The Defend Trade Secrets Act of 2016 (the “DTSA”), which became law on May 11, 2016, is a useful tool for franchisors in protecting their trademarks and trade secrets both against employees and potentially against former franchisees. Franchisors can utilize the DTSA to bring a federal claim for trade secret misappropriation, which was not an option prior to its enactment.

Critically, in order to obtain punitive damages or attorneys’ fees under the DTSA, employers must have given employees notice of their right to do so. To take full advantage of the DTSA’s trade secrets and trademarks protections, franchisors should review their form contracts governing the use of trade secrets or confidential information by franchisees and employees and ensure the required notice is included. It is important for franchisors to understand what constitutes a trade secret under the DTSA and re-evaluate their practices and agreements to better protect themselves.

Advantages of the Defend Trade Secrets Act

The DTSA empowers federal courts to enjoin actual or threatened trade secret misappropriation on whatever terms the court finds reasonable. There are limitations; for example, courts cannot enjoin a person from entering into an employment relationship; any conditions on the employment of a person in possession of trade secrets must be based on evidence of threatened misappropriation, not on mere possession of information; and injunctions cannot conflict with applicable state laws. The DTSA also empowers the Court to issue a mandatory injunction, requiring affirmative action be taken to protect trade secrets, where necessary. In exceptional circumstances, the Court may condition future use of the trade secret upon payment of a reasonable royalty.     

The DTSA provides for actual damages and damages for unjust enrichment. Punitive damages and attorneys’ fees may be awarded where misappropriation is willful and malicious.

Compliance with DTSA Notice Provisions

To obtain punitive damages or attorneys’ fees, franchisors must incorporate specific language in all agreements governing the use of trade secrets and confidential information. The notice requirement is a “whistleblower protection” intended to shield individuals who may need to disclose a trade secret in order to report a violation of the law.

To comply with the DTSA notice requirements, franchisors can revise all relevant agreements with employees and franchisees, including non-disclosure agreements, confidentiality agreements, separation and release of claims agreements, severance agreements, non-competition and non-solicitation agreements, and employee handbooks. The DTSA is applicable to contractors and consultants, so franchisors should also review all agreements with individuals performing work in those capacities. Alternatively, franchisors may provide employees, contractors and consultants with a single policy document that sets forth the reporting policy for suspected violations of law.