The Defend Trade Secrets Act, or DTSA, was signed into law in 2016. The new federal law allowed American businesses legal redress to protect their trade secrets and intellectual property. In addition, the law provides for whistleblower protections. With the gig economy growing, and the practice of hiring freelance contractors becoming more usual even for long-term and leadership roles, the courts have begun to detail specifics related to these contractors and business trade secrets. At this time, the understanding of this law with respect to private independent contractors and subcontractors working for a public company is that the law covers these contractors, as well as contracting businesses.
An Employee or an Independent Contractor?
The more control a business has over an independent contractor, including how, when, and where they can work, the more likely that contractor can be reassigned as an employee by the IRS. Care is being taken to walk a fine line between protecting intellectual property and other trade secrets — such as customer lists and unique supply chains, protecting a business from unfair competition from a former contractor and new competitor who has inside knowledge of challenges and weaknesses — and doing so in such a way that the independence of the contractor, and their status as independent, is protected.
There are ways these lines can be maintained and everyone’s rights protected. For example, by using careful language in contracts that details competition, solicitation, arbitration, and whistleblower protections.
Intellectual property belongs to a business. This property is part of the value of the company; it reflects the research and development costs to develop formula, recipes, algorithms, and other types of proprietary information. Independent contractors have no right to use this type of information to develop a competitive business after contracted work. Nor to sell proprietary information like trade secrets on the open market after contracted work.
But often, independent contractors get other types of information from doing freelance work. They may see a unique hole in the market, for example, that is not part of their contracted brief. They may gain knowledge of a system or market that was previously unknown to them. Then they may decide later to form their own business. Where is the line between protecting intellectual property from contractors who turn into competition, and promoting and protecting open markets?
Some state laws no longer support the use of non-compete clauses or contracts. Others continue to use the language, but are careful to reflect the latest understanding of how courts are viewing competition. Some businesses are specifying a length of time or a geographic region; for example, to deter direct loss of customers to a former contractor who is setting up business in their backyard. To avoid the appearance of illegally squashing fair competition, some businesses are using clauses or contracts that restrict solicitation of customers from a former contracted business, rather than using standard non-compete boilerplate language. In addition, the amount of control that the business has over information or knowledge gained during contracted work reflects the line between independent contractor and employee.
In all circumstances, the rights to use and further develop specific intellectual property remain with the company. Contracts for a specific unit of work for a contractor should, if using proprietary algorithms or formula, specify that use or further development of a proprietary formula remains with the company.
Arbitration and Whistleblowing
Contracts for freelancers can include an arbitration clause in the event of a conflict. By specifying arbitration rather than court decisions, details of specific intellectual property does not have to enter the pubic domain. Arbitration is usually quicker and less expensive than traditional court proceedings.
Part of DTSA is language that protects whistleblower’s rights. There are whistleblower protections in other state and federal laws, but concerns remain as whistleblowers continue to face discriminatory actions. For the purposes of understanding this law, independent contractors working for a public company have protected rights to communicate uncovered financial misconduct, shareholder fraud, consumer and worker safety issues, and illegalities. They will not have violated a company’s intellectual property or trade secrets; nor can they be prosecuted for violating contracts relating to the disclosure of company trade secrets. That is, if those secrets disclose fraud, misconduct, or illegal behavior.
One challenging aspect of this law is understanding the ramifications if an independent contractor discloses trade secrets, believing them to be financial misconduct, fraud, or other illegalities, and is proven to be wrong. Damage to both parties will have occurred, but protected information, once disclosed, may not be able to be contained. If the contractor is acting in best faith, it is likely protections against damage are in place under DTSA, but these complex issues are best left to arbitration.
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