'; Defend Trade Secrets Act of 2016 comes into focus after several cases

Defend Trade Secrets Act of 2016 comes into focus after several cases

November 9, 2016 Chicago Daily Law Bulletin

The Defend Trade Secrets Act of 2016 (“DTSA”), which was signed into law on May 11, 2016, provides the first federal civil cause of action for trade secret misappropriation. The DTSA amends the Economic Espionage Act to provide federal jurisdiction over civil actions pertaining to the theft of trade secrets for use in interstate or foreign commerce. The DTSA is widely perceived as a watershed event in trade secret jurisprudence. The impact and scope of the DTSA has emerged in recent months, as district courts have begun applying the DTSA in trade secret misappropriation cases.

Under the DTSA, a trade secret is information that the owner has taken reasonable measures to keep secret, and that derives independent economic value from not being generally known or readily ascertainable through proper means by another person. In addition to technical information, the DTSA protects competitive business information.

Plaintiffs often file DTSA claims alongside claims based on the state law regime, the Uniform Trade Secrets Acts (“UTSA”). The DTSA, which does not preempt the UTSA, offers several significant features, such as (1) federal remedies, including injunctive relief and exemplary (double) damages; (2) potential ex parte seizures of trade secret information by law enforcement officials; (3) stronger trade secret protection during litigation and for digital data; (4) a disclosure requirement for employers in order to obtain exemplary damages; and (5) a whistleblower provision.

District courts have encountered differences between the DTSA and state law. For example, some states incorporate common law doctrines that preclude employment if the employee would inevitably disclose a prior employer’s trade secrets. This “inevitable disclosure doctrine” does not apply under federal DTSA claims, which require that any conditions on employment must be based on evidence of threatened misappropriation. In addition, some state laws limit noncompete agreements. In light of this, the DTSA contains a carve-out forbidding injunctions that conflict with state laws prohibiting restraints on a lawful profession, trade, or business.

For example, in Henry Schein, Inc. v. Cook, No. 3:16-cv-03166-JST, 2016 WL 3212457 & 2016 WL 3418537 (N.D. Cal. June 10, 2016), the court granted plaintiff’s motion for a temporary restraining order blocking a former employee from accessing misappropriated data and from contacting former clients. Plaintiff asserted that defendant breached a non-solicitation agreement, but such agreements are often invalid under California law. Consequently, the court eliminated the restraint on defendant’s ability to contact former clients from the preliminary injunction.

In contrast, in Panera, LLC v. Nettles, No. 4:16-cv-1181-JAR, 2016 WL 4124114 (E.D. Mo. Aug. 3, 2016), the Court enjoined a former employee from working for or disclosing trade secrets to Papa John’s. The Court issued the injunction under Missouri law and noted that an analysis under the DTSA would likely result in a similar injunction. The court referenced the “inevitable disclosure doctrine,” although it has not been adopted in Missouri. Federal courts may apply the doctrine under applicable state laws, although the DTSA rejects a federal basis for the doctrine. As these cases illustrate, the outcome often depends on whether a claim is brought under the DTSA or a state trade secrets statute and which state law applies.

District courts have also addressed whether the DTSA covers misappropriation that commenced before the DTSA’s enactment date. The DTSA does not apply retroactively and only covers misappropriation on or after May 11, 2016; however, misappropriation usually occurs on a continuing basis rather than on a single date. At least two courts have concluded that the DTSA applies to a competitor’s continuing use of misappropriated trade secrets after the enactment of the DTSA. In Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group, Inc., No. 1:15-cv-00211-LGS-RLE, 2016 WL 5338550 (S.D.N.Y. Sept. 23, 2016) the court allowed a party to amend its pleadings to add a DTSA cause of action based on the competitor’s alleged continuing use of trade secrets after May 11, 2016. Similarly, in Adams Arms, LLC v. Unified Weapon Sys., Inc., No. 8:16-cv-1503-T-33AEP, 2016 WL 5391394 (M.D. Fla. Sept. 27, 2016), the court concluded that the DTSA applies as long as the alleged use or disclosure of the trade secrets continued on or after May 11, 2016.

In contrast, in Dazzle Software II, LLC v. Kinney, No. 2:16-cv-12191-MFL-MKM, 2016 WL 6248906 (E.D. Mich. Aug. 22, 2016), the court granted defendants’ motion to dismiss, apparently because the alleged trade secret misappropriation occurred before the enactment of the DTSA. Although the court did not issue an opinion, it appears that the court was persuaded by defendants’ arguments that the alleged misappropriation occurred prior to May 11, 2016, and that the DTSA does not apply to ongoing misappropriation. Based on these different outcomes, litigants may continue to debate whether the DTSA applies to ongoing misappropriation.

Overall, recent district court cases have underscored the importance for businesses to identify and inventory their trade secrets and to implement secrecy precautions, such as confidentiality agreements and policies regarding the access and use of trade secrets. For example, in M.C. Dean, Inc. v. City of Miami Beach, No. 1:16-cv-21731-CMA, 2016 WL 4179807 (S.D. Fla. Aug. 8, 2016), the district court concluded that the plaintiff did not sufficiently plead a DTSA claim, because he did not take reasonable steps to protect the secrecy of employee payroll information that he agreed, via contract, to disclose to the city. As federal jurisprudence regarding the provisions of the DTSA develops, trade secret litigants may continue to look to emerging cases for guidance.