May 16, 2017

One Year of the Defend Trade Secrets Act

By Bryan K. Wheelock, Principal

May 16, 2017 marked the first anniversary of the Defend Trade Secrets Act.  What has the year taught us about this new federal cause of action for trade secret misappropriation?  Here are the top 13 lessons from the first year of DTSA litigation:

  1. The threat is from within.  Like the scary story punch line, the call is from inside the house.  Most of the DTSA cases in the first year have involved former employees.
  2. The tools of espionage are mundane.  No need for James Bond’s Q here, the implements of trade secret misappropriation are as simple as emailing[1] the secrets to a personal email account,[2] loading up a flash drive, using Dropbox,[3] logging on the company systems,[4] or keeping a company lap top.[5]
  3. The DTSA applies to continuing use of a Trade Secret taken before the Effective date.  The most frequently litigated DTSA issue in the first year is the application of the DTSA to trade secrets taken before the May 16, 2016, effective date.  Although this will diminish in importance with time, the cases hold that the DTSA covers the continued use after the May 16, 2016, effective date, of trade secrets obtained before the effective date.[6]  The DTSA does not apply to misappropriations occurring prior to enactment,[7] and the courts will dismiss a Complaint under the DTSA unless and until the plaintiff can allege an act after the effective date.[8]  Conversely the courts will allow amendment to add a DTSA claim where plaintiff can allege post enactment use.[9]
  4. The Courts are willing to grant preliminary injunctions based upon the DTSA.[10]  The Courts apply the traditional four-factor test for the grant of a preliminary injunction.  In evaluating the balance of hardships the fact that the injunction does not require more than compliance with federal and state law weights in favor of a preliminary injunction.[11]
  5. The DTSA seizure provisions are not the exclusive ex parte remedy.[12]  The DTSA provided for ex parte seizure, which can be a helpful tool in investigating and combating trade secret misappropriation.  However, the rules are complex, if not onerous.  In appropriate cases, it may still be faster and easier, and just as effective, to go old school and seek a TRO under trade secret.
  6. The Trade Secret Owner (obviously) doesn’t have to disclose its trade secrets in its Complaint to protect those trade secrets.[13]  Nor is there any heightened level of pleading required for a DTSA complaint.[14]
  7. You shouldn’t count on the DTSA to stop your former employees from competing with you — that’s what non-compete agreements are for.[15]  In the absence of a non-compete provision, courts will restrict an individual’s employment only where the individual has stolen its former employer’s trade secrets and there is a high probability that the individual will “inevitably disclose” this information to its new employer.[16]
  8. Choice of Law Can be More Important Than Ever.  According to 18 U.S.C. § 1836(b)(3)(A)(i)(II), the remedies available under the DTSA may depend on state law, in the words of one district court, forcing the court into the “choice of law bramble.”[17]
  9. Defendants may attempt to hide behind the “whistle blower” provisions.[18]  Plaintiffs who live in glass houses should not throw stones.  Trade secret owners, like all prospective plaintiffs, should consider potential adverse consequences of bringing suit.  Is there something that the potential defendant could tattle about?
  10. The DTSA is not significantly different from state law including the Uniform Trade Secrets Act.[19]  The DTSA was patterned on the UTSA, and while there are some differences, the similarities outweigh the differences.[20]  The courts may look to the UTSA in interpreting the DTSA.[21]  Although one court noted that although the UTSA is effective in 48 states, those laws “vary in a number of ways and contain built-in limitations that make them not wholly effective in a national and global economy.”[22]
  11. Restrictions of injunctions against employees may not apply to contractors.[23]  Under the DTSA, the Court cannot grant an injunction that “prevent[s] a person from entering into an employment relationship,” and the Court can only place conditions on employment “based on evidence of threatened misappropriation and not merely on the information the person knows.” 18 U.S.C. § 1836(b)(3)(A)(i)(I).  There is no indication that “employment relationship” encompasses the role of an outside contractor.
  12. The balance of hardships favors the trade secret owner where the injunction would merely require defendant to comply with federal and state law.[24]
  13. The DTSA won’t help those who don’t help themselves.  Like the UTSA, the DTSA requires that the trade secret owner take some responsibility for securing the alleged trade secret.[25]

 

[1] Protection Technologies, Inc. v. Ribler, 3:17–cv–00144–LRH–WGC 2017 WL 923912 (D. Nevada. March 08, 2017); Henry Schein, Inc. v. Cook, 16-cv-03166-JST 2016 WL 3418537 (N.D. California. June 22, 2016).

[2] Chubb Ina Holdings Inc. v. Chang,  16-2354-BRM-DEA 2017 WL 499682  (D. New Jersey February 07, 2017);  Free Country Ltd, v. Drennen, 16 CV 8746 (JSR) 2016 WL 7635516 (S.D. N.Y. December 30, 2016);

[3] Free Country Ltd, v. Drennen, 16 CV 8746 (JSR) 2016 WL 7635516 (S.D. N.Y. December 30, 2016).

[4] Henry Schein, Inc. v. Cook, 16-cv-03166-JST 2016 WL 3418537 (N.D. California. June 22, 2016).

[5] Henry Schein, Inc. v. Cook, 16-cv-03166-JST 2016 WL 3418537(N.D. California. June 22, 2016).

[6] Allstate Ins. Co. v. Rote, 16–cv–1432, 2016 WL 4191015, at *1–5 (D. Or. Aug. 7, 2016) (granting preliminary injunction in DTSA case where the defendant left her job before the DTSA was enacted but remained in possession of alleged trade secrets after the DTSA’s enactment); Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp., Inc., 15–cv–211, 2016 WL 5338550, at *6 (S.D.N.Y. Sept. 23, 2016) (finding viable a continuing misappropriation claim that began pre-enactment because the DTSA defines misappropriation as the “disclosure or use of a trade secret” and the complaint alleged that the defendants “continue[d] to use” the trade secrets after the DTSA was enacted) (emphasis in original); Brand Energy & Infrastructure Services, Inc. v. Irex Contracting Group, 16-2499 2017 WL 1105648 (E.D. Pa. March 24, 2017) (denying motion to dismiss as to continuing misappropriation that started prior to effective date); High 5 Games, LLC v. Marks, 13-7161 (JMV) 2017 WL 349375 (D.N.J. January 24, 2017) (granting motion to amend to add DTSA claim).

[7] Champions League, Inc. v. Woodard, 2016 WL 8193292 S.D. New York. December 15, 2016 (Denying leave to amend complaint to add DTSA claim because it would be futile because the DTSA applies only to acts of misappropriation that occur on or after the May 11, 2016, date of the enactment of the Act); Avago Technologies U.S. Inc. v. Nanoprecision Products, Inc., 16-cv-03737-JCS 2017 WL 412524 (N.D. California. January 31, 2017) (granting motion to dismiss where all of the actionable conduct alleged in the Counterclaim occurred before the DTSA came into effect).

[8] Dazzle Software II, LLC v. Kinney, 16-cv-12191 2016 WL 6248906 (E.D. Michigan August 22, 2016), (Dismissing DTSA Count with leave to amend upon discovery of conduct following effective date of the act). Hydrogen Master Rights, Ltd. v. Weston, 16–474–RGA 2017 WL 78582 (D.Del. January 9, 2017) (DTSA Claims dismissed without prejudice because (1) the complaint fails to allege any nexus between interstate or foreign commerce; and (2) because he DTSA, by its own terms, applies only to an act of misappropriation that occur on or after the date of the enactment, and the Complaint only contains a conclusory allegation of continuing use and disclosure.); M.C. Dean, Inc. v. City of Miami Beach, Florida, 199 F.Supp.3d 1349 2016 WL 4179807 (S.D. Florida. August 08, 2016)(granting motion to dismiss for failure to state a claim); Cave Consulting Group, Inc. v. Truven Health Analytics Inc., 5-cv-02177-SI 2017 WL 1436044  (N.D. California. April 24, 2017) (Dismissed although agreeing post enactment use would be sufficient); Chubb INA Holdings Inc. v. Chang, 16-2354-BRM-DEA 2016 WL 6841075 (D. New Jersey. November 21, 2016) (granting motion to file amended complaint alleging violation of DTSA.).

[9] VIA Technologies, Inc. v. ASUS Computer International, 4-cv-03586-BLF 2017 WL 491172  N.D. California, San Jose Division. February 07, 2017 (Granting Leave to Amend Complaint to add DTSA claim after discover showed post enactment use).

[10] First Western Capital Management Company v. Malamed, 6–cv–1961–WJM–MJW 2016 WL 8358549 (D. Colorado. September 30, 2016) (This leads the court into the “choice-of-law bramble”).

[11] Dish Network L.L.C. v. Ramirez, No. 15–CV–04712–BLF, 2016 WL 3092184, at *7 (N.D.Cal. June 2, 2016) (balance of hardships tips in favor of plaintiff seeking injunction when it would “do no more than require Defendant to comply with federal and state … laws”).

[12] Magnesita Refractories Company v. Mishra, 2:16-CV-524-PPS-JEM 2017 WL 365619  (N.D. Indiana, January 25, 2017); OOO Brunswick Rail Management v. Sultanov, 5:17-cv-00017-EJD 2017 WL 67119  (N.D. California, San Jose Division. January 06, 2017); Protection Technologies, Inc. v. Ribler, 3:17–cv–00144–LRH–WGC 2017 WL 923912 (D. Nevada. March 08, 2017).

[13] Mission Measurement Corporation v. Blackbaud, Inc., 16 C 6003 2016 WL 6277496 (N.D. Illinois, October 27, 2016) (Denying motion to dismiss DTSA claim, noting trade secrets need not be disclosed in detail in a complaint alleging misappropriation for the simple reason that such a requirement would result in public disclosure of the purported trade secrets).

[14] Chubb Ina Holdings Inc. v. Chang,  16-2354-BRM-DEA 2017 WL 499682 (D. New Jersey February 07, 2017) (Denying motion to dismiss DTSA for failure to state claim because complaint included sufficient “factual allegations to raise a right to relief above the speculative level” that Defendants did, in fact, use Plaintiffs’ trade secrets, and noting “there is no heightened pleading standard for a misappropriation claim.”).

[15] Free Country Ltd, v. Drennen, 16 CV 8746 (JSR) 2016 WL 7635516 (S.D. N.Y. December 30, 2016) (Granting in part plaintiff’s motion for a renewed TRO by prohibiting defendants from using or disseminating plaintiff’s confidential information, but denying plaintiff’s request that defendants be prohibited from soliciting its customers, noting New York law recognizes a specific means for plaintiff to protect information under such circumstances: a non-competition provision.).

[16] Free Country Ltd, v. Drennen, 16 CV 8746 (JSR) 2016 WL 7635516 (S.D. N.Y. December 30, 2016).

[17] First Western Capital Management Company v. Malamed, 6–cv–1961–WJM–MJW 2016 WL 8358549 (D. Colorado. September 30, 2016),

[18] Unum Group v. Loftus, 4:16–CV–40154–TSH  2016 WL 7115967 (D. Massachusetts. December 6, 2016) ( Denying motion to dismiss, granting preliminary injunction despite argument that defendant’s actions were exempted under § 1836(b) of the DTSA, which provides immunity under any federal and state trade secret laws to individuals who disclose trade secrets in confidence to an attorney, “solely for the purpose of reporting or investigating a suspected violation of law”).

[19] VIA Technologies, Inc. v. ASUS Computer International, 4-cv-03586-BLF 2017 WL 491172  N.D. California, San Jose Division. February 07, 2017 (Finding differences between DTSA and uniform trade secret act did not justify denying motion to add DTSA claim to trade secret suit).

[20] Kuryakyn Holdings, LLC v. Ciro, LLC 15-cv-703-jdp 2017 WL 1026025 (W.D. Wisconsin. March 15, 2017) (“The DTSA gives rise to a federal cause of action, but the parties agree that substantively the UTSA and DTSA are “essentially the same”).

[21] Kuryakyn Holdings, LLC v. Ciro, LLC, 15-cv-703-jdp 2017 WL 1026025 (W.D. Wisconsin. March 15, 2017); Earthbound Corp. v. MiTek USA, Inc., 16-cv-1150, 2016 WL 4418013, at *10 (W.D. Wash. Aug. 19, 2016).

[22]  Adams Arms, LLC v. Unified Weapon Sys., Inc., 16–cv–1503, 2016 WL 5391394, at *5–7 (M.D. Fla. Sept. 27, 2016).

[23] Engility Corporation v. Daniels, 16–cv–2473–WJM–MEH 2016 WL 7034976 (D. Colorado. December 02, 2016).

[24] Dish Network L.L.C. v. Ramirez, No. 15–CV–04712–BLF, 2016 WL 3092184, at *7 (N.D.Cal. June 2, 2016) (balance of hardships tips in favor of plaintiff seeking injunction when it would “do no more than require Defendant to comply with federal and state…laws”).

[25] Raben Tire Co., LLC v. McFarland, 5:16-CV-00141-TBR 2017 WL 741569 (W.D. Kentucky, Paducah Division. February 24, 2017) (Noting that Raben Tire Co.’s complaint is entirely devoid of any allegations of how it protected the information in question from dissemination).