December 08, 2016 Articles

Defend Trade Secrets Act: Filing Considerations in Trade Secret Actions

An update on where things stand with trade secret misappropriation cases six months following the passage of the Defend Trade Secrets Act.

By Stephanie E. O'Byrne – December 8, 2016

Since it was signed into law in May 2016, the Defend Trade Secrets Act (DTSA) has provided companies a cause of action to pursue damages and injunctive relief for trade secret misappropriation in federal court.

Thus far, over 60 federal actions have been filed with DTSA claims, many of which also allege a violation of the forum state’s Uniform Trade Secrets Act (UTSA) and a variety of state law remedies, such as breach of contract, breach of fiduciary duty, tortious interference with prospective economic operations, and common law unfair competition. About a dozen temporary restraining orders (TROs) and preliminary injunctions have been granted in these actions, all of which were justified on the basis of noncompete clauses in employment agreements.

There have been no applications under the new DTSA “civil seizure” provision, which uniquely allows the federal court, on an ex parte application and under extraordinary circumstances, to issue an order seizing property “necessary to prevent the propagation or dissemination of the trade secret” at issue in the litigation. 18 U.S.C. § 1836(b)(2)(A)(i) (2016). Therefore, at this time, there are no decisions offering current guidance on what facts are necessary to demonstrate a threat of “immediate or irreparable injury” or circumstances that suggest that a party would “evade, avoid, or otherwise not comply” with a court’s judgment, sufficient to justify an ex parte seizure under the DTSA. 18 U.S.C. 1836(b)(2)(A)(ii)(I) (2016).

Thus, as DTSA cases filed to date look very much like UTSA/noncompete cases, the extent to which a federal action offers discrete advantages remains unclear. Some considerations follow

Nature of Misappropriation
The DTSA defines trade secrets more broadly than the UTSA. See, e.g., Earthbound Corp. v. Mitek USA, Inc., C.A. No. C16-1150 RSM, 2016 WL 4418013, at *10 (W.D. Wash. Aug. 19, 2016). Under the UTSA, both actual and threatened misappropriation may be enjoined, but misappropriation must be demonstrated by facts evidencing that the perpetrator has knowledge that the trade secret was obtained by improper means. While this is not difficult in most cases involving a breach of a noncompete, the DTSA end-runs some of these proofs and allows for injunctive relief for misappropriation of a trade secret as long as the trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. §1836(b)(1) (2016).

Thus far, no court has relied on the DTSA in granting a TRO where proof of irreparable injury would have fallen short under state law. Still, the presence of both claims may be helpful insurance in cases where the nature of the misappropriation is either unclear or difficult to pinpoint on a motion for a TRO.

Effectiveness of TROs
The lack of ex parte seizure applications in DTSA cases to date strongly suggests that TROs have been effective against those individuals accused of trade secret misappropriation under the statute. Recall that the DTSA specifies that seizure may be ordered by the court ex parte, on a showing of “specific facts” demonstrating “extraordinary circumstances” and “describ[ing] with reasonable particularity the matter to be seized,” which includes a showing under oath that an injunction would be insufficient because “the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order.” 18 U.S.C. § 1836(b)(2)(A)(i) (2016). Practically speaking, this remedy is likely to suit the facts of only an extremely limited subset of cases. For example, it is difficult to imagine circumstances that might definitively support a showing that a U.S. corporation would “evade, avoid, or otherwise not comply” with a court’s judgment. Absent facts suggesting a Snowden-esque exposure of corporate trade secrets, or prior wanton disregard of a court’s order, a TRO and/or preliminary injunction will remain sufficient in most cases.

Court Availability
The DTSA does not require that a trade secret misappropriation action be instituted against both a business entity and, separately, those individuals taking part in the theft. Rather, the statute provides that a civil action may be brought as long as the misappropriated trade secret is used “in interstate or foreign commerce,” and it provides injunctive and damages remedies without regard to whether the perpetrator is an entity or an individual or both. 18 U.S.C. §§ 1836(b)(1), (b)(3).

Nevertheless, given that the DTSA will, in most instances, provide limited additional value to remedies available under state trade secret laws, federal venue is the paramount consideration in crafting a misappropriation complaint. The legislative history of the DTSA makes clear that a more predictable, less congested path to court was contemplated in creating the federal cause of action. But depending on the target district, federal court may or may not be the most efficient.

One example is the Delaware Court of Chancery, which may exercise jurisdiction over nearly 50 percent of American publicly traded companies and 65 percent of Fortune 500 companies by virtue of their Delaware incorporation. Why Form a Delaware Corporation? (2016), This court can hear a motion for a TRO within days of filing and resolve an entire expedited case within months—not years—of its initiation. In comparison, the time to trial in intellectual-property-heavy federal districts may be significantly longer.

Court Expertise
The Delaware Court of Chancery has amassed specialized experience in noncompete cases. And, more generally, state courts sitting in law and equity around the country may be more familiar with UTSA law than their federal counterparts. Historically, federal courts have been called upon to resolve UTSA claims under supplemental jurisdiction in patent and trademark cases brought in federal courts. To that end, those districts having the most intellectual property litigation by volume over time (Delaware, Eastern District of Texas, Northern and Central Districts of California) not only are the most technically savvy but also can draw upon their broader intellectual property experience and any prior UTSA experience in considering and contrasting the DTSA’s new provisions.

The substantive impact of the DTSA on the outcome of federal cases brought with both DTSA and UTSA claims is yet to be determined. Absent a need to apply for seizure of the misappropriated trade secret, the choice of federal venue should be made carefully upon consideration of all of the costs and benefits. Those costs and benefits will, of course, depend on the facts presented, the risk of irreparable harm, and any extenuating circumstances, as well as the likely time to disposition in each venue.

Keywords: litigation, corporate counsel. Defend Trade Secrets Act, Uniform Trade Secrets Act, trade secrets, temporary restraining orders, misappropriation, irreparable harm

Stephanie E. O’Byrne is an associate with Potter Anderson & Corroon LLP.