It has been more than two years since President Obama signed the Defend Trade Secrets Act (DTSA) into law, which created a federal, private, civil cause of action for trade-secret misappropriation in which “[a]n 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 or foreign commerce.” Defend Trade Secrets Act of 2016, S. 1890, 114th Cong. § 2 (2016).
Quick Review
The DTSA provides a uniform statute to be applied nationwide in federal court. Although the DTSA will not preempt existing state trade-secret laws, it gives plaintiffs the powerful option of filing suit in federal court, thus adding an important additional tool for American companies, especially those with a national footprint, to enforce their intellectual property rights.
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).
The DTSA defines trade secret as “all forms and types of financial, business, scientific, technical, economic, or engineering information,” if “(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
The DTSA includes a safe harbor for whistleblower employees that provides immunity from any criminal or civil liability under any federal or state trade-secret law for disclosure of a trade secret that is made in confidence to an attorney or federal, state, or local governmental official “solely for the purpose of reporting or investigating a suspected violation of law,” or in a filing in a lawsuit made under seal.
The DTSA created a civil seizure mechanism in which a trade-secret owner, aware of a potential misappropriation of its trade secrets, may be able to quickly prevent further dissemination of that proprietary information during the pendency of a DTSA case. Following issuance of a seizure order, the court is required to hold a seizure hearing wherein the party who obtained the seizure order has the burden of proving the facts underlying the order.
LESSONS LEARNED AFTER TWO YEARS
Filing Trends After One Year
Between May of 2016 and May of 2017, 486 federal court cases that raised a DTSA claim were filed. Of these, 15 (3%) were cases originally filed in state court that were then removed to federal court by the defendant(s). In addition, 9 (2%) of these cases involved a DTSA claim raised by a defendant as a counterclaim or third-party claim.[1] Following the enactment, the greatest number of cases being filed in districts that include major metropolitan areas that are home to high-technology hubs and/or major corporate headquarters: the Northern District of Illinois (Chicago); the Northern District of California (San Francisco and Silicon Valley); the Central District of California (Los Angeles); the Southern and Eastern Districts of New York (New York City); the Eastern District of Virginia (suburban D.C.); and the Eastern District of Pennsylvania (Philadelphia).
Conduct that Occurs Prior to May 2016
The DTSA applies only to misappropriation occurring “on or after the date of the enactment of this Act.” However, many wondered whether acts before the effective date could sustain a claim under the DTSA. In the first year of application, courts have consistently required that some act of misappropriation occur after the law’s effective date, May 11, 2016. However, a trade secret owner may assert a DTSA claim for misappropriation that occurred prior to the DTSA’s enactment so long as unauthorized use continued past the effective date.
For example, in Syntel Sterling Shores Mauritius Limited v. Trizetto Group, the Southern District of New York allowed defendants to assert a DTSA counterclaim where the initial alleged misappropriation occurred prior to May 2016, but the wrongdoing continued after that date. According to the court, the “plain language” of the DTSA defines misappropriation as “disclosure or use of a trade secret without the consent of another,” and so any post-enactment use is sufficient to support a DTSA claim. Citing Syntel, the Eastern District of Pennsylvania recently reached the same conclusion. Other courts will likely follow suit.
DTSA Coexists with State Law
As intended, the DTSA does not preempt state law trade secret misappropriation claims. This means that a party can file suit under the DTSA in federal court and plead a state law claim arising out of the same facts. To a large extent, courts have interpreted the DTSA as a federal analogue of state-enacted variants of the Uniform Trade Secrets Act (UTSA).
The DTSA was proposed as an alternative to the UTSA because of the burden of obtaining discovery from other states and the lack of uniformity in enactment of the UTSA among the states. However, rather than being used as an alternative to UTSA claims, the DTSA has supplied an easy route into federal court with both federal and state claims. Notably, this has led to a convergence of the DTSA and UTSA as interpreted in a district court, diminishing some of the uniformity of application of the DTSA across districts.
Interstate Commerce Requirement
Unlike under state trade secret laws, the federal courts are only allowed to hear a claim under DTSA if the alleged trade secrets are “related to a product or service used in, or intended for use in, interstate or foreign commerce.” Courts will grant a dismissal if a plaintiff fails to allege a connection between the alleged trade secrets and interstate or foreign commerce. To avoid dismissal, plaintiffs should allege specific facts that demonstrate a clear nexus between the alleged trade secrets and interstate commerce.
Ex Parte Seizures – Few and Far Between
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. “[O]nly 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 that: (1) the plaintiff is likely to succeed on the merits; (2) if notice were provided, the defendant would likely “destroy, move, hide, or otherwise make such matter inaccessible;” and (3) 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.”
In the applications for seizure that have been requested in the hundreds of DTSA cases filed, courts generally have concluded that the moving party has failed to allege facts sufficient to satisfy the DTSA’s seizure requirements. Instead, many courts have granted seizures under more common forms of pre-trial relief, such as expedited discovery and TROs.[2]
However, 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 had downloaded contact lists from his former employer and then falsely represented that he had deleted this data. As a result, the court granted an order allowing for the seizure of the contact lists, but only because the customer lists had been described with sufficient particularity.
Whistleblower
The DTSA included whistleblower protections to insulate individuals from trade secret misappropriation liability under either state or federal law if they are turning information over, in confidence, to governmental officials or a lawyer “solely for the purpose of reporting or investigating a suspected violation of law.” However, an employee sued under the DTSA must present evidence to invoke this defense. Merely pleading an affirmative defense of immunity under the DTSA is not enough.
For example, in Unum Grp. v. Loftus, No. 4:16-CV-40154-TSH, 2016 WL 7115967 (D. Mass. Dec. 6, 2016), the District of Massachusetts rejected the argument of a former employee of Unum Group that Unum Group’s trade secrets misappropriation claims should be dismissed because the employee took documents containing trade secrets to pursue legal action against Unum Group for alleged unlawful activities. The court found Loftus’ immunity defense under the DTSA unpersuasive because the complaint did not allege 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. Instead, the court found that Loftus’ actions were simply impermissible “self-help discovery” and ordered the return of the documents.
[1]. The DTSA at One: An Empirical Study of the First Year of Litigation Under the Defend Trade Secrets Act
[2]. See Earthbound Corp., MiTek USA, Inc., 2016 WL 4418018, *11 (W.D. Wash. Aug. 19, 2016) (granting seizure of property under TRO and expedited discovery requests); Baleria Caribbean Ltd., Corp. v. Calvo, 16 2330-CIV-WILLIAMS (S.D. Fla. Aug. 5, 2016) (granting ex parte application for a seizure order as a form of expedited discovery); Dazzle Software II, LLC, et al. v. Kinney, 16-12191 (E.D. Mich. June 15, 2016) (denying application for seizure order, but permitting “expedited discovery”).
