certain trade secret misappropriations, to create a private civil cause of action. Trade secret owners now have the option to bring trade secret lawsuits in federal court, whereas before trade secret misappropriation was purely a matter of state law. While the DTSA does not preempt the various state trade secret rights, it provides an additional layer of protection to help safeguard companies’ unique formulas and know-how. Because of the DTSA and state law overlap, employers need to understand and conform their practices to both the new and existing laws.

Whistleblower Immunity

Second, the Act gives new immunity to certain whistleblowers who turn trade secrets over to the government to investigate potentially illegal activity. This provision grants both criminal and civil immunity to those whistleblowers under both federal and state trade secrets laws. The DTSA also requires employers to notify workers in any contract that is related to trade secrets or confidential information of their rights to turn over confidential information or trade secrets to the government if illegal conduct is suspected.

Employers should especially keep this notice provision in mind if they are planning to pursue trade secret theft. Employers will not be able to obtain either punitive damages or attorneys’ fees if such notice was not given to employees. Besides whistleblowers, employers will also need to advise employees going forward that they may turn over confidential information to their attorneys or a court in a retaliation suit, provided the disclosure is filed under seal. In light of the DTSA’s new requirements and potential consequences, employers should review their policies for handling confidential information and whistleblowers that are provided to employees.

Civil Seizure Clause

Third, the DTSA also contains a novel seizure provision that in "extraordinary circumstances" allows plaintiffs to ask courts to order the seizure of any property "necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action" without a hearing or answer from the defendant. While this provision will be beneficial in providing employers with a forceful method to recover trade secrets from misappropriators, it should be used with caution. If a seizure is later found to be wrongful, the individual who was the subject of the seizure can seek damages such as lost profits.

Injunctive Relief against Former Employees

Lastly, while the DTSA does allow for injunctive relief, the Act makes clear that former employees cannot be restrained from working for a competitor unless it is clearly needed to protect the trade secret, and that the DTSA does not circumvent state law on restrictive covenants. One of the concerns raised against early versions of the Act was that it would empower employers to prevent employee competition. Specifically, the Act provides that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” In addition, the injunctive relief cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.”

While it is yet to be seen how the law will be interpreted, the DTSA has major implications for employers who possess and protect trade secrets. As such, employers should be mindful of the need to develop an approved process for handling the various provisions under the DTSA.

Sara Dajani is an Attorney with Berenzweig Leonard, LLP. She can be reached at sdajani@berenzweiglaw.com.

Judge Was Not Amused By Supervisor’s Smiley Face Emoticon

An executive secretary at insurance company Munich Re in New Jersey took extended leave under the federal Family and Medical Leave Act (FMLA) citing her asthma condition.  The company became suspicious that the employee was not really too sick to work, and hired a private investigator to follow her and videotape her public activities.  The investigator captured the asthmatic employee on video shopping at a mall and carrying boxes as she moved into a new home.  When the company saw this video footage, it made the decision to fire the employee for abusing its FMLA leave policy.

The employee sued Munich Re for violating her federal right to take FMLA leave for her asthma condition, claiming that the real reason the company fired her was because it was perturbed that she needed to be out on medical leave from time to time.  In explaining the damaging videos, the employee said her doctor had ordered her to stay active while out on leave, which was why she felt she could go shopping and help with the house move.  ]

During the litigation, the employee’s lawyer requested internal company e-mails sent during the timeframe leading up to the employee’s termination.  In one such e-mail, which was sent the day the employee was fired, her supervisor began with a smiley face emoticon, and asked “:-)) did Ray chat with you about Elaina?”.  Another supervisor responded with, “Yes he did.  Thank you for your help.  That deserves a big :-))!!!”  

The employee argued that the smiley face emoticons in the supervisors’ e-mails showed that the supervisors were all too happy to get rid of her, and merely used the videos as a way to make that happen.  But the company moved to dismiss the case, claiming that the smiley faces in the e-mails were innocuous at best, and that the company had solid grounds to fire the employee for abusing FMLA leave.

A federal judge in Camden, New Jersey refused to dismiss the fired employee’s lawsuit against the company for FMLA retaliation.  In doing so, the judge specifically called out the smiley face emoticons in the e-mails sent between the supervisors on the day of termination, and found that a jury could conclude that Munich Re was happy to terminate the employee because the FMLA leave was inconvenient for them—which is unlawful.  

This case is a timely reminder for companies that snarky remarks and unprofessional digs, whether expressed verbally or obliquely by use of emoticons (or their more refined cousins the emoji—i.e., J), have no place in workplace communications dealing with company business. 

Posted by Declan Leonard, Managing Partner of Berenzweig Leonard, LLP, DLeonard@BerenzweigLaw.com

Telecommuting Employees Can Pose Certain Legal Risks For Employers

United Excel Corporation, a Kansas company in the hospital construction business, employed a sales representative to solicit business from hospitals throughout the country.  At some point, the sales representative asked to work out of his home, which was located in Massachusetts.  During the three years that he worked from his Massachusetts home for United Excel, the sales representative never closed any business with hospitals in that state.

After closing a big deal for a hospital located in California, the sales representative got into a dispute over how much commission was owed to him by United Excel.  He sued United Excel in a Massachusetts state court, but the company sought to dismiss the case on the ground that the Massachusetts court had no jurisdiction over the Kansas-based United Excel for a dispute involving a project in California.  From the company’s perspective, the sales representative could well have worked from a home office in Timbuktu, as long as he closed business with hospitals around the United States.  The mere fact that the representative happened to live in a small town in Massachusetts shouldn’t mean that the company could be sued in that town’s courts, United Excel argued.

But a federal appeals court in Massachusetts recently decided that the home office where the sales representative worked was akin to a remote sales office for United Excel.  The court noted that United Excel provided equipment for the sales representative’s home office, and it placed phone calls and sent emails to the sales representative in Massachusetts during his employment tenure. The court said the fact that the sales representative never actually closed a deal for a project located in Massachusetts was not at all determinative, and that his actions in soliciting business all across the country (including Massachusetts) from his home office was enough for that state’s court to have jurisdiction over the employment case.

The key missing ingredient in this case was the fact that United Excel did not have a forum selection clause in its employment agreement with the sales representative dictating where a lawsuit must be filed.  If the agreement had said all disputes must be brought in Kansas where United Excel was headquartered, the Massachusetts case would likely have been dismissed.  All companies, and particularly those who allow employees to work remotely or who otherwise employ people out of state, should strongly consider having a forum selection clause as well as a choice of law provision.

Posted by Declan Leonard, Managing Partner of Berenzweig Leonard, LLP, DLeonard@BerenzweigLaw.com

Company and CEO Held Jointly Liable for Minimum Wage Violations

A federal district court in Pennsylvania has held American Future Systems, Inc., and its CEO jointly liable for Fair Labor Standards Act (“FLSA”) violations arising from the company’s break policy. That policy required employees to log off of their computers and forgo compensation for all breaks, even short ones lasting fewer than 20 minutes. The CEO, as a 98% owner of American Future Systems and the “final authority” for compensation and break policies, was found to be a joint employer and therefore personally on the hook for these FLSA violations.

The company’s written compensation policy, which had been in place since 2009, required employees to log off of their computers during all breaks, including short personal breaks to use the restroom or get a cup of coffee. Because the company only compensated employees for the time they spent logged into their computers, all breaks were rendered unpaid. Such a policy clearly contradicts the FLSA, which states that short breaks between 5 and 20 minutes are considered compensable work hours. As a result of failing to pay employees for their short personal breaks, American Future Systems allowed employee compensation to dip below minimum wage over the course of each pay period, prompting the lawsuit, which was brought by the U.S. Department of Labor.

While a company facing liability for violating FLSA minimum wage and recordkeeping requirements is nothing new, the fact that the CEO was held personally on the hook as a joint employer is an interesting wrinkle that business leaders should take note of. In this case, American Future Systems’s CEO was a principal owner of the company, had hiring and firing authority, controlled compensation and break policies, and was ultimately responsible for company strategy and the activities of its employees. By having that level of control over the day-to-day operations of American Future Systems, the CEO was liable, along with the company itself, as a joint employer. Complying with the FLSA is always imperative, but for owners who exercise a high degree of control over their businesses, this decision provides a new sense of urgency in the form of potential personal liability. It also highlights the importance of having employee handbooks and workplace policies reviewed from time to time, as seemingly innocuous policies such as “always log off from your computer before going on break” could result in significant consequences for the company as well as its owners.

Frank Gulino is an attorney with Berenzweig Leonard, LLP. He can be reached at FGulino@BerenzweigLaw.com.

"Don't Ask, Don't Tell:" New Virginia Law Limits Access to Employee’s Social Media Accounts

The use of social media has become pervasive in today's workplace. As a result, employers have a strong interest in making sure employees are following company policies and preserving the confidentiality of company information while online, and in maintaining a positive public image on social media−while being careful not to interfere with employees’ rights under Section 7 of the National Labor Relations Act. In addition, employers have a responsibility to investigate social media behavior if they become aware of alleged misconduct and to exercise due diligence to protect other employees. In a press release last year, the EEOC noted that employers’ oversight responsibilities to monitor and remedy workplace harassment could extend to social media. For example, if an employee uses a company laptop to post harassing or discriminatory comments about a co-worker, the employer may not escape liability under Title VII merely because the harassment happened online.

Concerned with their employees’ potentially detrimental social media activities and also in order to screen potential job candidates, many employers require access to their applicants’ and employees’ social media accounts. However, Virginia is now the nineteenth state to impose limits on employer access to such accounts. The new law, Va. Code 40.1-28.7:5, which took effect July 1, 2015, prohibits employers in Virginia from requiring current or prospective employees to disclose the usernames and passwords for their social media accounts. The law also prevents employers from requiring employees and applicants to permit managers and supervisors to "follow" them on social media. The law’s definition of “social media account” is broad and includes any personal account where users can create, share or view: videos, photographs, blogs, podcasts, messages, emails or website profiles or locations.

However, the law does carve out employer activities associated with compliance with federal, state, or local laws and employer investigations of certain misconduct. Therefore, an employer’s right to request username and password information is not affected where such information "is reasonably believed to be relevant to a formal investigation or related proceeding by the employer of allegations of an employee's violation of federal, state, or local laws or regulations or of the employer's written policies." Yet, if an employer exercises its rights under this investigatory exception, the employer is prohibited from using the employee's information for any other purpose.

If an employer inadvertently receives an employee's username and password to the employee's social media account through the use of an electronic device provided to the employee by the employer, the employer will not be liable for having the information.  However, the employer is required to refrain from using the information to gain access to an employee's social media account.

Employers should review their social media policies and hiring procedures to confirm they are in compliance with this new law. Employers should not ask for, or seek access to, employee and/or applicant social media accounts unless there is a solid business justification that fits squarely within the exceptions provided. Employers should also remember that just because an action may not violate this new law, it does not insulate the employer from liability under the NLRA or other employment laws.  Facebook, Twitter, and other social media comments can be protected concerted activity or union activity under the NLRA.

Sara Dajani is an associate attorney with the business law firm, Berenzweig Leonard, LLP. Sara can be reached at sdajani@berenzweiglaw.com. 

Employee Can Sue More Than One Employer For Discrimination

For the first time, the U.S. Court of Appeals for the Fourth Circuit has expressly adopted the joint employment doctrine for Title VII cases.  Now, an employee can potentially go after more than just the company that pays her when bringing a claim for unlawful discrimination or harassment.  The Fourth Circuit joins the Second, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits in holding that more than one company can be held liable for an employee’s claim under Title VII.

Brenda Butler was hired by ResourceMFG, a temporary staffing agency, to work at the Drive Automotive Industries (“Drive Automotive”) factory in South Carolina.  During her time at the Drive Automotive factory, Ms. Butler wore a ResourceMFG uniform, her paycheck came from ResourceMFG, she parked her car in a special ResourceMFG lot, and ResourceMFG had the power to discipline and fire her.  But Drive Automotive set Ms. Butler’s work schedule and arranged portions of her training, and Drive Automotive employees supervised Ms. Butler when she was on the factory floor.

Ms. Butler claimed that one of her Drive Automotive supervisors verbally and physically harassed her on the job.  She said that the supervisor commented on many occasions about her physical features, particularly her rear end, even giving her the nickname “big booty Judy.”  According to Ms. Butler, the supervisor also rubbed up against her in a sexually suggestive way.  She complained about the sexual harassment to management at ResourceMFG, but she says they did nothing.  After further complaints from Ms. Butler, Drive Automotive made a request to Resource MFG that she be terminated.  Shortly thereafter, Ms. Butler received a call from ResourceMFG terminating her employment at Drive Automotive.

In response, Ms. Butler brought Title VII claims against not only her official employer, ResourceMFG, but also against Drive Automotive, since it was a Drive Automotive supervisor who she claimed sexually harassed her.  A South Carolina district court dismissed Ms. Butler’s claims against Drive Automotive, after determining that ResourceMFG was her sole employer for purposes of liability under Title VII.  But on appeal, the Fourth Circuit reversed this dismissal of Ms. Butler’s Title VII case against Drive Automotive, after finding that Drive Automotive could be liable under the joint employer doctrine.

This decision is the first time that the Fourth Circuit has expressly adopted the joint employer doctrine for Title VII cases, joining several other federal appellate jurisdictions across the country.  The Court reasoned that, given the remedial purpose of Title VII in stamping out discrimination in the workplace, the joint employer doctrine prevents a company from evading liability by hiding behind another employer such as a staffing agency.

In order to determine whether a company is a joint employer for purposes of liability under Title VII, the Fourth Circuit adopted what it called the “hybrid test,” which is comprised of nine enumerated factors, to consider the level of control a company has over a particular worker.  The Court said that of those nine factors, the most important are the following three: 1) whether the entity has the power to hire and fire; 2) whether the entity has supervisory power over the employee; and 3) whether the entity controls the place and way in which the employee performs the work.  The Court made it clear that the degree of control that an entity exercises over a worker remains the principal guidepost for determining joint employment under Title VII.

While the impact of this case for staffing companies is obvious, this case could reverberate far beyond the staffing industry.  In the government contracting arena, it is common for prime contractors to use subcontractors whose employees are closely controlled by the prime.  Similarly, in the construction industry, the employees of prime contractors and subcontractors are often closely intertwined.  These types of companies will need to be extra careful not to exercise too much control over non-employees, or they may find themselves on the receiving end of a Title VII suit.

Declan Leonard is managing partner of the Washington, DC regional business law firm Berenzweig Leonard, LLP. He can be reached at DLeonard@BerenzweigLaw.com. 

Employee Who Could Not Get Along With Co-Workers Was Not Protected By Federal Disabilities Law

Marissa Walz was a long-time employee of financial planning giant Ameriprise, and for most of her time there she received positive reviews.  But more recently, Walz began to engage in erratic and disruptive behavior due to a bipolar condition, which she did not disclose to Ameriprise.  She interrupted meetings, disturbed her co-workers, and disrespected her supervisor.  During one company meeting, Walz told a co-worker to “stop interrupting me, you don’t know what you are talking about.”  When the supervisor confronted her about her inappropriate conduct, Walz rudely responded that “no one thinks your position is necessary” and “there is no sense of direction since you came on board.”

After further complaints, Walz was issued a formal behavioral warning.  In response, Walz applied for and was granted a leave of absence under the Family and Medical Leave Act (FMLA).  Because Ameriprise’s FMLA policy was administered by a third party vendor, the company never learned the mental health basis for why Walz went out on leave.  When Walz returned, she presented a note from her doctor simply saying that she “has been stabilizing on her medicine” and could work full-time.  But a few months after her return from FMLA leave, Walz began to engage in the same disruptive behavior as before, and Ameriprise fired her.

Watz sued Ameriprise, claiming that her firing was due to her mental disability in violation of the Americans with Disabilities Act (ADA).

But a federal appeals court recently ruled that because Walz could not get along with her co-workers, she could not perform an essential part of her job and therefore was not protected under the ADA.  The court rejected Walz’ argument that Ameriprise should have known about her mental disorder due to her taking FMLA leave and the note from the doctor.  The court acknowledged that Walz’ supervisor had testified in his deposition that he assumed she was being treated for her mental health, but still found that the company was not placed on notice of any limitations that Walz had in the workplace.  Interestingly, Walz argued that Ameriprise should have forced her back on FMLA leave when she began acting erratically again, but the court said there is no duty for an employer to force an employee out on leave.

Declan Leonard is a managing partner at the Washington, DC business law firm, Berenzweig Leonard, LLP. Declan can be reached at DLeonard@BerenzweigLaw.com.