The Defend Trade Secrets Act: Will It Replace the Diminishing Restrictive Covenant?

Wednesday, September 26, 2018 - 10:17

 

Statute provides businesses with greater flexibility when bringing trade secrets claims.

States across the country are currently taking aim at one of the key tools that businesses use to protect their interests – restrictive covenants.  For example, state legislatures in New Jersey, New York and Massachusetts have all proposed bills that would limit an employer’s ability to include post-employment restrictions in employment agreements, which have long served to curb unfair competition.[1] In light of this trend, now is the right time to revisit one of the largest expansions of business information protection in recent memory – the Federal Defend Trade Secrets Act of 2016 (DTSA) – and check in on how the law has developed since its enactment.

To understand where we are, we need to understand where we came from. Businesses have always relied upon unfair competition theories to protect themselves. For hundreds of years, this has included claims for the misappropriation of trade secrets, a doctrine imported from English common law.[2]

Generally speaking, trade secret protection extends to information that an entity takes reasonable efforts to keep secret and “derives independent economic value” from not being generally known or ascertainable.[3] And businesses can pursue both injunctive relief and damages when qualifying information is stolen. 

Although for a short period of time a business could bring a misappropriation claim under federal common law, for approximately 80 years, businesses have had to rely exclusively on state law to protect their trade secrets.[4] Applying to a broader array of information than other forms of intellectual property protection, trade secret claims have long played a critical role in filling the gap in federal law by providing protection to non-patentable and non-copyrightable innovations.[5]

As each state’s law developed differently, businesses were faced with a series of logistical problems – trade secret protection could vary depending on the state law that applied and enforcement of a violation or misappropriation. This could lead to difficult choices about where to file a claim. To address the “uncertainty concerning the parameters of trade secret protection,” the Uniform Law Commission created the Uniform Trade Secrets Act (UTSA) to codify existing state common law standards.[6] Although some form of the UTSA has been adopted in 48 states, a lack of uniformity still exists at the state level.[7] And these differences can be “case-dispositive: they may affect which party has the burden of establishing that a trade secret is not readily ascertainable, whether the owner has any rights against a party that innocently acquires a trade secret, the scope of information protectable as trade secret, and what measures are necessary to satisfy the requirement that the owner employ ‘reasonable measures’ to maintain secrecy of the information.”[8]

But on May 11, 2016 Congress took a step towards addressing this problem by passing the DTSA.[9] Under this law, businesses may now bring a federal, private, civil claim for the misappropriation of trade secrets.[10] The DTSA is a key weapon in the arsenal of business torts; it expands a company’s options when it is faced with the theft of confidential information.

Scope

The DTSA allows the owner of a trade to bring a civil claim as long as it is “related to a product or service used in, or intended for use in, interstate or foreign commerce.”[11]

The DTSA leaves the fabric of state trade secrets law intact; it explicitly provides that it does not preempt or displace other remedies.[12] And it grants federal courts original, but not exclusive, jurisdiction over DTSA claims.[13] This provides businesses with maximum flexibility, as they can now sue in (1) state court alleging only state law claims, (2) state court alleging state law and DTSA claims, (3) federal court alleging only DTSA claims, or (4) federal court alleging DTSA and state law claims.[14] This flexibility benefits a business by not limiting the choice of forum.

The DTSA’s Applicability to Pre-Enactment Conduct Under a Continuing Misappropriation Theory

While the DTSA specifically forecloses the use of a continuing misappropriation theory to evade the three-year statute of limitations provision, the viability of claims based on misconduct that began prior to and continued after the effective date of the DTSA (May 11, 2016) is an evolving area of the law.[15] Courts around the country have grappled with this issue since the statute’s enactment.

The statute itself does not directly address the question. By its terms, it applies prospectively “to any misappropriation of a trade secret . . . for which any act occurs on or after the date of the enactment of this Act.”[16] Courts, on the other hand, have typically found that the “question of whether pre-enactment conduct is actionable under the DTSA depends on [p]laintiff's theory of liability.”[17] The DTSA prohibits both the acquisition of a trade secret, as well as its disclosure or use.[18] “Under an ‘acquisition’ theory of liability, a DTSA claim is only actionable if the trade secret was acquired after the effective date of the Act. However, under a ‘disclosure/use’ theory of liability, a DTSA claim is actionable when the disclosure or use continued to occur after the effective date.”[19] Courts have reached this conclusion throughout the country since the statute was enacted.[20] 

In making this determination, courts have focused their analysis on (1) Section 2(e) of the DTSA, which explicitly applies the statute “to any misappropriation of a trade secret . . . for which any act occurs on or after the date of the enactment,” and (2) Congress’s refusal to adopt language, contained in the Uniform Trade Secrets Act and in many state trade secrets laws, that explicitly prohibits continuing misappropriation claims based on conduct that began before the effective date.[21] Critically, a plaintiff must allege a specific act of misappropriation that occurred on or after the effective date to benefit from this theory.[22]   

The DTSA is also broader than many state laws in a few key areas, including permitting a civil seizure remedy and applying to extra-territorial conduct. 

Civil Seizure

Aside from providing the traditional misappropriation remedies of monetary damages and injunctive relief, the DTSA provides a powerful new tool for trade secret prosecutions – the ability to obtain an ex parte civil seizure of property.[23] This remedy is only available in “extraordinary circumstances” and requires a court to find that it “clearly appears” that:

  • Typical injunctive relief would be “inadequate” because the party would “evade, avoid, or otherwise not comply.”
  • “[A]n immediate and irreparable injury will occur if such seizure is not ordered.”
  • The harm to the applicant outweighs the harm to other parties.
  • The applicant is likely to succeed on its misappropriation claim.
  • The “person against whom seizure is ordered has actual possession of” the trade secret and property to be seized.
  • The application describes the matter to be seized and its location with “reasonable particularity.”
  • The person against whom seizure is ordered “would destroy, move, hide, or otherwise make such matter inaccessible to the court” if given notice.
  • “[T]he applicant has not publicized the seizure request.”[24]

Since the DTSA’s enactment, there have only been a handful of cases discussing this remedy.  However, as many commentators predicted given the nature of civil seizure and the statute’s requirements, courts have been reluctant to order it.[25] Courts have instead relied upon typical forms of injunctive relief, finding civil seizure to be unnecessary under the circumstances.  Nevertheless, this is the most drastic relief available and a key option to remedy the most egregious misappropriations.

Extra-Territorial Application

The DTSA “applies to conduct occurring outside the United States if” (1) the offender is a United States resident or organization, or (2) “an act in furtherance of the offense was committed in the United States.”[26] This provision allows a trade secret holder to both enjoin and recover damages for extra-territorial actions, and courts have already relied upon it to enjoin conduct occurring outside the United States.[27] The only apparent limitation appears to be the traditional Constitutional protections of personal jurisdiction.[28]

Indeed, when drafting the DTSA, Congress was expressly concerned with protecting trade secret owners from the increasing threat to trade secrets posed by conduct outside of the United States.[29] This provision will likely prove useful given the increasing importance of digital/computer-related trade secrets and the continued globalization of the marketplace.

Looking Ahead

While the parameters of DTSA continue to evolve, the statute will hopefully accomplish its stated purpose of creating “a single, national standard for trade secret misappropriation with clear rules and predictability for everyone involved” and prove to be invaluable for businesses that are seeking to move quickly and with certainty to protect their most important information.[30] More importantly, as the legal landscape changes, we expect trade secret claims to play an increasingly pivotal role in unfair competition cases.


Rosaria A. Suriano is a member in the litigation practice at Brach Eichler LLC.  Reach her at rsuriano@bracheichler.com.

Kent Anderson is an associate in the litigation practice at Brach Eichler LLC. Reach him at kanderson@bracheichler.com.


[1] Clifford R. Atlas, , Kevin R. Miller and Colin A. Thakkar, New Jersey Restrictive Covenant Bill Aims to Change the Landscape, available at: https://www.jacksonlewis.com/publication/new-jersey-restrictive-covenant....

[2] Christopher Rebel J. Pace, The Case for A Federal Trade Secrets Act, 8 Harv. J.L. & Tech. 427, 428 (1995); Int'l News Serv. v. Associated Press, 248 U.S. 215, 240-42, 39 S. Ct. 68, 73, 63 L. Ed. 211 (1918).

[3] Uniform Trade Secrets Act § 1(4).

[4] Barclays Capital Inc. v. Theflyonthewall.com, Inc., 650 F.3d 876, 894 (2d Cir. 2011).

[5] Christopher Rebel J. Pace, The Case for A Federal Trade Secrets Act, 8 Harv. J.L. & Tech. 427, 428 (1995).

[6] Id. at 433.

[7] Id. at 442-48; Peter J. Toren, The Defend Trade Secrets Act, 28 No. 7 Intell. Prop. & Tech. L.J. 3 (2016); S. Rep. No. 114-220, at 2 (2016) (Although the differences between State laws and the UTSA are generally relatively minor, they can prove case-dispositive . . .”).

[8] S. Rep. No. 114-220, at 2 (2016).

[9] Pub. L. 114–153, 130 Stat. 376, enacted May 11, 2016, codified at 18 U.S.C. § 1836, et seq.  The DTSA amends the Economic Espionage Act of 1996.

[10] S. Rep. No. 114-220, at 2 (2016).

[11] 18 U.S.C. § 1836.

[12] 18 U.S.C. § 1838 (“[T]his chapter 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 . . .”).

[13] See 18 U.S.C. § 1836(c) (“The district courts of the United States shall have original jurisdiction of civil actions brought under this section.”); cf. 28 U.S.C. § 1338(a) (granting federal courts original and exclusive jurisdiction over patent and copyright claims) (“No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights.”). 

[14] Of course, a defendant in a DTSA case brought in state court would have the option of removing the matter to federal court.

[15] See 18 U.S.C. 1836(d) (“A civil action . . . 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.”).

[16] Pub. L. No. 114-153, § 2(e).

[17] Sleekez, LLC v. Horton, No. CV 16-09-BLG-SPW-TJC, 2017 WL 1906957, at *5 (D. Mont. Apr. 21, 2017), report and recommendation adoptedSleekez v. Horton, No. CV 16-09, 2017 WL 1929473 (D. Mont. May 9, 2017). 

[18] 18 U.S.C. 1839(5).

[19] Sleekez, 2017 WL 1906957, at *5.

[20] See Brand Energy & Infrastructure Servs., Inc. v. Irex Contracting Grp., No. CV 16-2499, 2017 WL 1105648, at *3-*4 (E.D. Pa. Mar. 24, 2017) (denying motion to dismiss continuing misappropriation claim that began prior to effective date because plaintiff alleged defendants continued to use its trade secrets after the effective date); High 5 Games, LLC v. Marks, No. CV 13-7161, 2017 WL 349375, at *6 (D.N.J. Jan. 24, 2017) (noting “consideration of continuing post-enactment conduct” is possible under DTSA); Marimar Textiles, Inc. v. Jude Clothing & Accessories Corp., CV 17-2900, 2017 WL 4391748, at *6 (D.N.J. Oct. 2, 2017) (same); see also Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp., Inc., No. 15-CV-211, 2016 WL 5338550, at *6 (S.D.N.Y. Sept. 23, 2016) (holding continuing misappropriation counterclaim viable because it alleged plaintiffs “continue[d] to use [defendants’] Intellectual Property to directly compete with [defendants],” therefore “the wrongful act continue[d] to occur after the date of the enactment of DTSA.”); see also Singer v. Stuerke, No. 216-CV-02526, 2017 WL 2603305, at *3 (D. Nev. June 14, 2017) (holding DTSA claim could be based on ongoing misappropriation continuing past effective date of statute); Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16-C-03545, 2017 WL 1954531, at *7 (N.D. Ill. May 11, 2017) (holding DTSA claim could be based on continued use).

[21] Pub. L. No. 114-153, § 2(e) (emphasis added); Uniform Trade Secrets Act § 11 (“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.”); see Adams Arms, LLC v. Unified Weapon Sys., Inc., No. 8:16-CV-1503-T-33AEP, 2016 WL 5391394, at *6 (M.D. Fla. Sept. 27, 2016) (citing Section 2(e) and Uniform Trade Secrets Act and holding that “when an ‘act’ occurs after the effective date, [at least] a partial recovery is available on a misappropriation claim.”); Brand Energy, 2017 WL 1105648, at *3-*4 (same).

[22] See e.g., Adams Arms, 2016 WL 5391394, at *6 (alleging defendant entered into contract after effective date that disclosed plaintiff’s trade secrets); Syntel Sterling, 2016 WL 5338550, at *6 (alleging plaintiffs continued to use trade secrets to directly compete with defendants); Brand Energy, 2017 WL 1105648, at *3-*4 (denying motion to dismiss continuing misappropriation claim because plaintiff alleged defendants, among other things, continued to use misappropriated documents in same manner it used them prior to effective date); see also Hydrogen Master Rights, Ltd. v. Weston, No. CV 16-474, 2017 WL 78582, at *10 (D. Del. Jan. 9, 2017) (dismissing DTSA claim because complaint contained only conclusory allegations of continuing use and disclosure).

[23] 18 U.S.C. § 1836.

[24] Id.  The DTSA also contains specific provisions that must be included in an order granting a civil seizure.  Id.

[25] Ctr. for Advancing Innovation, Inc. v. Bahreini, GJH-18-1119, 2018 WL 2100279 (D. Md. May 4, 2018) (denying request for seizure order and temporary restraining order); OOO Brunswick Rail Mgmt. v. Sultanov, 5:17-CV-00017, 2017 WL 67119, at *2 (N.D. Cal. Jan. 6, 2017) (“Here, the Court finds that seizure under the DTSA is unnecessary because the Court will order that Sultanov must deliver these devices to the Court at the time of the hearing scheduled below, and in the meantime, the devices may not be accessed or modified.”); Magnesita Refractories Co. v. Mishra, 2:16-CV-524, 2017 WL 365619 (N.D. Ind. Jan. 25, 2017) (finding F.R.C.P. 65 injunctive relief was sufficient).

[26] 18 U.S.C. § 1837.

[27] See T&S Brass & Bronze Works, Inc. v. Slanina, CV 6:16-03687, 2017 WL 1734362, at *12 (D.S.C. May 4, 2017) (relying on 18 U.S.C. § 1837 to enjoin conduct occurring outside United States).

[28] Peter J. Toren, The Defend Trade Secrets Act, 28 No. 7 Intell. Prop. & Tech. L.J. 3, 9 (2016).

[29] S. Rep. 114-220, at 15 (2016) (“As trade secret owners increasingly face threats from both at home and abroad, the bill equips them with the tools they need to effectively protect their intellectual property and ensures continued growth and innovation in the American economy.”).

[30] Id. at 14.