March 07, 2018 Articles

Defend Trade Secrets Act of 2016: Important Take-Aways to Combat Those Who Take Away

A new federal law gives companies another tool to protect their trade secrets, along with a clear path to federal court to bring their claims

by Christopher S. Koller and Kathleen M. Laubenstein

Armed with an inexpensive thumb drive, a smart phone, or an employer’s very own email and Internet access—or simply walking out the door with paper files—an employee or competitor has an impressive arsenal to steal confidential information and trade secrets. It is not only easier to surreptitiously remove valuable confidential information; it is easier to take more varied types of information and to take much more of it.

No enterprise is immune from misappropriation of its trade secrets, which puts enterprises at risk of substantial losses in revenue and damage to reputation. Until recently, recovering the misappropriated information and getting damages for its removal and misuse meant relying on various state law causes of action and potentially languid state courts. However, with the enactment of the Defend Trade Secrets Act of 2016 (DTSA), practitioners can now bring a private cause of action in federal court for misappropriation of trade secrets, in addition to state remedies. What follows are the important take-aways you need to know about this recently enacted law before your client’s employees or competitors take away their trade secrets.

The Defend Trade Secrets Act of 2016 was signed into law by President Barack Obama on May 11, 2016, and immediately applied to all cases of misappropriation occurring on or after its enactment. At its core, the DTSA (codified at 18 U.S.C. §§ 1831–1839) amends the Economic Espionage Act of 1996 (EEA) by providing for a federal cause of action under which an owner of a trade secret that is misappropriated may bring a civil action if the trade secret is related to a product or service used in, or intended for use in, interstate commerce.

Intriguingly, the DTSA appears to give owners of trade secrets more power to protect their confidential information in an era when that power is otherwise being curtailed. At a time when non-competes and other contractual remedies to protect customer relationships are falling into disfavor, the DTSA codifies what many non-compete practitioners already know: Courts are more likely to prevent an idea worthy of protection from walking out the door than a person. Moreover, the DTSA recognizes that most businesses today operate across state lines, and the highly varied state laws often provide inadequate protection for an employer engaged in interstate commerce. Where time is of the essence, the uniformity and powers of a federal court will likely be far more efficient and will streamline access to relief.

Statutory Protections Before the DTSA
Prior to the enactment of the DTSA, trade secret holders were not without protection, but that protection largely came by way of state statutes adopting the Uniform Trade Secrets Act (UTSA), and plaintiffs were required to demonstrate diversity jurisdiction to proceed with an action in federal court. The UTSA has been adopted in 47 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. While the various UTSAs are very similar, enough differences exist that no two states’ laws are truly uniform. Aside from explicit differences in the statutory language, each state has developed its own unique common law governing what sort of information will be considered a trade secret.

Protections under the DTSA
The DTSA can be broken down into three main components: (1) a federal cause of action that includes broad definitions of trade secrets and misappropriation; (2) comprehensive remedies, including the power of federal courts to issue ex parte seizure orders, as well as compensatory and exemplary damages; and (3) protections offered to whistleblowers.

Federal jurisdiction and defining a trade secret. Prior to the DTSA, no federal private cause of action existed for misappropriation of trade secrets. Only the U.S. Department of Justice, under the EEA, could bring federal trade secret protection actions, which it rarely did: The Department of Justice has averaged about 10 EEA prosecutions annually.

The DTSA provides private parties the right to bring federal civil actions, which facilitates nationwide service of process and execution of judgments. More importantly, it does so without preempting state laws (with limited exceptions). Plaintiffs therefore can bring a DTSA claim, a claim under a state’s UTSA, and any other viable statutory, tort, or contract claims.

The DTSA sets out broad definitions of both “trade secrets” and “misappropriation.” The full definition of “trade secret,” which is derived from the EEA and mirrors the UTSA, is set out in section 1839(3). In short, it covers a wide swath of financial, technical, or business information if (a) the owner “has taken reasonable measures to keep such information secret” and (b) the information has value because it is not generally known to, or readily ascertainable through proper means by, someone who could gain economic value from the information.

Likewise, section 1839(5) broadly defines “misappropriation” and mirrors the UTSA. Generally, “misappropriation” means the acquisition of a trade secret by improper means or the disclosure or use of a trade secret a person knew or had reason to know had been obtained by improper means. In other words, it is not a defense to say you did not take the trade secret if you knew or had reason to know that it was obtained by improper means and yet made use of it. Finally, the DTSA expressly clarifies what was often the result under the various forms of the UTSA: Acquisition of a trade secret is not considered to have been by “improper means” when obtained by reverse engineering, independent derivation, or another lawful means of acquisition.

Given the similarities between the definition of trade secrets and misappropriation in the DTSA and the UTSA, the same pleadings likely will allege a trade secret successfully under both a state UTSA and the DTSA. There are, however, two key distinctions between state UTSAs and the DTSA. First, the DTSA does not recognize the doctrine of inevitable disclosure explicitly, although some courts have been willing to consider the doctrine as a basis for a damages claim under the statute. The doctrine states that certain employees learn intangible confidential information that cannot be returned to the company at the end of their employment and, therefore, they cannot work for a competitor without “inevitably” disclosing this confidential information. Indeed, the doctrine of inevitable disclosure operates essentially as a de facto non-compete provision. Second, the DTSA authorizes an injunction only when there is evidence of an actual misappropriation, not merely the potential for one. Thus, attorneys without evidence of misappropriation should also always file under the state UTSA.

DTSA remedies: injunctions, damages, and the seizure provision. Section 1835 of the DTSA provides for injunctive relief to protect trade secret information. The movant must satisfy the four requirements set forth under Rule 65 of the Federal Rules of Civil Procedure: (1) a likelihood of success on the merits; (2) immediate and irreparable harm that cannot be compensated by money damages; (3) that granting relief will not result in greater harm to the nonmoving party; and (4) that the public interest favors such relief. If satisfied, courts typically order relief such as the immediate return of misappropriated information, preservation of any electronic devices containing such information, and prohibition against disclosure of such information.

A court may award the aggrieved party damages for the actual loss caused by the misappropriation and for any unjust enrichment resulting from use of the misappropriated information. The DTSA also permits the recovery of attorney fees. Exemplary damages are available, up to twice the award of damages, where a trade secret is willfully and maliciously misappropriated. However, only parties that comply with the whistleblower notice provision, discussed below, are able to seek recovery of exemplary damages and attorney fees.

The seizure remedy in section 1836(b)(2) is probably the most talked-about remedy in the DTSA. In extraordinary (and rare) circumstances, a plaintiff can seek an ex parte court-ordered seizure of the alleged trade secret. To be granted a seizure order, a plaintiff must not only meet the burdens of Rule 65 discussed above but also demonstrate that any equitable relief under Rule 65 would be inadequate. Moreover, the movant is required to show a plethora of requirements beyond Rule 65:

  • immediate and irreparable harm without seizure;
  • that denying the seizure will cause more harm than granting it would cause;
  • that the non-movant has actual possession of the trade secret;
  • that the item to be seized can be described with reasonable particularity;
  • that the information at issue is likely to be destroyed or rendered inaccessible absent the seizure; and
  • the movant may not publicize the requested seizure.

After a plaintiff meets this onerous showing, the DTSA requires that the court issuing the seizure order take a number of steps. The court must (1) set forth findings of fact and conclusions of law, (2) identify the narrowest and least intrusive seizure possible, (3) order the seized property to be protected, (4) indicate when the seizure may be executed and whether force may be used to access locked areas, (5) set a date for a hearing within seven days after an order is issued to hear argument on the seized materials, and (6) require the applicant to post security against a wrongful or excessive seizure.

Two admonitions for attorneys: First, use this remedy only if truly warranted, as the DTSA provides a cause of action for a party who suffered an injury where the seizure was wrongful or excessive. Second, set appropriate expectations for your client. This relief, while enticing, is rarely granted or even entertained. See Dazzle Software II, LLC v. Kinney, No.16-12191, 2016 U.S. Dist. LEXIS 155993 (E.D. Mich. Aug. 22, 2016); OOO Brunswick Rail Mgmt. v. Sultanov, No. 17-00017, 2017 U.S. Dist. LEXIS 2343 (N.D. Cal. Jan. 6, 2017); Mission Capital Advisors LLC v. Romaka, No. 16-5878 (S.D.N.Y. July 29, 2016); Balearia Caribbean Ltd., Corp. v. Calvo, No. 16-23300 (S.D. Fla. Aug. 5, 2016); Jones Printing LLC v. Adams Lithographing Co., No. 16-00442 (E.D. Tenn. June 28, 2017). See also Magnesita Refractories Co. v. Mishra, 2017 U.S. Dist. LEXIS 10204 (N.D. Ind. Jan. 25, 2017) (demonstrating that courts continue to grant temporary restraining orders under Rule 65 to prevent spoliation of evidence even when other DTSA claims are made).

The DTSA’s whistleblower notice provision. Section 1833 of the DTSA protects a whistleblower from consequences for disclosing a trade secret if disclosure is made confidentially to a government official or to an attorney for the sole purpose of reporting or facilitating the investigation of a violation of law. A whistleblower is also protected where disclosure is made in a complaint or other document filed in a lawsuit or proceeding where that disclosure is made under seal by the court.

Employers must provide employees with notice of this whistleblower immunity in any contract or agreement between the employer and employee that governs the use of trade secrets or confidential information. Failure to do so precludes the employer from seeking exemplary damages and attorney fees under any claim brought under the DTSA or any related state causes of action. Employers may satisfy this requirement either by including this notice in an employment agreement or by cross-referencing an updated policy or other document that itself contains notice of the DTSA whistleblower protections.

Pleading the DTSA
Because the DTSA does not preempt state actions, a plaintiff can bring an action in federal court and invoke supplemental jurisdiction to allege a state trade secrets claim or bring state (and federal claims) in state court; in the latter case, a defendant could still seek removal of the action to federal court. In deciding in which jurisdiction to file, attorneys should consider factors such as the different proof requirements, the potential pool of jurors, jury verdict requirements, and the location of the parties and witnesses involved. Attorneys should also be cognizant of the limitations of discovery in federal court versus state court—while limitations on depositions and interrogatories could prove burdensome, the inability to depose out-of-state witnesses or the slower timetable often presented in state court may prove highly unattractive. A plaintiff could also use the DTSA to avoid choice-of-law conflicts.

Timing of misappropriation. A claim of misappropriation arises when the misappropriation is or should have been discovered. The DTSA provides for a three-year statute of limitations.

Interstate commerce requirement. At first blush, the interstate or foreign commerce requirement appears somewhat benign. The DTSA does not require that a trade secret be presently in or geared toward interstate commerce; rather, the fact that a trade secret is intended to be introduced in that capacity should satisfy the requirement. Yet, courts have dismissed actions under the DTSA for failure to properly plead this predicate requirement; therefore, plaintiffs should remember to clearly plead how this requirement is satisfied in every complaint. See, e.g., Hydrogen Master Rights, Ltd. v. Weston, No. 16-474, 2016 U.S. Dist. LEXIS 2694, at *34–35 (D. Del. Jan. 9, 2017); Gov’t Emps. Ins. Co. v. Nealey, 2017 U.S. Dist. LEXIS 91219, at *33–35 (E.D. Pa. June 13, 2017). Because case law on this issue under the DTSA is extremely limited, plaintiffs can look to decisions related to the EEA’s similar (although not identical) interstate or foreign commerce requirement for some guidance. That guidance suggests the requirement will be read broadly, intended to be more inclusive than exclusive.

Ownership of the trade secret. Section 1839 of the DTSA requires that the “owner” of a trade secret take reasonable measures to keep such information secret. While the DTSA does not define who will be considered an owner of a trade secret, plaintiffs should specifically plead the means by which they have ownership over the alleged trade secrets. For example, if the alleged trade secret was developed by a company, specifically plead that the trade secret is “owned” only by that company. Likewise, plaintiffs must plead what measures were taken to protect and to secure the misappropriated information.

Other means of establishing federal jurisdiction. The DTSA provides a direct method of gaining federal jurisdiction. However, it is not the only means of federal jurisdiction. Where there is no diversity, consider a claim under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030. Under the CFAA, private plaintiffs have a cause of action to seek damages where a person has accessed confidential information by intentionally accessing a computer without authorization or by exceeding his or her authorized access. Note, however, that a circuit split currently exists regarding what entails “exceed[ing] authorized use.” The First, Third, Fifth, Seventh, and Eleventh Circuits take a broad view that an employee exceeds authorized access when violating the employer’s policy for accessing computer information. In contrast, the Second, Fourth, and Ninth Circuits take a literal or “narrow” view that an employee must truly hack or access a computer system that the employee was not authorized to access in the first place.

Another reason to plead the DTSA: It calls for uniformity of confidentiality in proceedings. Even without the DTSA, courts are obligated to preserve the secrecy of alleged trade secrets by placing documents that would expose the information under seal. However, different courts may hold different views on what is subject to secrecy, as well as the procedures for, or the timing of, the measures to preserve secrecy. Section 1835(b) of the DTSA offers a streamlined process by providing: “The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential.” Thus, a party bringing a DTSA claim can clearly identify what information will need to remain secret at the outset.

The DTSA offers a long-overdue uniform method for seeking the prompt return of information and damages stemming from the misappropriation of trade secrets. While the DTSA undoubtedly will feel familiar to attorneys who have experience with UTSA, certain disparities exist such that one should take pause when pleading or defending a claim or a violation of both. In addition, one should not forget that the DTSA is not, and need not be made into, a substitute for additional avenues for protection of a client’s trade secrets. For these reasons, attorneys will likely want to keep abreast of not only case law developments affecting and modifying the application of the DTSA but also developments as to the enforceability of non-compete agreements more generally.

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