The DTSA Giveth But Does Not Taketh Away

Further thoughts on the Defend Trade Secrets Act and inevitable disclosure

Guest post by Maxwell Goss. Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation. Dr. Goss blogs at Law and the Creative Economy.

Last week I wrote about the doctrine of “inevitable disclosure” as it relates to the Defend Trade Secrets Act of 2016 (DTSA), the statute that created a general, private cause of action for trade secret misappropriation under federal law. Because inevitable disclosure is of continuing importance and controversy, I wanted to unpack the issues further here. As discussed below, the DTSA leaves room for trade secret plaintiffs to assert inevitable disclosure.

Trade secret plaintiffs frequently face problems of proof. Gathering evidence that a suspected individual or company has actually misappropriated trade secrets, or legitimately threatens to misappropriate trade secrets, can be a substantial hurdle to getting a lawsuit off the ground.

Take a typical scenario where an employee of company A goes to work for company B, and A alleges that the employee is using its trade secrets on behalf of B. In some cases, company A will have evidence that the employee swiped its secrets before leaving, perhaps by emailing himself a customer list or downloading technical specifications onto a flash drive. Company A might even have evidence that company B is now using the secrets, perhaps because it is soliciting A’s customers or has launched a product based on A’s specifications. In many cases, though, the activities of the employee and the new employer are a black box. The employee was exposed to trade secrets at Company A, and is now working for Company B, but Company A has not uncovered evidence of specific disclosures to Company B. Company A may have reason to believe the employee must be disclosing secrets to B, or threatens to do so, but has no way to confirm this directly prior to filing suit and obtaining discovery—a catch-22. Is company A without recourse?

Enter the “inevitable disclosure” doctrine. Under this common-law doctrine, a trade secret plaintiff may base a claim for trade secret misappropriation on a showing that disclosure of trade secrets is “inevitable.” In PepsiCo, Inc. v. Redmond, the landmark Seventh Circuit case on inevitable disclosure, a former employee of PepsiCo went to work for a competing beverage company. Notably, there was no allegation that the employee had stolen specific information and given it to the competitor. Instead, PepsiCo argued that the employee could not help but use the company’s trade secrets to help its competitor “achieve a substantial advantage” and “respond strategically” through his knowledge of PepsiCo’s pricing, distribution, and marketing information. Because his reliance on such information was inevitable, the court affirmed an injunction barring the former employee from assuming his position at the competitor company.

The doctrine of inevitable disclosure is controversial, and is only recognized in some jurisdictions. One objection is that it essentially allows courts to impose a non-compete on those who never signed a non-compete agreement. Another objection is that it facilitates abusive lawsuits against former employees based on flimsy evidence. Yet another objection is that it can enable a company to obtain an injunction that damages a competitor without any evidence of wrongful conduct by the competitor itself. Unsurprisingly, then, inevitable disclosure was frequently discussed in the lead-up to the passage of the Defend Trade Secrets Act. As enacted, the DTSA did ultimately limit the application of the doctrine. Though the language of the DTSA largely tracks that of the Uniform Trade Secrets Act (UTSA), which has been enacted in some form in nearly all states, the DTSA departs from the UTSA in that it expressly disallows injunctions that “prevent a person from entering into an employment relationship” and prohibits any conditions placed on a person’s employment in an injunction based “merely on the information the person knows.”

In light of this language, many observers have concluded that inevitable disclosure is a dead letter under the DTSA. For example, one article states that the DTSA “explicitly rejects the inevitable disclosure doctrine under federal law.” To take another example, I recently attended a (very good) presentation in which it was stated that inevitable disclosure is “foreclosed” by the DTSA. And I would be remiss not to mention that I myself declared in a CLE presentation last year that “[t]he DTSA seemingly rejects inevitable disclosure by dictating that conditions on employment in an injunction may not be based merely on information the person knows.”

But the doctrine of inevitable disclosure lives on under the DTSA, albeit in a diminished form. As explained in my previous post, the court in Molon Motor and Coil Corp. v. Nidec Motor Corp. recently held that a plaintiff had successfully stated a claim for trade secret misappropriation under the DTSA where it had pled allegations supporting an inference that a former employee who went to work for a direct competitor would inevitably have disclosed the plaintiff’s trade secrets to the competitor during the period in which the DTSA has been in effect. The court added: “Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date [of the DTSA] is plausible.” Notably, the court then ordered the parties to discuss a “discovery plan on the trade secret claims.” In short, the plaintiff’s allegations of inevitable disclosure entitled it to move forward on both its federal and state trade secret claims.

It would be easy to dismiss Molon as dealing only with a narrow issue of limited importance. The Court’s principal concern, after all, was how the DTSA applies where the alleged theft at issue preceded its passage—an issue relevant in only a few and declining number of cases. But the ruling should not be dismissed so quickly. In reaching its holding, an essential part of the Court’s analysis was that was that inevitable disclosure can in fact support a DTSA claim. This conclusion has at least two potential implications applicable beyond the specific procedural posture of the case.

First, the DTSA could be used to secure jurisdiction in federal court and then state law could be used to secure an injunction based on inevitable disclosure. Consider companies A and B again. Company A wants to sue an employee of company B in federal court—for instance, because of perceived advantages in bringing the case before a federal judge or because of the streamlined process for obtaining discovery across state lines under the federal rules. But suppose the parties are citizens of the same state. Prior to passage of the DTSA, unless there had been some hook other than diversity jurisdiction for bringing the case in federal court, company A would have been forced to bring the case in state court. Under the DTSA, diversity of citizenship does not matter. Company A can bring the case in federal court regardless of the parties’ citizenship.

If company A goes this route, is it stuck with the DTSA’s strict limitations on injunctive relief, including the prohibition of injunction based “merely on the information the person knows”? Very arguably not. By its own terms, the DTSA does not preempt state trade secret law, and state law claims will nearly always be available in cases where the DTSA applies. Assuming the applicable state law permits injunctive relief based on inevitable disclosure, company A could file a concurrent claim for trade secret misappropriation under state law and obtain an injunction based on an inevitable disclosure theory. In such a case, the DTSA would be used to obtain federal court jurisdiction while state law would be used to obtain the desired relief.

Second, the DTSA stops well short of barring all injunctive relief based on inevitable disclosure. The limitations on injunctions under the statute apparently extend only to employment relationships: An injunction may not “prevent a person from entering into an employment relationship,” and any conditions on employment must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” This suggests that an injunction that does not impact employment may still be based on inevitable disclosure.

For example, if company A can offer evidence that an employee who departed for company B will inevitably disclose A’s trade secrets to B, a court conceivably might grant an injunction prohibiting B from using or disclosing A’s trade secrets. For companies that believe their trade secrets are being misused but cannot get into the “black box” of the competitor’s activities prior to discovery, this could be a major advantage. More controversially, a court could grant an injunction directly against the employee based on inevitable disclosure, provided the injunction does not prevent the employee from working for company B or impose conditions on his or her employment.

If the Molon opinion is any indication, the DTSA giveth but the DTSA does not taketh away. That is, a trade secret owner can use the DTSA to bring its case in federal court, and can avail itself of the distinctive benefits and relief available under the DTSA, without losing its ability to assert inevitable disclosure in jurisdictions recognizing the doctrine under state law. Of course, it is unknown how other courts would address similar issues. (As far as I can determine, while a few opinions have made passing reference to inevitable disclosure in DTSA cases, Molon is the first to directly address the applicability of the doctrine under the DTSA.) At a minimum, though, the opinion indicates that rumors of the demise of inevitable disclosure are greatly exaggerated.

Implementing and Interpreting the Defend Trade Secrets Act (DTSA)

undefinedI am looking forward to our event at the University of Missouri School of Law on Friday, March 10, 2017: Implementing and Interpreting the Defend Trade Secrets Act.  Sponsored by our Center for Intellectual Property and Entrepreneurship (CIPE) and the Business, Entrepreneurshisp & Tax Law Review (BETR)

Key Points for Friday:

Speakers include Mark Halligan from FisherBroyles in Chicago; Peter Menell, Professor at University of California, Berkeley School of Law; Robin Effron,
Professor at Brooklyn Law School; Yvette Joy Liebesman, Professor at
Saint Louis University School of Law; Orly Lobel, Professor at
University of San Diego School of Law; and me (Crouch).

Some Background Reading:

  • Menell, Peter S., Misconstruing Whistleblower Immunity Under the Defend Trade Secrets Act (January 3, 2017). UC Berkeley Public Law Research Paper No. 2893181. Available at SSRN: https://ssrn.com/abstract=2893181
  • Effron, Robin, Trade Secrets, Extraterritoriality, and Jurisdiction (December 1, 2016). Wake Forest Law Review, Vol. 51, No. 6, 2016; Brooklyn Law School, Legal Studies Paper No. 475. Available at SSRN: https://ssrn.com/abstract=2896137
  • Lobel, Orly, Enforceability TBD: From Status to Contract in Intellectual Property Law (June 2, 2016). Boston University Law Review, Vol. 96, 2016; San Diego Legal Studies Paper No. 16-217. Available at SSRN: https://ssrn.com/abstract=2788857
  • Goldman, Eric, Ex Parte Seizures and the Defend Trade Secrets Act (November 30, 2015). Washington and Lee Law Review, Vol. 72, No. 284, 2015. Available at SSRN: https://ssrn.com/abstract=2697361
  • Cannan, John, A (Mostly) Legislative History of the Defend Trade Secrets Act of 2016 (May 4, 2016). Available at SSRN: https://ssrn.com/abstract=2775390

 

DTSA: Temporary Restraining Order for Former Employer

by Dennis Crouch

Henry Schein, Inc., v. Cook (N.D.Cal. 2016)

In one of the first written decisions based upon the Defend Trade Secrets Act (DTSA), Judge Tigar has granted Schein’s motion for a temporary restraining order (TRO) blocking former employee Jennifer Cook “from accessing, using, or sharing” allegedly stolen confidential data.  Cook was a sales representative for Schein’s dental-supplies business and left to join competitor Patterson Dental.  The TRO also prohibits Cook “from soliciting, contacting, or accepting business from any HSI customers assigned to her while she was employed by Plaintiff.”  In addition to the standard fiduciary duty employees owe to their employer, Cook had also signed a confidentiality and non-solicitation agreement.

Here – as with most trade secret cases – the basis for the case begins with a breach of contract. That breach is then used to establish misappropriation.  The trade secret claim gets the plaintiff to Federal Court and offers additional remedies not otherwise accessible.

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In California many non-solicitation agreements are deemed void based upon the state’s Business and Professions Code section 16600 which provides that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

If it moves forward, this case will be an important test of whether the new federal law protecting trade secret rights preempts this state-law policy.*

Judge Tigar here failed to even consider this issue in his opinion — likely because, as is typical with TROs, the defendant was given no chance or opportunity to respond to the allegations.

= = = = =

* In looking at the agreement, it recites that NY law will control its interpretation. [CookAgreement]

** Read the decision here: [ScheinTRO Decision]

 

Mahamedi IP v. Paradice & LI: DTSA Between Patent Lawyers

by Dennis Crouch

Many aspects of trade-secret & non-compete law do not apply cleanly when a lawyer leaves the firm. Confidentiality outside the firm is already required by the rules of professional conduct and client-secrets are thought of as the property of the client rather than the firm.  Further, agreements between former partners divvying-up clients (or other covenants not to compete) are largely unenforceable because they are seen as improperly limiting clients ability to choose their lawyer.

With that in mind, a new Defend Trade Secrets Act (DTSA) lawsuit has been filed by the patent attorney Zurvan (Van) Mahamedi against his former partner William (Trip) Paradice.   The Mahamedi-Paradice firm split in April 2016 and both lawyers reached-out to firm clients (including Qualcomm) claiming to be the successor firm.

The complaint alleges that Paradice misappropriated confidential information and client files in violation of the Defend Trade Secrets Act.  In the background is a Partnership Separation Agreement (“PSA”) that was allegedly signed by both parties that purported to give Paradice access only to client files only after providing Mahamedi with written consent from the client.  Instead of following that procedure, Paradice allegedly copied the old firm database including billings, contacts, etc.  Paradice also allegedly asked firms to pay him for past work rather than the Mahamedi firm.  The complaint alleges: “These revenues from these canceled invoices rightfully belonged to the old firm, and such revenue was to be distributed between Mahamedi and Paradice in accordance with the old firm’s standard practices.”

Read the Complaint: DTSAComplaint.

Although it is still unclear the extent that patent attorneys will take-on DTSA practice – at least we know that they will serve as the subject matter for the actions.

Thus far, DTSA actions (like most Computer Fraud and Abuse Act actions) stem from an ‘abuse’ of contract.  Here, the Partnership Separation Agreement spells out a number of duties and obligations and Mahamedi’s basic allegation is that Paradice has failed to comply with those terms.  The hook with the DTSA and CFAA is that the plaintiff gets to protect its property right (rather than merely suing for breach) and do so in Federal Court.

Read the Separation Agreement: Separation Agreement.

DTSA Litigation Updates

Universal Protection Services v. Thornburg et al, Docket No. 2:16-cv-00097 (N.D. Tex. May 19, 2016)

In this newly filed DTSA case, Universal Protection (a company providing security guards, etc.) has sued its former employee Thornburg for trade secret misappropriation (as well as various breach contract claims involving his non-compete agreement and breach of loyalty).  In the case, Thornburg apparently developed a good relationship as head of security for a customer (JBS) and decided to quit his job and start-up a competing company where he could charge the company less and make more money.  The primary trade-secret at issue here is apparently the pricing plan provided to JBS and the security plan (developed by Thornburg while at JBS).  [Read the complaint: UniversalProtectionServiceDTSA].

 

 

DTSA Litigation Begins

The first couple of DTSA lawsuits have been filed.

M.C. DEAN, INC. v. City of Miami Beach, Docket 16-cv-21731-CMA (S.D. Fla filed May 16, 2016) and Bonamar, Corp. v. Turkin and Supreme Crab, Docket 16-CV-21746 (S.D. Fla. filed May 16, 2016).

In M.C.Dean, the plaintiff is attempting to stop the Miami Beach from disclosing his payroll information to the local electric workers union. [Complaint: MC Dean v. City of Miami Beach]

In Bonamar, the crab-meat dealer is suing a major competitor after its VP jumped ship and started targeted undercutting of Bonamar’s prices. [Complaint: CrabCase]

 

DTSA as a Shoe Horn for Contract and Employment Law Claims

I expect that an important result of the Defend Trade Secrets Act (DTSA) will be the creation of supplemental federal jurisdiction over contract and employment disputes that are otherwise a matter of state law decided by state courts.  The majority of trade secret lawsuits also involve breach of contract and/or employment law claims – with the breach serving as the requisite ‘improper means,’

The DTSA provides federal district courts with original jurisdiction of the new federal claim of trade secret misappropriation.  Once a federal cause of action is established, the court will also “have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a).   Where, as above, the breach of contract or employment duty wrapped into the factual tale of trade secret misappropriation then a court would likely find the supplemental jurisdiction requirements met.   The statute goes on to give district courts deference to “decline to exercise supplemental jurisdiction” in certain situation.  28 U.S.C. § 1367(c).

As we move toward more contract cases in Federal Courts, it will be interesting to see the extent that large corporations next push for federalizing of contract law.

 

DTSA Moving Forward

The House Judiciary Committee has taken the next major step toward implementation of the Defend Trade Secrets Act of 2016 (DTSA).  In an unopposed voice vote the committee has approved the text of the already-passed Senate version (S.1890). DTSA would create a federal civil remedy for trade secret misappropriation.  Next step – is passage by the full House. President Obama has indicated his support as well.

From the committee:

Trade secrets are an increasingly important form of intellectual property that have become more vulnerable to theft as a result of our globalized economy. While current federal law protects other forms of intellectual property by providing access to federal courts for aggrieved parties to seek redress, there is no federal option to do so for trade secret theft. The bipartisan Defend Trade Secrets Act seeks to change that by allowing companies to seek civil penalties in order to protect their businesses from those engaging in economic espionage. S. 1890 gives American innovators a powerful new tool which will help them compete in an ever-evolving global market.

At Mizzou, we’re planning our symposium for next academic year that will focus on implementation of the new federal cause of action.

Guest Post: Where we Stand with Trade Secret Enforcement in Federal Courts

Guest Post by Prof. David Opderbeck (Seton Hall), originally published on his blog The CyberSecurity Lawyer.

Introduction

Trade secrets are important to cybersecurity because many data breaches involve trade secret theft.  The Defend Trade Secrets Act of 2016 (DTSA) amended the Espionage Act of 1996 to provide a federal private right of action for trade secret misappropriation.   Some commentators opposed the DTSA in part because it seems redundant in light of state trade secret law and could lead to unnecessary litigation and restrictions on innovation.  Now that the DTSA has been in effect for nearly a year, I conducted an empirical study of cases asserting DTSA claims (with the able help of my research assistant, Zach Hansen).  This post summarizes the results of that study.

Methodology

We ran keyword searches in the Bloomberg Law federal docket database to identify cases asserting DTSA claims in federal courts.  It is not possible to search only on the Civil Cover Sheet because there is no discrete code for DTSA claims.  Our search ran from the effective date of the DTSA (May 26, 2016) through April 21, 2017 (just prior to our symposium on the DTSA at Seton Hall Law School).  After de-duping, we identified 280 unique Complaints, which we coded for a variety of descriptive information.  Our raw data is available online.

Findings

This chart shows the number of filings by district:

We were not surprised to see that the Northern and Central Districts of California, Southern District of New York, or District of Massachusetts were among the top five.  We were surprised, however, to see the Northern District of Illinois tied for first.  This could reflect the influence of the financial services industry in Chicago, but further research is required.

The next chart shows the number of filings by month:

It is interesting to note the decline in filings following the initial uptick after the May 26, 2016 effective date.  Perhaps this reflects a slight lull during the summer months.  Filings then remained relatively steady until March, 2017, when they increased significantly.  This could have something to do with the quarterly business cycle or bonus season, since many of the cases (as discussed below) involve employment issues.  Or, it could reflect a random variation given the relatively small sample size.

We next examined other claims filed along with the DTSA counts in these Complaints:

We excluded from this chart related state law trade secret claims.  Not surprisingly, nearly all the cases included claims for breach of contract.  As noted above, trade secret claims often arise in the employment context in connection with allegations of breach of a confidentiality agreement or covenant not to compete.  Another finding of note was that a fair number of cases assert Computer Fraud and Abuse Act claims, although the number is not as high as expected.  Most trade secret cases today involve exfiltration of electronic information, but perhaps many cases do not involve hacking or other access techniques that could run afoul of the CFAA.

We also noted a smaller but not insignificant number of cases asserting other intellectual property claims, including trademark, copyright and patent infringement.  Since many documents taken in alleged trade secret thefts are subject to other forms of intellectual property — particularly copyright — this may show that some lawyers are catching on to the benefit of asserting such claims along with DTSA claims.

Finally, our review of case status revealed the following:

  • 198 cases in various pre-trial stages
  • 61 cases dismissed
  • 5 preliminary injunctions
  • 4 final judgments, including 2 permanent injunctions
  • 3 default judgments
  • 1 case sent to compulsory arbitration
  • 8 undetermined / miscellaneous

At first blush, the number of cases dismissed seems high, given that none of the cases have been pending for more than a year.  We assume the vast majority of these cases settled, though further investigation is required.  In contrast, the number of preliminary injunctions granted seems very low.  Again, further investigation is required, but so far it does not seem that the DTSA is resulting in the kind of preliminary injunction practice we expected to see under a federal trade secret statute.

The Defend Trade Secrets Act and Inevitable Disclosure

When Can a Company That Hires its Competitor’s Former Employee Be Sued in Federal Court?

Guest post by Maxwell Goss.  Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation.

The Defend Trade Secrets Act (DTSA) was enacted a year ago, on May 11, 2016. One of the most sweeping changes in intellectual property law in recent years, the statute creates a private cause of action for trade secret misappropriation under federal law.

For trade secret owners, the advantages of the DTSA include access to nationwide discovery and enhanced remedies such as ex parte seizure of property to prevent propagation of stolen trade secrets. For those accused of trade secret theft, the DTSA provides substantial protections including strict limitations on the injunctive relief available and entitlement to a hearing no later than seven days after a property seizure.

An open question has been the status of the controversial “inevitable disclosure” doctrine under the DTSA. Under state law in some jurisdictions, courts will enjoin a company’s former employee from working for a competitor if the company establishes that the employee would “inevitably” use its trade secrets in his or her new position. Trade secret owners like the doctrine of inevitable disclosure because actual misappropriation can be hard to prove. At the same time, the doctrine has been criticized as effectively allowing courts to impose a non-compete on someone who never signed a non-compete agreement.

How does inevitable disclosure fare under the DTSA? The statute provides that an injunction to prevent misappropriation may not “prevent a person from entering into an employment relationship,” and that any conditions placed on a person’s employment in an injunction must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” In light of this language, some have concluded that the inevitable disclosure doctrine is a dead letter under the DTSA.

But a recent court opinion indicates otherwise. Interestingly, the opinion was issued on May 11, 2017, the one-year anniversary of the DTSA, by the United States District Court for the Northern District of Illinois, a federal court in the Seventh Circuit, where inevitable disclosure was first definitively recognized. In Molon Motor and Coil Corp. v. Nidec Motor Corp., the plaintiff, a maker of bespoke motors and gearmotors, sued a competitor after an employee who had allegedly downloaded the plaintiff’s designs and technical data went to work for the competitor.

The defendant moved to dismiss the case, arguing (among other things) that the DTSA did not apply because the alleged acts at issue occurred before the DTSA was enacted in May 2016. The court rejected this argument. Noting that the “key question is whether the inference of inevitable disclosure reasonably extends to continued use beyond the Act’s effective date,” the Court reasoned:

At least on the limited record—the Third Amended Complaint—the alleged trade secrets are not of the nature that would necessarily go stale in the course of a couple of years. A motor design, and the quality control data associated with it, plausibly would retain its trade secret value well into the future. If it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that Nidec would be continuing to use them. Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date is plausible.

In short, even though the plaintiff company’s former employee had allegedly downloaded the files and gone to work for the competitor before the DTSA went into effect, the court found it plausible that there was a “continuing use” of the information by the competitor after the statute went into effect. Based on this finding, the court allowed the plaintiff to go forward on its DTSA claim.

How does this ruling square with the DTSA, which requires that an injunction be based on “evidence of threatened misappropriation and not merely on the information the person knows”? Though the Molon opinion does not connect the dots, the answer, in part, seems to be that the opinion was addressing a motion to dismiss, not a motion for injunction. A court may not be able to enjoin someone based on inevitable disclosure under the DTSA, but this does not mean a plaintiff may not sue someone based on inevitable disclosure under the DTSA. That is, even where injunctive relief may not be available as an initial matter, a trade secret owner might nevertheless file a claim and move forward with discovery—which could ultimately turn up the evidence necessary to fully substantiate a claim.

Molon represents a significant development in the body of law unfolding under the DTSA. In jurisdictions where inevitable disclosure is recognized, the ruling could help trade secret owners get a case off the ground even where information obtainable in a pre-suit investigation is necessarily limited. On the other hand, defendants will be quick to point out that Molon does not alter the specific allegations needed to plead a trade secret claim premised on an inevitable disclosure theory. Moreover, where an injunction is sought, it should be emphasized that any conditions placed on employment under the statute must be based on evidence of threatened misappropriation and not merely information the person knows.

What the Defend Trade Secrets Act Means for Trade Secret Defendants

Trade Secret Protections at the Patent Office

The USPTO is hosting a free symposium on Trade Secret Protections – May 8, 2017, from 9 a.m. to 4 p.m. EDT at the Alexandria HQ as well as via webcast. More info here: https://www.uspto.gov/​learning-and-resources/​ip-policy/​enforcement/​trade-secret-symposium.

DTSA enforcement continues to primarily focus on charges against former employees who join a competitor.  In Santander Securities v. Gamche, 2017 WL 1208066 (E.D. Penn. April 2017), the case centers on Gary Gamche who left Santander and joined a competitor Citizens Securities as a financial advisor – taking with him a list of his clients.  Similarly, in Brand Energy v. Irex, the construction company claims its former employees stole its proprietary business information (target bids and potential customer information); joined competitor Irex; and began poaching business.  So far, there are only a few DTSA decisions. In Brand, the Pennsylvania District Court  recently denied the defendant’s 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted – finding that the alleged use easily fits within very broad definition of misappropriation found in the new federal statute.

Although the DTSA is limited to post-enactment misappropriations, the court in Brand held that it can apply to “continuing misappropriation that occurs after the effective date.”   Following Adams Arms, LLC v. Unified Weapon Sys., Inc., 16–cv–1503, 2016 WL 5391394, at *5–7 (M.D. Fla. Sept. 27, 2016).

In addition to the DTSA claim, the court found that the RICO and CFAA claims had been appropriately pled.

CFAA (Computer Fraud and Abuse Act) is interesting in that it imposes liability on anyone who knowingly “accesses a … computer without authorization, or exceeds authorized access” of the computer.  Here, Brand’s theory is that of ‘indirect access.’ After leaving BRAND, the defendants convinced a current employee to access the database and provide information.  According to the judge here, the defendants can be seen as accessing the computer (albeit indirectly and non-electronically via the employee) without authorization.  The statutory justification for this outcome is the court’s conclusion that Congress could have particularly defined “access” as “personal access” or “direct access” but instead left the term broadly stated.

 

 

Brand Energy v. Irex.

Unpacking Trade Secret Damages

Prof. Elizabeth Rowe (Florida) has posted a new article on trade secret damages: Unpacking Trade Secret Damages.   The article looks at outcomes of about 150 federal trade secret lawsuits that went to trial and received a verdict. These cases are all pre-DTSA and thus in federal court on diversity or supplemental jurisdiction grounds.   Prof Rowe found – in my view – a surprisingly low percentage of cases where punitive damages or attorney fees were awarded (~2% and 8% respectively – of cases with an award).

The award distribution is also highly skewed.  “[T]en cases account for half of the total damages of the approximately $2.4 billion awarded since 2000.”  Top on this list is DuPont’s 2011 award of 900 million against Kolon.

[Read the Article]

 

Extra-Territorial Application of the Defend Trade Secrets Act

by Dennis Crouch

When U.S. courts interpret U.S. statutes, they tend to read an inherent territorial limitation into the law.   “It is a long-standing principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States,” Morrison v. National Australia, 130 S.Ct. 2869 (2010) (internal quotation omitted). However, when Congress clearly requires a longer reach, the courts oblige.

The Economic Espionage Act (EEA) includes a provision regarding its “applicability to conduct outside the United States.” 18 U.S.C. § 1837.  Section 1837 was left unchanged with DTSA’s amendments to EEA, but seemingly applies to the new private civil cause of action for trade secret misappropriation. The provision offers important insight on how the new cause of action can be applied in the foreign context.  Most importantly, a (1) U.S. corporation or citizen can be held liable for trade secret misappropriation under the DTSA regardless of whether the misappropriation occurred abroad; and (2) an entity can be held liable under the DTSA for foreign misappropriation if “an act in furtherance of the offense was committed in the United States.”

The provision:

This chapter also applies to conduct occurring outside the United States if—

(1) the offender is a natural person who is a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof; or

(2) an act in furtherance of the offense was committed in the United States.

18 U.S.C. § 1837 (DTSA Amendments) (The EEA/DTSA is collectively codified in Chapter 90 of Title 18).   It will be interesting to watch this play-out, but I expect that we will see a number of extra-territorial and cross-border cases over the next few years.

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Notes:

  1. To be clear, a court would still need personal jurisdiction over the defendant. See International Shoe.  
  2. A possible but unlikely limitation on the extraterritorial application could occur if the courts read a territorial limitation into the definition of trade secret such that information is only protectable under the DTSA if created and/or stored in the U.S.

 

A Comparison of the EU Trade Secrets Directive and the US Defend Trade Secrets Act

Guest post by Mark Ridgway and Taly Dvorkis, Allen & Overy, LLP, London. 

It has been a busy year for law makers seeking better protection for trade secrets.  Much coverage has been given to the Defend Trade Secrets Act (DTSA), which provides a federal private right of action for trade secret protection.  President Obama signed the DTSA on May 11, and the law takes effect immediately.  Patently-O has covered the DTSA legislation and legislative process in several posts here.

On May 17 the European Council is expected to formally adopt the Trade Secrets Directive, requiring all Member States to provide certain minimum standards for trade secret protection.  Member States will have two years to implement the provisions of the Directive into their own national laws.

How do the US and EU positions on trade secrets compare?  Below are the key similarities and differences between the DTSA and the European Trade Secrets Directive.

What has led to these Legislative Changes?

The desire for harmonization of trade secret protection has spurred these movements both in the US and the EU.  According to the European Commission, the lack of a uniform European approach has resulted in a “fragmentation of the internal market” and “weakening of the overall deterrent effect of the relevant rules.”  The EU Directive seeks to harmonize the laws of the various member states by providing a consistent definition of what qualifies as a “trade secret.”  Additionally, the Directive addresses the remedies available to trade secret holders and the measures courts can use to prevent the disclosure of trade secrets in legal proceedings.

In the U.S., the DTSA arose from a desire to federalize trade secret protection, which had thus far been dominated by state law (although most states had previously adopted the Uniform Trade Secrets Act (UTSA), published by the Uniform Law Commission in 1979).  While certain federal protection previously existed in the form of the Economic Espionage Act of 1996, the DTSA provides an individual right sue in federal court, thus obviating the need to bring private actions in various state courts where procedures differ greatly.

How is “Trade Secret” Defined?

Under both the EU Trade Secrets Directive and the DTSA, to qualify as a trade secret the information at issue must be kept confidential and must derive economic value from being kept confidential.

Article 2 of the Trade Secrets Directive defines a trade secret as information which meets all of the following requirements:

  1. is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
  2. has commercial value because it is secret;
  3. has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

This definition tracks the definition for “undisclosed information” provided in article 39(2) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), which requires all signatories to afford some level of protection for confidential information.

The DTSA definition of “trade secret”, meanwhile, consists of “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if-

  1. the owner thereof has taken reasonable measures to keep such information secret; and
  2. the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”

As seen, whether in Europe or in the U.S., to be considered a trade secret the information must be kept confidential and derive an economic value from the fact that it is confidential.  Both the EU Directive and the DTSA are aimed at protecting commercial confidential information.  What is not required is that the information be entirely novel, a distinction from other forms of intellectual property.  Further, the EU Directive makes explicit that combinations of otherwise publicly available information can be protected provided they are not readily accessible or generally known.

Confidentiality in Litigation

The EU Directive and DTSA have similar provisions for the preservation of confidentiality during legal proceedings for trade secret misappropriation.  In the U.S. the ability to file confidential documents under seal to maintain secrecy has long been an option open to litigants.  The DTSA specifically sets out that a court may not authorize or direct the disclosure of information unless the owner is first given the opportunity to file a submission under seal describing the interest in keeping the information confidential.  The DTSA therefore extends the option of filing briefs under seal to include disclosure at trial and in court opinions, and also allows non-parties to request that certain information be kept confidential.

The EU Directive similarly addresses preserving confidentiality during legal proceedings.  The Directive sets out that an applicant must first supply a “duly reasoned” application as to why certain information should be kept confidential.  The maintenance of secrecy is therefore not the default position, and requires court approval.  It remains to be seen how the national laws of the Member States will implement the Directive and how courts will interpret what qualifies as a “duly reasoned” application.  In some countries this will require minimum changes (for instance, in the U.K. no change will be required), while in others it will be a more significant cultural and legal shift.

Protection for Whistle-blowers

The protections for whistle-blowers and press freedom have been a significant part of the public debate concerning the EU Directive.  Opponents of the Directive expressed concern that, as a result of the Directive, journalists and whistle-blowers could be criminalized for publishing information that companies consider secret.  However, the EU Directive specifically sets out that it should not prevent whistle-blowers and those publishing trade secrets to serve the public interest from doing so.  Moreover, there are no criminal provisions in the Directive.  The Directive states:

The measures, procedures and remedies provided for in this Directive should not restrict whistleblowing activity. Therefore, the protection of trade secrets should not extend to cases in which disclosure of a trade secret serves the public interest, insofar as directly relevant misconduct, wrongdoing or illegal activity is revealed. This should not be seen as preventing the competent judicial authorities from allowing an exception to the application of measures, procedures and remedies in a case where the respondent had every reason to believe in good faith that his or her conduct satisfied the appropriate criteria set out in this Directive.

This exception for whistle-blower activity is much broader than that provided by the DTSA.  The DTSA provides immunity from liability for disclosing a trade secret only when the disclosure is confidential and made to the government or in a court filing (under seal).  There is no specified exception for journalists or other public good-doers, although arguably the First Amendment provides protection.  The DTSA does include a provision by which employers must notify their employees of the protection available under the new law, a notice requirement which is not present in the EU Directive.  Employee is defined broadly by the DTSA to include those working as contractors or consultants.

Remedies

The most controversial part of the DTSA has been the introduction of an ex parte seizure order as a federal measure.  Under the DTSA, a court can issue an order for the seizure of property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  Additional remedies include injunctions and damages, where an injunction is deemed most appropriate for any continuing harm.  For previous harm, a court may award damages for actual loss or any unjust enrichment.  A court can also choose to award damages measured by a reasonable royalty for the unauthorized use of the trade secret.  As with other protection of intellectual property, violation of the DTSA done wilfully or maliciously may result in a court awarding enhanced damages as well as attorneys’ fees.

The EU Directive similarly allows for injunctions, damages measured as lost profits, account of profits, or a reasonable royalty for the trade secret use (paid as a lump sum).  The Directive also allows for provisional and precautionary measures, and says that Member States can provide for more far reaching protection, so long as the safeguards in the Directive are met.

The EU Directive does not call for enhanced damages for malicious activity, but rather approaches damages from the opposite viewpoint, specifying that Member States may limit the liability for damages of employees for misappropriating trade secrets if the employee acted without intent.

Employee Mobility and Non-Compete Agreements

In the sensitive area of employee mobility and competition, the Directive specifically states that it shall not offer any ground for restricting the mobility of employees.  However, the Directive does not include any requirement to harmonize the laws in relation to post-termination restrictions or non-compete clauses, meaning that national laws will continue to apply.

The DTSA addresses employee mobility in requiring that an injunction against a former employee be “based on evidence of threatened misappropriation” of trade secret information and not simply on the fact that the person may know certain information.  The DTSA also states that any injunction preventing or limiting future employment cannot conflict with applicable state laws protecting employee mobility.  Shortly before the DTSA took effect, the White House released a report that criticizes non-compete agreements and state laws that offer too much protection for such agreements.  While no immediate action is expected following the report, it is offered as a discussion point in considering what is necessary in non-compete agreements and how states should treat them.

Limitation Period

In the U.S., the limitation period for a company to bring an action under the DTSA is three years after the date on which the misappropriation is discovered or could have been discovered with reasonable diligence.  The EU Directive gives the Member States the freedom to set the limitation period for their respective national laws, but sets the maximum period at six years (albeit Member States have discretion as to when the clock starts to run).

Conclusion

It is obviously desirable that trade secret protection be consistent across borders, whether state or national, as protection is only as strong as its weakest link.  In the U.S., the DTSA specifically sets out a requirement that the Attorney General provide a report on the threats of trade secret theft outside the U.S. and the protection of trade secrets afforded by U.S. trading partners.  How the EU Directive and DTSA play out as Member States implement the Directive and courts interpret the laws will help shape trade secret protection around the globe.

[Update] Defend Trade Secrets Act of 2016: Markup and Commentary

by Dennis Crouch

President Obama has signed the Defend Trade Secrets Act of 2016 (DTSA) into law.  The new law creates a private cause of action for trade secret misappropriation that can be brought in Federal Courts and with international implications. I have created a mark-up (with commentary) of the new law that shows how the DTSA’s amendments to the Economic Espionage Act (EEA).

We have covered the DTSA legislation and legislative process in several Patently-O Posts, including the following:

 

Immediate action for Human Resource Departments on the Defend Trade Secrets Act

by Dennis Crouch

The Key: Starting May 12, 2016 all employers will be required by Federal Law to provide a notice-of-immunity to employees and contractors “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.” (If the DTSA is enacted as expected.)

Whistle Blower Immunity: The Defend Trade Secrets Act (DTSA) amends 18 U.S.C. 1832 to provide limited whistle blower immunity. The headline for the provision is “immunity from liability for confidential disclosure of a trade secret to the government or in a court filing.”  Thus, an action that would otherwise count as trade secret misappropriation will be immunized if the disclosure:

(A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

The statute is clear that the immunity extends to protect against both state and federal law; both civil and criminal allegations.  A statute also (unnecessarily in my view) includes a provision that allows someone “who files a lawsuit for retaliation by an employer for reporting a suspected violation of law” to disclose trade secrets to his attorney and “use the trade secret information in the court proceeding” so long as documents containing the trade secrets are filed under seal and are not disclosed except by court order.[1]

Under these rules, it seems that the party planning to disclose another’s trade secret in open court should first seek an order of permission from the judge. And, at that point, the court will be required to allow the third party to explain the importance of the trade secret.[2]

Required Notice to Employees and Independent Contractors: Under the provision, employers are required to provide notice of the immunity “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.”  The statute suggests that this may be done via reference to a policy document rather than restating the entire immunity provisions in each agreement.  The statute does not appear to have any small-business exception to the notice requirement.

Failure to Comply with the Notice Requirement has a fairly small penalty: If the employer later sues the employee (or independent contractor) for trade secret misappropriation under the DTSA, the employer will not be able to collect exemplary double-damages or attorney fees.  No other specific penalties are provided, but neither does the statute indicate that these are the sole potential penalties.  I could imagine the FTC pursuing employers who fail to provide the notice (but likely only as part of a larger enforcement campaign). In addition, you might imagine a class action suit against major employers who fail to provide the notice. Finally, since this is a requirement of all contracts involving trade secret or confidential information, failure to provide the notice in a particular instance could be seen as evidence that either (1) there was no agreement or (2) the agreement did not involve trade secrets.[3]

Who Needs the Notice?: The notice requirement applies to employees as well as “any individual performing work as a contractor or consultant for an employer.”  Although the statute does not define ‘individual,’ I believe that the best interpretation is that individuals include only humans and not business entities. This conclusion is based upon the statute’s implicit distinction between “entities” and “individuals.”  A common situation might be a start-up company contracting with a cleaning company to do the janitorial work.  Do the people doing the actual vacuuming and cleaning need to have received the notice?  The statutory answer to that will depend upon how a court construes the language “performing work as a contractor or consultant for an employer.”  At this point, a cautious trade secret holder who wants the benefits of notice would ensure that those individuals are also provided notice.

Timing:  The DTSA will be effective once enacted and apply to “any act” that “occurs on or after the date of enactment.”  I expect that President Obama will sign the DTSA on May 11, 2016 and that will be its enactment date.  The notice requirement will “apply to contracts and agreements that are entered into or updated after the date of enactment of this subsection.”  Thus, as of May 12, 2016 employers must begin providing notice under the law.

Earlier this week, the White House issued a new white paper on the problems created by the existence of so-many covenants not-to-compete binding low-skilled workers.  Of course, this new notice requirement will mean that more employer HR departments will now be considering if it is time to add those contracts (along with the notice requirement).

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[1] A potential hole in the provisions involves arbitration proceedings (that are common in employee disputes) since, immunity applies to court disclosures and disclosures to government officials, but not expressly to private arbitrators.

[2] This process is outlined in the newly added 18 U.S.C. § 1835(b).

[3] I think it is an important topic for another time stems from how the statute subtly distinguishes between a “contract” and an “agreement” and also between “trade secrets” and “other confidential information.”

White House on Non-Competes and Trade Secrets

While still apparently fully on-board with ramping-up US trade secrecy law through the Defend Trade Secrets Act (DTSA), the White House has also released a new report that criticizes non-compete agreements and state laws that over-zealously enforce those agreements.  Although the report recognizes that non-compete agreements are wrapped-up with trade secrecy enforcement, but suggests that a large number of non-competes are not used for that purpose. The U.S. Treasury Department released a parallel report in March 2016

The White House report explains:

[T]he U.S. economy faces a number of longer-run challenges, some of which go back several decades. In at least part of the economy, evidence suggests that competition for consumers and workers is declining, and the number of new firms each year is experiencing a downward trend. In addition to this trend, there has been a decrease in ‘business dynamism’—the so-called churn of firms and who is working for whom in the labor market— since the 1970s. One factor driving these issues may be institutional changes in labor markets, such as greater restrictions on a worker’s ability to move between jobs. To address these and other issues that limit competition in the marketplace, the President has directed executive departments and agencies to propose new ways of promoting competition and providing consumers and workers with information they need to make informed choices, in an effort to improve competitive markets and empower consumers’ and workers’ voices across the country. Building on these efforts, this document provides a starting place for further investigation of the problematic usage of one institutional factor that has the potential to hold back wages—noncompete agreements. These agreements currently impact nearly a fifth of U.S. workers, including a large number of low-wage workers. . . .

The main economically and societally beneficial uses of non-competes are to protect trade secrets, which can promote innovation, and to incentivize employers to invest in worker training because of reduced probability of exit from the firm. However, evidence indicates that non-competes are also being used in instances where the benefit is likely to be low (e.g., where workers report they do not have trade secrets), but the cost is still high to the worker.

The White House is not expected to take any immediate action but rather is offering discussion points and will likely have further comments at the signing of the Defend Trade Secrets Act later this week.

What the Defend Trade Secrets Act Means for Trade Secret Defendants

Guest Post By Maxwell Goss. Dr. Goss is a business litigation attorney with McDonald Hopkins PLC in Bloomfield Hills, Michigan. His practice focuses on trade secret, noncompete, patent, trademark, and shareholder litigation.

The Defend Trade Secrets Act of 2016 (DTSA)—arguably the most sweeping change to the nation’s intellectual property laws in a generation or more—is about to become law. The bill recently passed both houses of Congress with overwhelming bipartisan support. President Obama is certain to sign the bill into law.

Much has already been written about the powerful new tools the DTSA gives to businesses looking to protect their trade secrets. Dennis Crouch, who has been covering the DTSA extensively, recently commented on those tools here, and I have written about them here. Most notably, the DTSA allows a trade secret owner to seek to have law enforcement officials seize property—without advance notice to the accused—to prevent dissemination of the trade secrets at issue.

But how do defendants fare under the DTSA? For example, suppose a business accuses its former employee of taking a confidential customer list or technical information when the employee left the company, and files suit under the DTSA. Or suppose another company hires someone accused of trade secret theft, and the person’s former employer sues the company for conspiracy under the DTSA. What does the DTSA mean for the accused?

Without a doubt, the DTSA gives some advantages to trade secret owners. But it also contains protections that defendants should take advantage of. These include a process for challenging an improper seizure of property, employment protections in the event of an injunction, and recovery of attorney’s fees for actions brought in bad faith. In the right circumstances, these provisions could give a trade secret defendant the upper hand.

Challenging an Improper Seizure

Under the DTSA, a person may have a laptop, server, storage device, papers, or other property forcibly taken into custody without advance notice. Litigants must keep in mind that this is an extraordinary remedy. Before seizure can be ordered, the applicant must show, among other things, that the accused person would evade an ordinary injunction and that the accused person would destroy or hide the property if given advance notice.

A key aspect of the DTSA for defendants is its requirement that a hearing be held within seven days of a seizure order, unless otherwise agreed by the parties. At the hearing, the trade secret owner will have to prove the facts and law necessary to support the order. This hearing can provide a chance for the defendant to set the tone of the case by attacking the trade secret owner’s position and possibly getting the seizure order dissolved. The DTSA also expressly permits modification of the usual time limits for discovery “to prevent the frustration of the purposes” of the seizure hearing. For the defendant who acts quickly, this may mean that expedited document production or even a helpful deposition could be obtained in advance of the seizure hearing.

Employment Protection

Injunctions sought in trade secret cases frequently involve restrictions on employment. For example, where a former employee is accused of misappropriating trade secrets, the former employer may try to obtain an order enjoining the person from disclosing the trade secrets to a competitor, using the trade secrets in service of a competitor, or even working for a competitor at all. Under the DTSA, an injunction to prevent actual or threatened misappropriation may not “prevent a person from entering into an employment relationship.” Moreover, any conditions that an injunction may place on a person’s employment may not be based “merely on information the person knows.” Instead, there must be evidence that the trade secret information at issue will actually be misappropriated. Counsel for the accused will of course seek to avoid any injunction. But where one is entered, counsel should ensure that these requirements are strictly followed.

Attorney’s Fees for Bad Faith

Finally, the DTSA provides that the accused may recover his or her reasonable attorney’s fees from the plaintiff if (among other things) the claim of misappropriation was made in bad faith. While existing state laws generally contain similar provisions, the DTSA is unique in adding expressly that bad faith “may be established by circumstantial evidence.” This is significant given that direct evidence of bad faith—say, an admission by the plaintiff that the claim was without merit—can be exceedingly difficult to obtain. One place to look for evidence of bad faith would be the affidavits submitted by the plaintiff in connection with an application for ex parte seizure.

In short, while the DTSA tightens the screws for those accused of trade secret misappropriation, it also contains important provisions allowing defendants to challenge improper claims and to limit their impact even where relief may be granted.

Rights of Trade Secret Owners in Federal Cases

by Dennis Crouch

By longstanding tradition, US courts are open, transparent in proceedings, and transparent in judgment.  The FISA courts that I cover in my internet law course are so controversial because they are so contrary to that tradition.  Courts are also sensitive to the disclosure of trade secrets and, in the past, have liberally allowed parties to file documents under seal to avoid destroying those rights.  Most recently, for instance, the Supreme Court permitted Shukh to file redacted public briefs to avoid discussing secret information regarding his invention rights. See Supreme Court Rule 5.2.

The Defend Trade Secrets Act (DTSA) includes an new provision added to the Economic Espionage Act (EEA) that, depending upon how it is interpreted, may govern how district courts handle trade secret information in all cases. The new section will be codified as 18 U.S.C. 1835(b) and reads:

(b) Rights Of Trade Secret Owners.—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. . . .

Courts already liberally allow parties to file documents under seal – so that doesn’t provide the entire impact of the provision.  Rather, the provision’s importance is that it extends beyond briefs being filed by parties and instead reaches disclosures at trial and court opinions.   Thus, the statute presumably prevents a court from disclosing a trade-secret in its opinion without first providing the trade-secret owner with the opportunity to brief the issue of disclosure.  In addition, it provides non-parties with a right to request (under seal) non-disclosure of their trade secret rights.

Unlike other provisions in EEA/DTSA, this “right” is not expressly limited to actions arsing from the EEA/DTSA. Rather, it may be read broadly as a provision providing procedural rights of trade secret owners in all federal cases.  If so, it will effectively serve as a form of trade secret privilege and will end-up being the most cited aspect of the new law.

The DTSA was presented to President Obama for his signature on April 29, 2016 and should become law within the week.

Implementing and Interpreting the Defend Trade Secrets Act

By Dennis Crouch

With today’s 410-2 House vote, the Defend Trade Secrets Act (DTSA) has now passed both the House and Senate and is headed to President Obama for his expected signature.[1]  The DTSA amends the Economic Espionage Act to create a private civil cause of action for trade secret misappropriation based upon the Congressional sense that trade secret theft exists and is harmful.[2]  Trade secret misappropriation (as a civil matter) has previously been purely a matter of state law.  Although there is substantial uniformity between the states,[3] there are also a number of differences and perceived procedural weaknesses.[4]  The DTSA would not eliminate or preempt the various state trade secret rights but rather would operate as an additional layer of potential protection.[5] The law is designed to go into effect on its day of enactment and apply to any misappropriation that occurs on or after that date.

On March 10, 2017, the University of Missouri’s Center for Intellectual Property and Entrepreneurship (CIPE) along with our new Business, Entrepreneurship, and Tax Law Review (BETR) will host a symposium on Implementing and Interpreting the Defend Trade Secrets Act.  I expect that we will live-stream the event and will also publish speaker articles in BETR.  There is a lot to figure out. Contact me if you are interested in sponsorship opportunities (dcrouch@patentlyo.com).

The central provision of the DTSA will be codified as 18 U.S.C. § 1836(b) and reads:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

Defining Trade Secret: The DTSA broadly defines the term “trade secret” to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing 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, the another person who can obtain economic value from the disclosure or use of the information.”  Although this definition is broad and certainly includes abstract ideas and laws of nature, it might not encompass information that is only stored in the human mind.[6]

Defining Misappropriation of a Trade Secret:  The statute also defines “misappropriation” in detail.  My rough approximation is as follows: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means.  These “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”  The DTSA does not otherwise include a more general fair-use or news-reporting exception.  However, the First Amendment will certainly serve as a backstop.  Further, these definitions do not include any express territorial limit – it will be very interesting to see the extent that these limits will be implied into the law.  Thus, if a U.S. company is holding trade-secrets in India that are stolen in India, could the U.S. company bring action against the Indian entity that caused the injury (presuming personal jurisdiction over the defendant)?

Remedies Civil Seizure: A key procedural benefit of the DTSA is to offer a mechanism for Civil Seizure ordered by courts and enforced by Federal, State, and/or local law enforcement as a preventive measure (akin to a temporary restraining order).

Remedies: Once misappropriation is found, the court will be authorized to grant injunctive relief as “reasonable.”  If “exceptional circumstances” render injunctive relief is “inequitable” then a court may order a reasonable royalty for the misappropriator’s continued use of the trade secret.  Depending upon how the statute is interpreted, this setup appears to create a presumption of injunctive relief – a stark difference from contemporary patent law doctrine under eBay v. MercExcange.  The statute also provides for compensatory damages for either (i): (I) “actual loss of the trade secret” and, in addition (II) “any unjust enrichment” not compensated in (I); or (ii) a reasonable royalty for the use.  Willful misappropriation can double damages.[7] In these calculations, I suspect that courts will take into account both the market-value of the trade secret as well as the “expenses for research and design and other costs of reproducing the trade secret” that were avoided by the misappropriation. The provision also includes an attorney fee shifting provision limited to cases involving bad-faith or willful-misappropriation.

Remedy against Former Employees: Most trade secret cases involve former employees moving (or starting-up) to a competitor.  A major concern raised against early versions of the bill was that the DTSA would empower employers to prevent such movement.  As amended, the bill now indicates that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”[8]  Of course, such “threat” does not necessarily mean that the employee expressly threatened misappropriation but rather will likely be based upon circumstantial evidence regarding likelihood of misappropriation (i.e., ‘threat level’).[9]  In addition, the injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”  This bit appears to be directed toward giving credence to non-compete and other limits in various states. However, of key importance is that it only limits injunctive relief and does not appear to limit any cause of action against former employees.  As a consequence, this sets the likelihood of a fight between certain state employment laws that favor employee rights against the new federal trade secret law.

Whistle Blowers: Professor Peter Menell was instrumental in proposing a public policy immunity provision that is included in the DTSA.  The provision would offer immunity from liability (whistle blower protection) for confidential disclosure of a trade secret to the Government or in a Court Filing (made under seal).  The provision includes a notification requirement that employers should immediately implement.

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Notes:

[1] Defend Trade Secrets Act of 2016, S. 1890.

[2] Although trade secret rights are thought of as a form of intellectual property, the bill is clear that the DTSA “shall not be construed to be a law pertaining to intellectual property.”  The result of this could, for example, mean that the intellectual property licensee exception in bankruptcy law would not apply to licenses of trade secret information.  See 11 U.S.C. § 365(n).  [In Bankruptcy Law, Trade Secrets are defined as a form of IP, but it is unclear to me at this point which statute would prevail.]  Because the DTSA is an amendment to the Economic Espionage Act – a criminal law – it will also be codified in Title 18 of the United States Code that is generally directed to “crimes and criminal procedure.”  Although I don’t know exactly, there may be aspects of Title 18 (such as general definitions) that will shape the interpretation of federal trade secret law.  As an example, 18 U.S.C. § 2(b) offers a “general principle” of respondeat superior that “[w]hoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.”

[3] Consider the popularity of the Uniform Trade Secrets Act in the various states.

[4] Jury trial should still apply to the extent it has in state cases.

[5] The Economic Espionage Act already includes a rule of construction that the statute “shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession, or territory law for the misappropriation of a trade secret, or to affect the otherwise lawful disclosure of information by any Government employee under section 552 of title 5(commonly known as the Freedom of Information Act).”  The DTSA reaffirms this principle by stating that “[n]othing in the amendments made by this section shall be construed to modify the rule of construction under section 1838 of title 18, United States Code, or to preempt any other provision of law.”  The bill provides for original jurisdiction of these trade secret cases in federal district court. However, it does not create exclusive jurisdiction – as such it would be proper for a party to bring such a claim in state court (when permitted by the state court). However, in that case, the other party may attempt to remove the case to Federal Court.  You might also query as to whether the federal claim is a ‘compulsory claim’ under the law such that if someone brings a state-law claim and loses they would later be estopped from bringing the federal claim.

[6] There may also be constitutional limitations on a company owning and controlling that information.

[7] This provision suggests by implication that misappropriation may be non-willful despite the fact that the misappropriation definition includes a mens rea element.

[8] My understanding is that Jim Pooley and Mark Lemley were instrumental in suggesting the addition of this provision that has now put the Bill in form where it is broadly supported by the politicians.

[9] Improperly obtaining a trade secret is a form of misappropriation – this creates some potential confusing situations in the interpretation of the provision.