New Federal Trade-Secret Law Could Prove To Be a Double-Edged Sword for ISOs

Every business, including merchant processors and independent sales organizations, wants to protect its trade secrets, and a new federal law gives them stronger tools to do that than available before. But the law also could expose ISOs to damages should they unwittingly hire sales representatives who use somebody else’s stolen trade secrets.

That was the word from payments attorney Holli Targan, a Southfield, Mich.-based parter at Jaffe Raitt Heuer & Weiss P.C. Targan reviewed the Defend Trade Secrets Act of 2016 during a Wednesday session about compliance issues at the MidWest Acquirers Association annual conference in Cleveland.

Congress passed the trade-secret bill by overwhelming majorities in both the Senate and House of Representatives, and the new law took in effect in May. Previously, employers asserting damages from having their trade secrets stolen had to seek relief in state courts, which meant they had to deal with numerous different standards, according to Targan. Two states don’t even have trade-secret laws.

Trade secrets typically are defined as information of economic value that is not generally known and is protected. For the merchant-acquiring industry, such information can include merchant names, pricing, and profit margins, said Targan, a past president of the Electronic Transactions Association, the national acquirer trade group.

The new federal law provides for recovery of actual losses as well as an injunction to stop someone from using another’s trade secrets. A business also can ask the court to seize property, for example, a computer, that contains stolen trade secrets. In addition, the law also enables plaintiffs to seek so-called exemplary damages of twice the actual damages in cases of willful trade-secret theft.

“There are now a couple of different remedies that you can seek if your trade-secret information has been poached,” Targan said.

In order to have the ability to seek exemplary damages, an ISO or acquirer should put disclosures about trade secrets in such standard notices as employment contracts, employee handbooks, contractor and consulting agreements, non-disclosure agreements, and related documents, according to Targan. The law applies not just to direct employees of an ISO or processor, but also to so-called 1099s, the independent representatives that sell merchant services on behalf of a processor.

The downside of the new law is that an ISO that hires a sales representative or contracts with an independent rep who is using the stolen trade secrets of a former employer at his or her new job exposes that new employer to damages. Even an ISO that unwittingly benefits from stolen trade secrets could face liability. “They would be liable if someone came after them for unjust enrichment damages,” Targan said.

Thus, the new law makes it more important than ever for ISOs and processors to do due diligence when hiring. “That’s a tough thing, how to protect yourself…You need to keep your eyes open as to what those sales reps are bringing,” said Targan.