The Defend Trade Secrets Act: One Year Later

About the Authors:

Bradford K. Newman is the founder and chair of Paul Hastings’ Employee Mobility and Trade Secret Practice. He is the editor of the 2017 edition of Recent Developments in Business and Corporate Litigation and a past chair of the ABA Section of Business Law’s Employment Litigation Subcommittee of the Business and Commercial Litigation Committee.

Jessica Mendelson and MiRi Song are members of the Paul Hastings’ Employee Mobility and Trade Secret Practice.

Introduction

The Defend Trade Secrets Act of 2016 (DTSA) was signed into law by former President Obama and became effective on May 11, 2016, amid much fanfare. At the time of its passage, the law was described as the “most significant expansion” of federal law in intellectual property since the Lanham Act in 1946. The DTSA provided a federal cause of action for trade secret misappropriation. In addition, it provided for a specialized seizure remedy, as well as an immunity provision designed to protect employees who might disclose trade secrets when allegedly reporting violations of the law.

The DTSA’s impact over the past year has been limited. Although the DTSA has made it easier for trade secret litigants to establish federal jurisdiction and thus get into federal court, there have been no sweeping changes in trade secret litigation. To date, federal courts do not appear enamored by the extra case load, and nearly all of the federal court decisions have continued to predominantly rely on pre-existing state and federal law and remedies. Despite the widespread publicity, both the seizure remedy and the immunity provision have had extremely minimal application and impact to date. See Bradford K. Newman & Esther Cheng, Federal Trade Secrets Protection: Law Would Create More Problems than It Solves, Daily J., Apr. 28, 2016.

This article provides an overview of the recent developments in DTSA trade secret litigation over the course of the past year. For more detailed information, please refer to the “Employee Mobility, Restrictive Covenants, and Trade Secrets Chapter” of Recent Developments in Business and Corporate Litigation, which was released in April 2017.

Creating a Federal Cause of Action

The DTSA creates the first federal civil cause of action and suite of statutory remedies for the misappropriation of trade secrets in the United States and provides a single uniform cause of action for trade secret misappropriation across the states. Prior to its enactment, as a civil matter, trade secret misappropriation claims (as opposed to Computer Fraud and Abuse Act claims pursuant to 18 U.S.C. § 1030) were governed exclusively by state laws. (Although most states have enacted the Uniform Trade Secrets Act (UTSA), there are still two outliers that protect trade secrets under unique state statutes or common law: New York and North Carolina.) Plaintiffs who sued for trade secret misappropriation in different states faced some longstanding and well-understood differences in legal standards and procedural requirements. The DTSA was purportedly intended to create a uniform body of federal trade secret law while establishing jurisdiction for claims brought pursuant to the DTSA in the federal courts.

On its face, however, the DTSA does not pre-empt state law, meaning that a party can file suit under the DTSA in federal court and plead a state law claim arising out of the same facts. In practice, this means that the DTSA’s primary function to date has been to create a path for plaintiffs to litigate what historically were essentially state law trade secret claims in federal court.

The DTSA cause of action is similar to those brought pursuant to the UTSA. The DTSA at 18 U.S.C. § 1836(b)(1) allows a plaintiff to bring a civil action for misappropriation of a trade secret only if the “trade secret is related to a product or service used in, or intended for use in, foreign or interstate commerce”—an easy showing in today’s world. Under the DTSA at section 1836(b)(3)(B)(5), “misappropriation” is defined much like it is under the UTSA and means: (a) acquisition by a person who knows (or has reason to know) the trade secret was acquired by improper means; or (b) disclosure or use of the trade secret by a person who used “improper means” to acquire the trade secret or had certain knowledge. Notably, the term “improper means” does not include reverse engineering or independent derivation under section 1836(b)(3)(B)(6).

Monetary and Injunctive Relief

Under section 1836(b)(3)(B) of the DTSA, a party can recover injunctive relief, monetary damages, and attorney’s fees. A discussion of injunctive relief follows. (To date, no court has reached the damages stage of a DTSA case, and thus, monetary relief is not addressed in this article.)

Injunctive relief is permitted under section 1836 (b)(3)(A)(i) of the DTSA to prevent any actual or threatened misappropriation on terms “the court deems reasonable.” To prevent plaintiffs from pursuing inevitable disclosure claims and claims aimed at restraining employee mobility, section 1836 (b)(3)(A)(i)(I) provides that injunctive relief may only be issued if it does not “prevent a person from entering into an employment relationship,” and if the “conditions placed on such employment” are “based on evidence of threatened misappropriation and not merely on the information the person knows.” In addition, under section 1836 (b)(3)(A)(i)(II), the injunctive relief ordered must not conflict with any applicable state laws. Injunctive relief is also available under section 1836(b)(3)(A)(ii) if affirmative actions are required to protect the trade secret and the court determines it is appropriate. At a high level, experienced practitioners will recognize there is little about this standard that could be deemed novel under the Federal Rules of Civil Procedure or state corollaries.

Since the enactment of the DTSA, federal courts have not hesitated to grant injunctive relief based solely on existing state and federal law that predates the DTSA. Frequently, the analysis focuses on traditional application of the Federal Rules of Civil Procedure’s injunctive relief provision and either ignores the existence of the DTSA claim in the complaint, or analyzes the dual state-law/DTSA basis for a traditional injunction in tandem.

For example, in Henry Schein, Inc. v. Cook, No. 16-CV-03166-JST, 2016 WL 3418537 (N.D. Cal. Jun. 22, 2016), the court granted a motion for preliminary injunction after finding, inter alia, that Henry Schein, Inc. had established a likelihood of success on its claims of trade secrets misappropriation brought under both the DTSA and California Uniform Trade Secrets Act (“CUTSA”). In making this decision, the court analyzed both the DTSA and CUTSA claims simultaneously.

Similarly, in Engility Corp. v. Daniels, No. 16-CV-2473-WJM-MEH, 2016 WL 7034976, at *10 (D. Colo. Dec. 2, 2016), the Colorado district court granted a preliminary injunction under both the DTSA and the Colorado Uniform Trade Secrets Act. Notably, as part of the preliminary injunction in Engility Corp., the court enjoined Daniels and his new company from competing for certain business for a period of one year. The court noted that, although the DTSA prohibits injunctions that “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business,” such as Colorado’s statutory restrictions on noncompete provisions, the injunction was necessary to prevent Daniels and his new company from taking advantage of trade secrets in their possession and therefore fell within an exception to Colorado’s statutory noncompete restrictions. The court did not separately analyze the proprietary of the injunction under the Colorado Uniform Trade Secrets Act, merely concluding that, despite its less specific provision regarding injunctive relief, it “probably has the same sorts of restrictions as the DTSA.”

In Panera, LLC v. Nettles, No. 4:16-CV-1181-JAR, 2016 WL 4124114, at *4 (E.D. Mo. Aug. 3, 2016), Panera LLC, a restaurant chain, moved for a temporary restraining order against Michael Nettles, a former employee, and his new employer, Papa John’s International, Inc., in the Eastern District of Missouri under both the Missouri Uniform Trade Secrets Act (MUTSA) and the DTSA. The court granted the motion based on the MUTSA claim and declined to analyze the DTSA claim in the context of a footnote, which pointed out that, “although the Court’s analysis has focused on Panera’s Missouri trade secrets claim, an analysis under the Defend Trade Secrets Act would likely reach a similar conclusion.”

Finally, in Earthbound Corp. v. MiTek USA, Inc., C16-1150 RSM, 2016 WL 4418013, at *11 (W.D. Wash. Aug. 19, 2016), a Washington district court also granted a temporary restraining order under both Washington state law and the DTSA based on strong circumstantial evidence of defendant’s misappropriation of confidential and trade secret information about Earthbound’s current and prospective customers, pending projects, bids, pricing, product design, and other elements of its business, which would lead to irreparable harm if not enjoined.

The takeaway in the year following the DTSA’s enactment is that, although the DTSA provides a new basis for federal court jurisdiction, absent extraordinary circumstances, practitioners should expect federal judges to analyze injunctive requests largely according to traditional notions of what is required for such relief.

Ex Parte Civil Seizures

One of the most widely publicized features of the DTSA is section 1836(b)(3)(d), which permits trade secrets misappropriation plaintiffs to request, on an ex parte basis, seizure of the alleged trade secrets before giving any notice to the defendant. Specifically, this provision provides at section 1836(b)(2)(A)(i) that “only in extraordinary circumstances” may the court issue an order “providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” To order an ex parte seizure, the court must find under section 1836(b)(2)(A)(ii)(IV)–(VIII) that: (1) the plaintiff is likely to succeed on the merits; and (2) if notice were provided, the defendant would likely “destroy, move, hide, or otherwise make such matter inaccessible.” The court must then find under section 1836(b)(2)(A)(ii)(III) that the harm in denying the ex parte application “outweighs the harm to the legitimate interests of the person against whom seizure would be ordered” and “substantially outweighs the harm to any third parties who may be harmed by such seizure.” To avail themselves of this relief, applicants cannot have publicized the requested seizure under section 1836(b)(2)(A)(ii)(VIII).

Federal Courts Are Extremely Hesitant to Grant a Request for the Seizure Remedy

On a nationwide basis, federal courts generally have limited relief under the DTSA to what was already available under the Federal Rules of Civil Procedure and developed state law. For example, in OOO Brunswick Rail Mgmt. v. Sultanov, No. 5:17-cv-00017, 2017 WL 67119, *2–3 (N.D. Cal., Jan. 6, 2017), the court declined to issue a seizure order against Sultanov, a former employee accused of trade secret misappropriation, to seize the company-issued laptop and mobile phone in his possession, despite finding that the plaintiff had satisfied the requirements for a temporary restraining order (i.e., a likelihood of success on the merits of its trade secret claims and irreparable harm in the absence of injunctive relief). The court cited the DTSA’s requirement that seizure orders may be issued only if other forms of equitable relief would be inadequate. It then found that, in this case, such a remedy was “unnecessary” because the court would order Sultanov to deliver the devices to the court at the time of the hearing without accessing or modifying them in the interim.

Similarly, in Magnesita Refractories Co. v. Mishra, 2017 WL 365619 (N.D. Ind. Jan. 25, 2017), the court noted that the DTSA’s seizure provision did not apply because the existing relief, an ex parte temporary restraining order authorizing the seizure of the defendant’s personal laptop computer, was sufficient. The court had ordered the seizure under the traditional temporary restraining order provision in Federal Rule of Civil Procedure 65 after it was shown that there was a “strong likelihood that [Mishra, the former employee] was conspiring to steal [the employer’s] trade secrets contained in the laptop.” The court rejected Mishra’s argument that he was denied the due process provided under DTSA’s seizure provision and denied his motion to vacate the temporary restraining order.

As of the publication of this article, a federal court has granted a request for the seizure remedy in a published decision only in a single, extraordinary circumstance. In Mission Capital Advisors, LLC v. Romaka, No. 16-civ-5878 (S.D.N.Y. July 29, 2016), the District Court for the Southern District of New York ordered a seizure against a defendant, Romaka, only after the defendant first violated a temporary restraining order. Romaka was a former employee of a commercial real estate company and had downloaded contact lists from his former employer without authorization. He then falsely represented that he had deleted this data. In reality, Romaka simply changed the file names and failed to comply with the existing temporary restraining order. As a result, the court granted an order allowing for the seizure of the contact lists, but because only the customer lists had been described with sufficient particularity, the court denied such a request for all other confidential information.

The Future Impact of the Seizure Provision

The early headline from a nationwide review of the initial DTSA cases is an emerging trend by federal courts to look warily on requests to issue DTSA seizure remedies in routine cases where traditional remedies would suffice. Courts are giving great deference to the statutory phrase “extraordinary circumstances” and refraining from finding as much in most cases, despite allegations typically included in the complaint to the contrary.

Should courts become more inclined to grant the seizure order provided under the DTSA, this remedy would prove effective for trade secret owners who seek to immediately enjoin trade secret misappropriators in the most extreme cases from using and disclosing their trade secrets or, for example, from fleeing the country. On the other hand, the seizure provision may also subject over-eager plaintiffs to substantial damages. In addition, although the seizure provision contains a long list of substantive requirements, an emphasis on confidentiality, and procedural safeguards, until the federal trial and appellate courts provide further guidance in the form of published decisions, there is certainly potential for this provision of the DTSA to lead to exploitive tactics, particularly by plaintiffs bringing misappropriation claims based on anticompetitive motives. This scenario could lead to the “potential for abuse of this provision by ‘trade secret trolls’ and larger companies seeking to use the DTSA for competitive advantage against smaller players.” See Bradford K. Newman & Esther Cheng, Federal Trade Secrets Protection: Law Would Create More Problems than It Solves, Daily J., Apr. 28, 2016. It might also lead to the seizure of company trade secrets by competitors who never should have had access rights to those secrets in the first place. Fortunately, as noted, courts seem to favor a conservative approach, faithful to the statutory text of the seizure provision, signaling the bench’s acknowledgement that it will indeed take “extraordinary circumstances” not found in the commonplace to-and-fro of trade secret litigation.

The Employee Immunity Provision

Another notable provision of the DTSA is its public policy immunity provision at 18 U.S.C. § 1833(b), which offers immunity from liability for the confidential disclosure of a trade secret to a government official or an attorney in order to report a violation of the law. The immunity provision at section 1833(b)(1) protects individual employees from civil or criminal liability for the disclosure of a trade secret that: (a) is made “in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney” and solely for “the purpose of reporting or investigating a suspected violation of law”; or (b) is made in a complaint or document “filed in a lawsuit or other proceeding” so long as the filing is made under seal. This provision also allows for the use of trade secret information in an anti-retaliation lawsuit. Specifically, if an employee files a lawsuit for retaliation by the employer for “reporting a suspected violation of law,” then the employee is permitted under section 1833(b)(2) to disclose the trade secret to his or her attorney and use the trade secret information in the court proceeding so long as the trade secrets are filed under seal and not disclosed, except pursuant to a court order.

Under the immunity provision at section 1833(b)(3)(A), an affirmative duty is placed on employers to provide notice of the provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” An employer can also comply with a notice requirement under section 1833(b)(3)(B) by providing a “cross-reference” to a policy given to the relevant employees. The cross-reference can be an amendment to the contract, which informs the employee of the existence of the immunity provision and “sets forth the employer’s reporting policy for a suspected violation of law.” Failure to comply with the notice requirement prevents an employer from recovering exemplary damages or attorney’s fees in an action against the employee under the DTSA.

No court has so far sanctioned an employee’s actions under the DTSA’s immunity provision; thus, this provision has had minimal impact. Bradford K. Newman, Protecting Intellectual Property Law in the Age of Employee Mobility (American Law Media 2014); 2017 updates at §12-7. In Unum Grp. v. Loftus, No. 4:16-CV-40154-TSH, 2016 WL 7115967 (D. Mass. Dec. 6, 2016), a Massachusetts federal court considered and rejected the argument of Loftus, a former employee of Unum Group, based on the DTSA immunity provision, that Unum Group’s trade secrets misappropriation claims should be dismissed because he took documents containing trade secrets to pursue legal action against the plaintiff for alleged unlawful activities. The court found Loftus’ contentions that his actions were immune under the DTSA unpersuasive because there was nothing in the record to support this affirmative defense at the motion-to-dismiss stage of litigation because discovery had not yet been conducted to determine the significance of the documents taken or their contents, it was not ascertainable from the complaint whether the former employee used, was using, or planned to use those documents for any purpose other than investigating potential violation of law, and no whistleblower suit had been filed. As such, the court found that Loftus’ actions were simply impermissible “self-help discovery” and ordered the return of the documents.

Despite the limited case law to date, the DTSA’s immunity provision likely will be raised repeatedly and thus become the subject of scrutiny by the federal trial courts, given that it is anticipated that employees accused of trade secret theft will continue to invoke this provision as part of their defense. For example, when a company discovers evidence that an employee secretly downloaded trade secrets in connection with exiting the company and files suit under the DTSA, the accused will likely claim that they took the trade secrets for the purpose of providing them to their attorney as part of an “investigation” into suspected violation of some law. Given that this defense is not available under the UTSA, and many states in fact specifically outlaw such “self-help” remedies, hedging against this defense may be one of many reasons why a DTSA plaintiff would also want to bring a claim under the UTSA.

Future Implications of the Defend Trade Secrets Act

At this point, apart from conferring federal jurisdiction over most of the trade secret claims, which would heretofore be governed exclusively by state law, and absent diversity jurisdiction, would be litigated solely in state courts, the DTSA in practice has been something less than a “seismic event.” Federal courts have correctly credited the statutory language that prohibits the seizure remedy absent “extraordinary circumstances,” which, despite being pled in every complaint, is rarely present. In addition, although practitioners should expect to see the employee immunity provision invoked on an increasing basis, it will require unique circumstances to get any traction as well.

Are there any action items in light of the DTSA that companies can employ to strengthen their trade secret protections? The answer is most certainly “yes.” Companies should have qualified counsel review policies and agreements to ensure they contain the language required under the DTSA in order to recoup attorney’s fees in the case where an employee unsuccessfully invokes the DTSA’s immunity provision. Beyond that, companies should continually be assessing and improving how they protect their most valuable confidential employee from insider (employee) threats, including devising and utilizing a high-risk departure program designed to safeguard the most valuable trade secrets upon the departure of key executives.

Finally, given that the DTSA does provide for a seizure remedy, in all cases where a company is faced with a DTSA claim, it is essential to conduct a privileged review of immediate measures to employ in order to minimize the ongoing threat to a third party’s trade secrets (if any) and, thus, decrease the likelihood of a seizure remedy granted.

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