Snippets
22 minute read

The DTSA After One Year: Has the Federal Trade Secrets Law Met Expectations?

Joshua R. RichSummer 2017 (snippets)

On May 11, 2017, the Defend Trade Secrets Act (DTSA) – the law that created a Federal cause of action for trade secret misappropriation – celebrated its first birthday. The law was the result of years of negotiation between stakeholders concerned with balancing improved protection of corporate intellectual property with protecting market competition, employee rights and mobility, and individual privacy. The DTSA reflects those negotiations with three basic elements: a civil cause of action modeled on (but not identical to) the state-law Uniform Trade Secrets Act (UTSA), an ex parte seizure provision to prevent threatened destruction or dissemination of secrets, and whistleblower protection provisions. From the first year of enforcement, it appears that the DTSA got the balance right with some provisions, may need to be tweaked with others, and has yet to render clear results in some.

DTSA Claims Have Uniformly Been Paired with UTSA Claims

The DTSA was originally proposed as a necessary alternative to the UTSA because of the burden of obtaining discovery (especially prompt discovery for temporary restraining order proceedings) from other states and the lack of uniformity in enactment of the UTSA among the states. That is not how the DTSA has been used. Instead, DTSA and UTSA claims have been pled together in almost every case, with the UTSA claims usually falling only under the court’s supplemental jurisdiction. That is, 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.

While the unexpectedly consistent linking of DTSA claims to UTSA claims is not overly troubling, it may carry with it some unintended consequences. First, more litigation of UTSA claims in Federal court can lead to greater inconsistency in outcomes based solely on the choice of Federal or State court. While both fora are expected to follow binding state authority, they may fill in the interstices between the controlling decisions differently. Second, increasing familiarity with a given state’s UTSA claims is likely to inform how Federal courts interpret the DTSA. And, while that may harmonize the law between UTSA and DTSA decisions, it may continue to lead to different DTSA outcomes from different Federal courts. Third, the distinction between the procedural rules in State and Federal courts may ultimately shape UTSA decisions merely because plaintiffs have used the DTSA to get into Federal court.

Ex Parte Seizure Has Been Appropriately Rare

The ex parte seizure provision, unprecedented in American civil law, was the most controversial part of the DTSA when enacted. In fact, it was the only provision that had both witnesses testifying for it and witnesses testifying against it in pre-enactment hearings. Based on that testimony, additional safeguards against the overuse of the ex parte provisions were put into place. Those protections form almost half of the entire DTSA itself. And, at least from the experience so far, those protections appear to have worked.

There is a complex set of procedural and substantive safeguards that protects defendants against ex parte seizures; most importantly, a seizure order can be granted only under “extraordinary circumstances.”[1] According to the legislative history, “[t]he ex parte seizure provision is expected to be used in instances in which a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately or is otherwise not amenable to the enforcement of the court’s orders.”[2] It thus requires a very strong showing of imminent harm from the defendants’ actions, including a finding that a temporary restraining order or preliminary injunctions would not protect the plaintiff.

While plaintiffs have sought ex parte seizure orders several times, courts have generally seized on the availability of standard temporary restraining orders and preliminary injunctions to deny them. In OOO Brunswick Rail Mgmt. v. Sultanov,[3] the plaintiff moved for ex parte seizure of one defendant’s laptop and phone, preservation of e-mail evidence, and a temporary restraining order against evidence destruction and dissemination of trade secrets. The Court denied the ex parte seizure for lack of extraordinary circumstances. Instead, it ordered Google and Rackspace to preserve the defendants’ e-mail, and ordered the defendants to preserve other evidence (and provide the computer and phone to the court). In comparison, in Magnesita Refractories Co. v. Mishra,[4] the plaintiff moved for a TRO against potential evidence destruction and dissemination of trade secrets, and for a third party to image a laptop and phone. The court ordered the defendant to turn over his laptop to the plaintiff’s counsel for imaging. In doing so, the court made it clear that it was ruling based on Rule 65 (TRO), rather than the DTSA’s ex parte seizure provision.

Only one reported decision has involved an ex parte seizure order under the DTSA, and it appeared to involve the very sort of circumstances that the provision was designed for. That is, it arose out of the court’s imposition of a seizure after the defendant failed to comply with a standard temporary restraining order, not the plaintiff’s initial motion for an ex parte seizure. In Mission Capital Advisors, LLC v. Romaka,[5] the plaintiff filed a complaint under the DTSA and state trade secret law and contemporaneously sought an ex parte seizure. The court refused to enter the ex parte seizure order, and instead issued a temporary restraining order and order to show cause why a preliminary injunction should not be entered.[6] The defendant ignored the court’s order, neither responding to e-mail notice of the orders nor accepting in-person service.[7] In response, the court entered an ex parte order for the U.S. Marshal to copy the plaintiff’s customer contact list from the defendant’s desktop computer as evidence, then delete the file from the computer.[8] As it turned out, the defendant had not sought to leverage the customer contact list – or any of the plaintiff’s other files that he had on his computer – but had simply stopped responding to anyone. When the plaintiff sent a private investigator to his apartment, he willingly turned his entire computer over to the investigator and never asked for it back.[9] Thus, while the defendant’s contempt of court motivated the order, the order itself did not actually prevent any imminent spoliation of evidence or misuse of trade secrets.

Because the Mission Capital seizure order was both atypical and uncontested, it has left important questions of implementation of the seizure provisions unanswered. Unlike the seizure cases contemplated in the drafting of the DTSA, the marshal did not seize a physical device – such as a personal computer – that could have both relevant and irrelevant information stored on it. How will seizure orders play out to protect a defendant’s privacy and property rights when non-trade secret information is stored on the seized device? Also, what will happen if misappropriated trade secrets are held on a third party’s devices, such as in the cloud? How will the statute’s prohibition on a plaintiff’s publicizing an alleged misappropriation square with the requirements for Federal court openness and publication of orders on PACER? All of these questions remain to be answered in the years to come, and may call for amending the DTSA to react to changes in technology.

We Still Await Clarity on the Whistleblower Provisions

As a counterbalance to the increased power of employers to enforce their trade secret rights against employees (both current and former), the DTSA included whistleblower protections. Specifically, the Act insulates 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.”[10] Based on the one reported case weighing in on the provisions, however, it appears that the defense may not work as smoothly as intended.

In Unum Group v. Loftus,[11] the plaintiff was a benefits provider and the defendant was its recently-departed Director of Individual Disability Insurance Benefits. The plaintiff’s in-house counsel interviewed the defendant as part of an internal investigation on claims practices; within the next week, the defendant was seen coming to work on a Sunday afternoon and returning to work late on a week night, in both cases leaving with boxes or bags of documents. The plaintiff sued the defendant for trade secret misappropriation, and the defendant filed a motion to dismiss under the whistleblower provisions.

The Unum court analyzed the whistleblower defense under traditional motion to dismiss jurisprudence. That is, it looked to the face of the complaint to determine whether the defense was supported there. Of course, the plaintiff had not pled that the removed documents would be relevant to a whistleblower suit, that the defendant had turned all of the documents over to a lawyer, or that the documents were being used only in relation to the investigation of a suspected violation of law. Notably, no whistleblower lawsuit had yet been filed by the court’s resolution of the motion to dismiss, over two months after the documents were taken. As a result, the Unum court denied the motion to dismiss and granted a motion for preliminary injunction, compelling the return of the documents.

Certainly, the whistleblower provisions were not meant to protect defendants only when the use of trade secrets for the purpose of reporting or investigating a suspected violation of law appears on the face of an aggrieved party’s complaint. That would render the protections useless, as a plaintiff is highly unlikely ever to admit the existence of an appropriate justification for a defendant’s actions, especially when those facts would not be necessary for the proper pleading of a misappropriation claim. On the other hand, the provisions were not meant to insulate every defendant who turns the trade secrets over to a lawyer. Accordingly, the whistleblower provisions will need to be clarified, either through further court decisions or further legislation.

The DTSA Has Borrowed from State Law, and Vice Versa

Because the DTSA was drafted against the backdrop of the UTSA, courts construing the DTSA’s provisions have often looked to the UTSA for guidance. For example, in Panera LLC v. Nettles,[12] the court analyzed the plaintiff’s claims under the Missouri UTSA, then simply dropped a footnote reaching the same conclusion under the DTSA because “[a]lthough 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.”[13] Similarly, in Earthbound Corp. v. MiTek USA, Inc.,[14] the court performed its analysis under the Washington UTSA then stated, “The same evidence demonstrates a likelihood of success on the merits on Plaintiffs’ claim for violation of the Economic Espionage Act, as amended by the Defend Trade Secrets Act.”[15] And, in Kuryakyn Holdings, LLC v. Ciro, LLC,[16] the court simply relied on the parties’ agreement that the Wisconsin UTSA and the DTSA are “essentially the same” substantively and that “courts may look to the state UTSA when interpreting the DTSA.”[17]

On the other hand, the State of Texas has revised its version of the Uniform Trade Secrets Act to more closely track the DTSA.[18] The amendments, which take effect on September 1, 2017, include revised definitions of a “trade secret,” “owner,” “willful and malicious misappropriation,” and “clear and convincing.”[19] All four revised definitions draw the Texas statute closer to the DTSA, although the definition of a trade secret continues to include a “list of actual or potential customers,” unlike the DTSA.[20] In addition, the section on remedies was amended to limit injunctions for actual or threatened misappropriation to situations in which “the order does not prohibit a person from using general knowledge, skill and experience that person acquired during employment.”[21] Thus, just as state law has informed the DTSA, the DTSA has been used as a model for revising state law.[22]

Courts Have Found Continuing Misappropriation Sufficient to Assert a Claim that Started with Pre-DTSA Conduct

One way in which the DTSA clearly differs from the UTSA is in its effective date provision. The UTSA expressly excludes a claim for “continuing misappropriation”: The UTSA “does not apply to misappropriation occurring prior to the effective date. With respect to a continuing misappropriation that began prior to the effective date, the [Act] also does not apply to the continuing misappropriation that occurs after the effective date.”[23] In contrast, the DTSA applies “with respect to any misappropriation of a trade secret [as defined therein] for which any act occurs on or after the date of the enactment of this Act.”[24] Federal courts have read this distinction as allowing claims that began before May 11, 2016, but continue afterward.

In Henry Schein, Inc. v. Cook,[25] acts of misappropriation started no later than May 10, 2016, but there were additional acts of misappropriation on May 12, 2016 and later. The court entered a TRO and preliminary injunction with no discussion of the continuing misappropriation issue. In Allstate Insurance Co. v. Rote,[26] the defendant quit her position as an agent on February 29, 2016, months prior to the DTSA’s enactment. However, she refused to honor the geographic term of her non-compete agreement and retained confidential information. The court entered a preliminary injunction ordering return of the confidential information, but not relocation. The Rote court thereby “split the baby” between the pre-DTSA conduct and post-DTSA conduct without addressing the continuing misappropriation issue.

After Cook and Rote, defendants began to challenge the viability of claims under a continuing misappropriation theory. They have failed. In Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group, Inc.,[27] the plaintiff terminated a software consulting agreement in February 2015 based on November 2014 notice of termination; the trade secrets were allegedly downloaded between the notice and termination. In September 2016, after discovery, the defendant sought to amend counterclaims to add DTSA claims (among others) based on post-DTSA conduct. The court stated,

The plain language of the Act defines misappropriation to include ‘disclosure or use of a trade secret without the consent of another.’ Accordingly, as Defendants allege that Syntel continues to use its Intellectual Property to directly compete with Trizetto, the wrongful act continues to occur after the date of the enactment of DTSA.[28]

Similarly, in Adams Arms, LLC v. Unified Weapon Sys., Inc., [29] the defendants got access (subject to an NDA) to the plaintiff’s rifle designs, prices, and plant from 2014 through 2015. One of the defendants then signed an agreement with the Peruvian army for arms sales based on the confidential information on May 16, 2016. It relied on the DTSA’s statute of limitations provision to argue against liability for continuing misappropriation. The statute of limitations provision states,

A civil action under [the DTSA] may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.[30]

The Adams Arms court relied on the introductory phrase to limit that last sentence to application only to statute of limitations questions. It then noted that the DTSA’s language regarding initial application was different from the UTSA and concluded that the difference was intentional. It therefore drew a distinction between liability for pre-DTSA conduct (for which there would be none, and Adams Arms appeared not to be seeking) and post-DTSA conduct, which would be subject to the Act.

The issue of continuing misappropriation came to a head in Brand Energy & Infrastructure Servs., Inc. v. Irex Contracting Group.[31] Former Brand employees had gone to Irex in 2014-15, allegedly taking financial, technical, and client information. Irex was allegedly continuing to use Brand’s information and “Market Playbook” after enactment of the DTSA. Brand sued, and Irex challenged timeliness of the claim based both on the statute itself and constitutionality as an ex post facto law. The court relied on prior decisions and the distinction between the UTSA and the DTSA to find that the DTSA applied to continuing misappropriation. Brand had pled factually specific allegations of continued use of its trade secrets to support a claim for continuing misappropriation, so the court turned to the question of constitutionality under the ex post facto clause of Article I, Section 9. The critical question there was whether it would be permissible for the statute to apply retroactively. The Brand court applied the Supreme Court’s previously-established framework for whether the DTSA could apply retroactively. That required it to ask whether Congress had expressly prescribed the statute’s proper reach. If so, the inquiry was over; if not, the court should “try to draw a comparably firm conclusion about the temporal reach specifically intended by applying our normal rules of construction.”[32] Here, nothing in the DTSA expressly prescribes its proper reach and its language is amenable to different readings. But, although the DTSA was generally modeled upon the UTSA, it strikingly left out UTSA § 11’s prohibition against continuing misappropriation claims. Thus, the Brand court held, Congress’s choice to omit the anti-retroactivity language was conscious, so a continuing misrepresentation claim is constitutional.

Under the existing case law, it appears that a claim for continuing misappropriation will be recognized under the DTSA, even if the original misappropriation occurred before May 11, 2016. However, the claim has to be pled with some post-DTSA conduct identified, and recovery will be limited to post-DTSA misappropriation. Nonetheless, it provides an alternative to the UTSA for such claims, while the UTSA would not provide such an alternative to the DTSA in the same circumstances.

The DTSA May Not Have Eliminated the Inevitable Disclosure Doctrine

The DTSA appeared to limit equitable remedies in a way that prevented trade secret owners from invoking the inevitable disclosure doctrine in order to prevent a former employee from taking a job at a competitor when there is no proof that the employee took information improperly. First applied in a case under the Illinois UTSA, PepsiCo, Inc. v. Redmond, [33] the inevitable disclosure doctrine allows a trade secret owner to “prove a claim of trade secret misappropriation by demonstrating that [the] defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Against the backdrop of the Redmond case, the DTSA limited injunctive relief to situations in which a court’s order would not “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.”[34] In doing so, it appeared that the DTSA had chosen not to recognize the inevitable disclosure doctrine.

On the DTSA’s first birthday, however, a district court appeared to bring the possibility of applying the inevitable disclosure doctrine back to life. In Molon Motor & Coil Corp. v. Nidec Motor Corp.,[35] the plaintiff brought claims under the DTSA and the Illinois Trade Secrets Act against a competitor that hired its former head of quality control.[36] That competitor argued that the plaintiff may have a case against the former employee, but that it had done nothing wrong. In response, the plaintiff argued that disclosure and use of trade secrets could be inferred under the inevitable disclosure doctrine.[37] The defendant moved to dismiss; the court analyzed the DTSA claim under the standards of the Illinois UTSA for inevitable disclosure and refused to dismiss.[38] Thus, without citing the DTSA’s equitable remedies provision, the Molon court appeared to revive the possibility of a claim for inevitable disclosure under the act.[39]

Conclusion

The first year of the DTSA has shown us that it has generally worked well, although with some unintended consequences and a few hiccups. We will have to see how the law continues to develop, and whether Congress sees the need to fix any of the issues with the DTSA.



[1] 18 U.S.C. §§ 1836–1839 (2016).

[2] H.R. Rep. No. 114-529 at 9–10 (2016).

[3] No. 5:17-cv-00017-EJD (N.D. Cal. Jan. 6, 2017).

[4] No. 2:16-cv-524-PPS-JEM (N.D. Ind. Jan. 25, 2017).

[5] No. 1:16-cv-05878-LLS (S.D.N.Y. July 22, 2016).

[6]  Id. at Dkt. #7, p.1 (July 29, 2017)

[7] Id. at 2.

[8] Id. at 5.

[9] Id. at Dkt. # 22, p. 2 (Sept. 20, 2016).

[10] 18 U.S.C. §§ 1833(b)(1)(A)(ii) (2016).

[11] No. 4:16-cv-40154-TSH (D. Mass., Dec. 6, 2016).

[12] No. 16-cv-1181-JAR (E.D. Mo. Aug. 3, 2016).

[13] Id. at n.2.

[14] No. C16-1150 RSM (W.D. Wash. Aug. 19, 2016).

[15] Id. at 10.

[16] No. 15-cv-703-jdp (W.D. Wisc. Mar. 15, 2017).

[17] Id. at 5.

[18] See Texas Uniform Trade Secrets Act, Title 6, Chapter 134A (2017).

[19] See Texas House Bill H.B. No. 1995 (May 8, 2017).

[20] Id.

[21] Id.

[22] The amendments to the Texas UTSA also included the adoption of a seven-factor test for determining whether a party can participate and assist counsel in the presentation of the party’s case. There is no analogous provision in the DTSA.

[23] UTSA § 11.

[24] See Pub. L. 114–153, § 2(e),  130 Stat. 381 (May 11, 2016).

[25] No. 16-cv-03166 (N.D. Cal. June 10, 2016).

[26] No. 3:16-cv-01432 (D. Or. Aug. 7, 2016).

[27] No. 15-cv-211(LGS)(RLE) (S.D.N.Y. Sept. 23, 2016).

[28] Id. at 13 (citations omitted).

[29] No. 8:16-cv-1503 (M.D. Fla. Sept. 27, 2016).

[30] Id. at 14 (emphasis in original).

[31] No. 16-2499 (E.D. Pa. Mar. 23, 2017).

[32] Id. at 5.

[33] 54 F.3d 1262, 1269 (7th Cir. 1995). 

[34] 18 U.S.C. § 1836(b)(3)(A)(i)(I).

[35] No. 1:16-cv-03545 (N.D. Ill. May 11, 2017),

[36] Id. at 1.

[37] Id. at 11.

[38] Id. at 11-15.

[39] The U.S. District Court for the Eastern District of Missouri also made use of the inevitable disclosure doctrine under the DTSA, saying, “Although Missouri has not formally adopted the doctrine of inevitable disclosure—and neither has the Eighth Circuit, with regard to federal trade secrets claims—the Court finds the rationale underpinning such a theory helpful to understanding why [the defendant’s] performance of his new role would almost certainly require him to draw upon and use trade secrets and the confidential strategic planning to which he was privy at [the plaintiff].” Panera LLC v. Nettles, No. 16-cv-1181-JAR (E.D. Mo. Aug. 3, 2016).

 

© 2017 McDonnell Boehnen Hulbert & Berghoff LLP

snippets is a trademark of McDonnell Boehnen Hulbert & Berghoff LLP. All rights reserved. The information contained in this newsletter reflects the understanding and opinions of the author(s) and is provided to you for informational purposes only. It is not intended to and does not represent legal advice. MBHB LLP does not intend to create an attorney–client relationship by providing this information to you. The information in this publication is not a substitute for obtaining legal advice from an attorney licensed in your particular state. snippets may be considered attorney advertising in some states.