The Defend Trade Secrets Act of 2016: An Overview and Analysis of the Statute Establishing a Federal Civil Cause of Action for Trade Secret Misappropriation and Notable Case Law to Date
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016, 18 U.S.C. §1836, et seq. (“DTSA”). This Alert will provide an overview of the DTSA and discuss several important court decisions interpreting this statute in the almost two years since its enactment. Pursuant to the DTSA, a federal civil cause of action for trade secret misappropriation exists for the first time.
The DTSA grants a trade secret’s owner the right to sue in federal court for “trade secret” “misappropriation” if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce, even if diversity and amount in controversy requirements are not otherwise met. Several definitions are key to bringing and defending against DTSA claims. “Trade secret” is broadly defined to include “all forms and types of financial, business, scientific, technical, economic, or engineering information,” if the owner “has taken reasonable measures to keep such information secret” and “the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” “Misappropriation” is defined as the trade secret’s acquisition by a person who knows, or has reason to know, that the trade secret was acquired by "improper means," or the trade secret’s disclosure or use by a person who used improper means to acquire the trade secret or possessed certain specified knowledge as to how the trade secret was acquired. "Improper means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means,” but does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”
Significantly, the DTSA allows a federal court to issue an order seizing property necessary to prevent the trade secret’s “propagation or dissemination.” A court even may grant a seizure order ex parte upon the applicant’s showing of extraordinary circumstances and that, among other things, an injunction or other equitable relief would be inadequate, the target possesses the trade secret and the property, e.g., goods, to be seized and the target would destroy the property if notified.
Importantly, the inevitable disclosure doctrine is likely not viable under the DTSA, which bars an injunction preventing a defendant from entering into an employment relationship based merely on information that he or she knows, rather than actual evidence of threatened misappropriation. The court may condition employment only if there is such evidence. The DTSA also contains whistleblower protections for confidentially disclosing a trade secret to the government or in a court filing under seal, as well as in anti-retaliation lawsuits under seal.
The DTSA does not preempt state trade secret laws. Federal courts possess original – not exclusive – jurisdiction over DTSA claims. DTSA and state law trade secret claims may be brought in both state and federal courts.
Accordingly, new strategic considerations attend a plaintiff’s decision to file its trade secret case, such as whether to sue under the DTSA in federal court at all, or instead pursue only state law claims in state court. A plaintiff filing its complaint with DTSA claims in state court and subject to removal very well may find its temporary restraining order or preliminary injunction motion delayed by removal. Another major strategic consideration is whether to seek a civil seizure remedy in a federal court complaint. The inevitable disclosure doctrine’s likely unavailability under the DTSA is another key factor to be evaluated. Other considerations include whether claims may be stated pursuant to the Computer Fraud and Abuse Act, 18 U.S.C. §1030, et seq., and/or the Stored Communications Act, 18 U.S.C. §2701, et seq.
Since its enactment, federal courts have cited the DTSA at least 194 times. The Northern District of California issued the first reported decision less than a month after the DTSA’s enactment. In Henry Schein, Inc. v. Cook, 191 F. Supp.3d 1072 (N.D. Cal. 2016), the plaintiff HSI alleged that the defendant Cook, its former employee, stole confidential data in violation of the DTSA, California trade secret law and employment agreements. Specifically, HSI alleged that Cook forwarded from her work email account to her personal email account “‘several comprehensive, confidential HSI customer practice reports that were produced using HSI's proprietary software,’ which all ‘contained a wide array of confidential and trade secret information.’” HSI further alleged that Cook had failed to return her HSI laptop for two weeks and had unlawfully accessed its computer system after resigning. HSI requested a TRO preventing Cook from accessing, using or sharing its confidential data, as well as expedited discovery from her and her new employer, a non-party.
The district court granted the requested TRO ex parte, but denied expedited discovery. The court found that HSI was entitled to a TRO because it had demonstrated that Cook’s misuse of the confidential data could cause it to lose established customer relationships. The court held that HSI was likely to succeed on the merits of its DTSA claim, as it had alleged, among other things, that Cook used “improper means” to obtain its customer-related information, i.e., she had “e-mailed and downloaded, to her personal devices, confidential information from HSI before leaving her employment to work at a competitor.”
The court granted the TRO ex parte because there was a reasonable likelihood that HSI’s customer relationship losses might occur before Cook could present opposition to the TRO application. In denying the expedited discovery request, the court explained that allowing HSI to obtain, through a forensics expert, a mirror image or clone of Cook’s personal email accounts and electronic devices would too greatly intrude into her privacy, especially before she could be heard in court.
In the only reported court of appeals decision addressing the DTSA, the Tenth Circuit reversed the district court’s preliminary injunction in the plaintiff’s favor, finding that the DTSA does not permit a presumption of irreparable harm. First W. Capital Mgmt. Co. v. Malamed, 874 F.3d 1136 (10th Cir. 2017). The plaintiff financial services firm obtained a preliminary injunction preventing the defendant, its former employee, from soliciting business from any of the plaintiff’s clients. The district court found that the plaintiff did not need to demonstrate irreparable harm in the absence of an injunction. Although establishing irreparable harm is typically one of the standard requirements to obtain preliminary injunctive relief, the district court found that such a requirement is excused when the evidence shows that a defendant is or will soon be engaged in acts or practices prohibited by statute. The district court reasoned that because the DTSA provides for injunctive relief to prevent misuse of trade secrets and the defendant was threatening to misuse trade secrets as to the plaintiff’s clients, “irreparable harm presumptively exists and need not be separately established.”
The Tenth Circuit reversed, finding that the DTSA “merely authorize[s] and do[es] not mandate” injunctive relief to prevent an actual or threatened misappropriation of trade secrets, “and thus do[es] not allow a presumption of irreparable harm.” The Tenth Circuit observed that the DTSA states that a court “may…grant an injunction…to prevent any actual or threatened misappropriation” of a trade secret, 18 U.S.C. §1836(b)(3)(A), (B) (emphasis in original), and that the DTSA also provides for “other means of enforcement, permitting recovery of damages for ‘unjust enrichment...that [were] not addressed in computing damages for actual loss’ and ‘exemplary damages’ in cases where the trade secret was ‘willfully and maliciously misappropriated.’” 874 F.3d at 1142-43 (quoting 18 U.S.C. §1836(b)(3)(B), (C)). Thus, the plaintiff could not obtain injunctive relief without showing irreparable harm, even if it demonstrated a misappropriation of trade secrets.
The District of New Jersey has considered the DTSA in several cases, most extensively in Chubb INA Holdings Inc. v. Chang, No. CV 16-2354-BRM-DEA, 2017 WL 499682 (D.N.J. Feb. 7, 2017). The plaintiff Chubb alleged that the defendants had “misappropriated, threatened to misappropriate, misused, revealed and disclosed trade secrets and/or confidential or proprietary information or knowledge of Chubb, and will continue to do so….” The defendants argued that Chubb’s allegations were insufficient to state a claim under the DTSA because the mere allegation that former employees retained their former employer’s documents “is not an improper acquisition, disclosure or use that would satisfy that statutory definition of ‘misappropriation.’” In denying the defendants’ motion to dismiss the DTSA count of Chubb’s second amended complaint, the district court found that Chubb had alleged more than mere “retention” of documents. Rather, it set forth an inference that the defendants actually did misappropriate trade secrets by alleging that they had violated “company policies by emailing Confidential Information to their personal email addresses and transferring and copying Confidential Information to personal devices without a legitimate business need.” The court determined that Chubb had “alleged ’more than the mere possibility of misconduct’” and “‘need not make out specific allegations as to exactly how Defendants used or disclosed Plaintiff[s’] trade secrets; there is no heightened pleading standard for a misappropriation claim….’”
Conversely, in Oakwood Labs., LLC v. Thanoo, No. 17-CV-05090(PGS), 2017 WL 5762393 (D.N.J. Nov. 28, 2017), the district court dismissed without prejudice the plaintiff’s claims under the DTSA. The defendant argued that the plaintiff had inadequately pled the alleged trade secrets because the plaintiff “never identifies the misappropriated trade secrets but simply lists general categories of tasks that are routinely undertaken by every generic drug manufacturer.” The district court agreed, finding that the list of actions allegedly constituting trade secrets was not sufficiently specific and stating that “[p]laintiff never identifies or points to a specific action, process, or formula that is the subject of this action.”
For more information, please contact Edwin Chociey at firstname.lastname@example.org.