May 31, 2017 Articles

Tips for When Not to Bring a Claim under the Defend Trade Secrets Act

State law—and state courts—often remain a plaintiff’s best hope of avoiding, halting, and remedying trade secret misappropriation.

By Kevin C. Quigley

Your scientists were so preoccupied with whether or not they could that they didn’t stop to think if they should.

—Jurassic Park (1993)

The Defend Trade Secrets Act (DTSA), signed into law by President Obama on May 11, 2016, is one of the most significant developments in intellectual property law of the past few years. The DTSA creates a federal cause of action for trade secret misappropriation. Its most buzzed-about provision permits a plaintiff, upon a heightened showing, to seek an ex parte seizure of misappropriated property by court order. In general, however, the DTSA largely parallels the model Uniform Trade Secrets Act (codified, in one form or another, by 48 states, Massachusetts and New York being the two exceptions). For that reason, pleading a DTSA claim may strike a trade secret plaintiff’s counsel as a familiar and accessible replacement for a state law claim. And, because the DTSA expressly does not preempt state trade secret law, tacking on a DTSA claim to state law misappropriation claims may seem like an even lower-risk proposition.

But counsel should think carefully before bringing a DTSA claim instead of—or even in addition to—state law trade secret claims. DTSA provisions regarding injunctive relief, required notice, and fee shifting can sneak up on the unwary plaintiff. Moreover, while the DTSA provides a welcome expansion of access to federal court, some trade secret plaintiffs may have better prospects of relief at the state level. In short, just because you couldbring a DTSA claim does not necessarily mean that you should.

Injunctive Relief and the DTSA’s Rejection of the “Inevitable Disclosure” Doctrine
Trade secret cases are frequently preliminary injunction cases. In a typical scenario, a key employee leaves the plaintiff employer for a competitor. From the employer’s perspective, it would be impossible for the employee not to use his or her knowledge of the former employer’s trade secrets on behalf of the competitor. In the oft-cited analogy of the Seventh Circuit in PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995), the plaintiff employer “finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.” The employer sues for an injunction preventing its former employee from working for the competitor. Whether the plaintiff is successful in obtaining the injunction often depends on whether it has sued in a jurisdiction (or under a statute) that recognizes the so-called “inevitable disclosure” doctrine.

The inevitable disclosure doctrine under state law. PepsiCo is the genesis of the inevitable disclosure doctrine. There, the Seventh Circuit ruled, under Illinois law, that a plaintiff may prove its right to injunctive relief “by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Id. That rule is controversial because it can result in an injunction without any evidence of actual or threatened misappropriation.

In the decades since PepsiCo, the inevitable disclosure doctrine has been squarely rejected by some states, accepted outright by others, and adapted in various modified forms by still more. A full catalogue of the various state approaches is beyond the scope of this article, but the point can be seen in a comparison of PepsiCo with, for example, White v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 293 (Cal. Ct. App. 2002) (“Lest there be any doubt about our holding, our rejection of the inevitable disclosure doctrine is complete.”), and Kelly Services Inc. v. Marzullo, 591 F. Supp. 2d 924 (E.D. Mich. Nov. 20, 2008) (requiring evidence of bad faith before applying inevitable disclosure doctrine). In many states, it remains unclear whether and how the doctrine applies. It is surely one of the most unsettled and jurisdiction-specific aspects of trade secret law.

The inevitable disclosure doctrine under the DTSA. Like the Uniform Trade Secrets Act, the DTSA allows a court to issue an injunction to “prevent any actual or threatened misappropriation.” 18 U.S.C. § 1836(b)(3)(A). Unlike the UTSA, however, the DTSA contains two additional provisions limiting the availability of injunctions. Both were proposed by Senator Dianne Feinstein (D-CA) and align with California’s strong policy favoring employee mobility:

  • A court cannot issue an injunction that would “prevent a person from entering into an employment relationship”; and
  • “[C]onditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows[.]”

Id. (emphasis added).

The DTSA’s implicit rejection of the inevitable disclosure doctrine changes the claim calculus for a trade secret plaintiff seeking an injunction or temporary restraining order against a departing employee. If the sought-after injunction would prevent the former employee from working for a competitor, for example, it would appear to be barred by the express language of the DTSA. Note, however, that this does not mean that the DTSA precludes injunctions independently based on restrictive covenants or state trade secret law in cases that also happen to include DTSA claims. See Panera v. Nettles, 2016 U.S. Dist. LEXIS 101473 (E.D. Mo. Aug. 3, 2016) (enjoining defendant executive from working for competitor Papa John’s, based on plaintiff’s likelihood of success on claims for breach of employment agreement and violation of the Missouri Trade Secrets Act, where Panera also brought a DTSA claim).

Moreover, if the plaintiff brings suit in a jurisdiction that has adopted (or has not outright rejected) the inevitable disclosure doctrine, a state law misappropriation claim plainly will offer a better chance of success in obtaining the injunction—particularly where there is limited evidence of actual or threatened misappropriation. In those circumstances, introducing an otherwise duplicative DTSA claim in addition to a promising state law claim may be ineffectual at best and self-defeating at worst. If the court wavers at all on the applicability of the controversial inevitable disclosure doctrine, why remind it that Congress (in a nearly unanimous vote) statutorily rejected that doctrine?

Whistleblower Notice Requirements: Not Just for Whistleblower Cases
Another provision unique to the DTSA is that it grants “whistleblower immunity” to persons who reveal trade secret information to attorneys or government investigators in good faith for purposes of investigating corporate wrongdoing. That immunity will apply only in rare cases, but an associated notice provision could have far-reaching consequences for trade secret plaintiffs. The DTSA requires the employer to provide notice to its employees of such whistleblower protections “in any contract or agreement with an employee that governs the use of a trade secret of other confidential information.” 18 U.S.C. § 1833(b)(3)(A). If the employer does not provide notice of whistleblower immunity, it “may not be awarded exemplary damages or attorney fees . . . in an action against an employee to whom notice was not provided.” 18 U.S.C. § 1833(b)(3)(C) (emphasis added).

It is not entirely clear whether Congress intended the latter provision to apply in all DTSA cases or only in those that concern whistleblowing activity. But, by its plain language, it appears to apply to all DTSA claims. Trade secret plaintiffs who have not yet incorporated the required notice into their employment contracts, nondisclosure agreements, or policy statements likely must resort to state law to recover punitive damages and attorney fees in lawsuits against their former employees. Moreover, a successful plaintiff’s ability to recover such damages and fees based on an all-encompassing request at the end of its complaint may be complicated by the existence of a DTSA claim under which such damages are unavailable.

An Unsuccessful Plaintiff’s Exposure to Attorney Fees
The DTSA provides that the accused defendant may recover his or her reasonable attorney fees from the plaintiff if (among other things) the claim of misappropriation was made in bad faith. While existing UTSA-based state laws generally contain similar provisions, the DTSA is unique in adding expressly that bad faith “may be established by circumstantial evidence.” 18 U.S.C. § 1836(b)(3)(D).

Do You Really Want to Be in Federal Court?
Before the DTSA was enacted, trade secret plaintiffs could bring their case in federal court only where there was complete diversity between the parties or as a matter of supplemental jurisdiction where other federal, non–trade secret claims were brought. Now, nearly all trade secret plaintiffs have the option to bring a federal DTSA claim. (There are two important qualifiers. First, the asserted act of misappropriation must have occurred on or after—or continued on or after—May 11, 2016 (the effective date of the DTSA). Second, the asserted trade secrets must relate to a product or service “used in, or intended for use in, interstate or foreign commerce.”) Although federal courts often do have advantages over state courts—including broader discovery powers and judges more comfortable with complex technologies—the decision to file in federal court should not be an automatic one. Consider, for example, whether a state court might be more likely to grant a desired injunction, to place the case on a faster (or slower) track to trial, or to be friendlier to the “hometown” plaintiff company. Forgoing a DTSA claim to keep a lawsuit in state court may be the right strategic decision. However, keep in mind that, while DTSA claims may be filed in state court, a defendant will likely exercise his or her right to remove to federal court for the same reasons the plaintiff chose to avoid federal court.

Conclusion
To be clear, a DTSA claim will be valuable to many trade secret plaintiffs. It ensures an open door to federal court, and its ex parte seizure process provides extraordinary protections in extreme circumstances. As a body of case law interpreting and applying the statute develops, litigants will have further guidance and support to draw upon. In the meantime, however, state law—and state courts—often remain a plaintiff’s best hope of avoiding, halting, and remedying trade secret misappropriation.

Kevin C. Quigley – May 31, 2017