Joint Ventures and Strategic Partnerships After the Defend Trade Secrets Act of 2016

DTSA has significantly altered how companies can litigate trade secret theft in the courts. It presents new challenges for businesses that engage in joint ventures or other similar arrangements that involve the sharing of confidential information. There are new avenues of relief for companies that conclude that they were victimized by their collaborators in these arrangements, and new pitfalls for companies that open themselves up to the charge that they took or made use of information in a manner not permitted by the applicable agreements.

This article explains how trade secrets were protected prior to DTSA, what changed under DTSA, and how companies on both sides of research collaboration should plan for this new law.

State Trade Secret Remedies

Before DTSA, companies had to rely on a “patchwork of state laws” to protect their trade secrets. Most states have adopted a version of the Uniform Trade Secrets Act (UTSA), which was first drafted in 1979 and later amended in 1985. UTSA both defines a “trade secret” and provides a private cause of action for trade secret misappropriation. Nearly all 50 states (except for Connecticut and North Carolina as of this writing) and the District of Colombia have adopted a version of UTSA or introduced adopting legislation. State laws under UTSA provide some form of civil relief for trade secret theft. This regime poses a number of challenges to plaintiffs, however:

Lack of Uniformity: Because states have at times adopted different versions of UTSA, there is a lack of uniformity among them on several substantive issues (such as the definition of “trade secret,” what kinds of injunctive relief are available, and whether punitive damages are authorized). Legal commentators have highlighted the differences between states' trade secrets statutes. For example, while most state statutes require plaintiffs to prove that their trade secret was not “readily ascertainable by proper means by others,” California and several other jurisdictions do not impose this burden. Instead, these states require the defendant to prove, through an affirmative defense, that the plaintiff's trade secrets were readily and lawfully ascertainable. Similarly, some states, such as South Carolina, prescribe very specific rules relating to discovery in trade secrets cases.

Choice of Law: Given these sometimes substantive differences between the states' trade secrets rules, the determination of which jurisdiction's laws to apply can seriously impact a trade secret case. This analysis can be time-consuming and uncertain, particularly where companies collaborate across multiple state boundaries. Some companies tailor their trade secrets policies and litigation strategy to comply with all states,' or the strictest state's, requirements, but this can be inefficient and unnecessary.

Procedural Complications: As a 2016 House Report on DTSA emphasized, because today's corporate transactions are complex and involve multiple states, the witnesses and materials related to a particular appropriation case may be located across several jurisdictions. In such cases, it can be “difficult for state courts to efficiently order discovery and service of process.”

Significant Differences Between DTSA and State Trade Secrets Laws

These challenges, in part, led Congress to pass DTSA. The bill's sponsors emphasized that a federal cause of action would provide for a uniform federal definition of key terms and make multistate litigation more efficient.

Although DTSA is expressly modeled after UTSA and is not intended to preempt state trade secret laws, there are several important differences between DTSA and the UTSA framework. These differences are why companies involved in joint research projects will be more likely to utilize DTSA, rather than state trade secret laws, to address trade secret theft:

Federal Uniformity of Definitions: Because it will focus on a single statute, DTSA jurisprudence will involve less uncertainty and variability about key definitions than the state UTSA regime. Like UTSA, DTSA defines key terms such as “[trade secret] owner,” “misappropriation,” and “improper means.”

Federal Uniformity As to the Scope of Plaintiff's Remedies: Furthermore, unlike under the UTSA regime, where there is some variance between the states, DTSA provides certainty about the scope of plaintiff's remedies. DTSA's remedies are drawn from the UTSA and allow a prevailing plaintiff, for example, to collect exemplary damages in the event of willful or malicious appropriation and to seek a permanent injunction “on such terms as the court deems reasonable.”

Expanded Definition of 'Trade Secret': Notably, while both UTSA and DTSA define the term “trade secret” broadly, DTSA has a more expansive definition. DTSA provides a longer list of examples of what qualifies as a “trade secret” (including, for example, “engineering information,” “techniques,” “financial [and] business [information],” and “program devices”). Also, unlike UTSA, DTSA makes clear that information may constitute a trade secret “whether [it is] tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”

Efficient Nationwide Discovery for Multi-state Cases: DTSA will make it easier and faster for plaintiffs to collect discovery from other states.

The most significant difference between DTSA and the UTSA regime, however, is that DTSA allows a plaintiff to seek a special type of preliminary injunctive relief in the form of an ex-parte asset seizure. In “extraordinary circumstances,” DTSA allows the court to seize a defendant's physical assets if doing so is “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” The court can order such a seizure based only on plaintiff's ex-parte affidavit (although it must schedule a hearing at the earliest possible time and not later than seven days after the seizure was ordered).

The civil asset seizure provision of DTSA is unlike any remedy under state trade secret law and is the source of much controversy. In DTSA's legislative history, Congress recognized the gravity of this provision, and noted that such a seizure should only be used in rare situations such as when a defendant is planning to immediately flee the country, is planning to immediately disclose plaintiff's trade secrets to a third party, or is unamenable to other forms of injunctive relief. Nevertheless, litigants should expect this provision to be invoked in many DTSA cases.

How Companies in Joint Research Projects Should Plan Around DTSA

Companies with sensitive technology rising to the level of a trade secret often form strategic partnerships with other companies that involve the sharing of such secrets. The more sophisticated companies entering into such arrangements already take appropriate steps to ensure that any disclosure of a trade secret as part of these arrangements is limited and that the contract governing the venture contains the requisite protections. Depending on the arrangement and the IP involved, these protections might include an identification of the trade secret or secrets in the contract and an acknowledgement by the counter-party that the information is in fact a trade secret; limiting access to the trade secret information to those at the counter-party with a “need to know”; marking all the trade secret information in some fashion; creating an ongoing commitment of confidentiality as to the trade secret information; requiring the return or destruction of anything tangible embodying the trade secret at the end of the relationship; and the like.

These prophylactic measures should of course continue to be employed following the enactment of DTSA.

Assuming that at least some of these protections have been provided for in the operative agreements, a company that believes its trade secret information has been misused by its joint venture partner has a powerful new tool with the passage of DTSA. That company can now sue in federal court and obtain the benefits of the federal forum, including nationwide service of process and more streamlined discovery procedures, especially for non-party witness depositions taken outside the forum state. The aggrieved business can also take advantage of the many pro-plaintiff substantive DTSA provisions outlined above, including the broad definition of trade secret, the availability of exemplary damages and attorneys' fees and, not least, the possibility of ex parte seizure of property.

Note that the DTSA plaintiff must allege and prove that it is the “owner” of the trade secret. Fee ownership of the trade secret is not required in many state trade secret statutes and, in any case, the concept of ownership of certain kinds of trade secrets can be an elusive one. This suggests that the company concerned about the sharing of its sensitive information ask for a stipulation in the governing agreement that it is the owner of the secrets in question.

Many of the joint venture or other strategic partnerships we are concerned with here are between a U.S. company and a foreign business. Of course, obtaining redress against a foreign company in a U.S. court presents a range of difficult issues. Ideally, the governing agreement would contain a forum-selection clause stipulating to a U.S. forum and a choice of law clause as well. But, in the absence of such clauses, assuming the plaintiff can serve the defendant foreign company where it is located and that there is personal jurisdiction over it, it is no defense under DTSA that the offending conduct occurred outside the U.S., as long as an act in furtherance of the offense was committed in the U.S.

From the standpoint of a company that may be subject to a claim of trade secret misappropriation by a joint venture partner under DTSA, the following should be kept in mind. If the governing agreement has not been drafted to specify the trade secret involved or to establish procedures to protect the information, the alleged trade secret misappropriator would have all the defenses available to any alleged offender. These defenses include: that the complaining party is not the actual “owner” of the trade secret; that the information or process in question does not qualify as a trade secret because it is generally known or readily ascertainable or because the owner did not take reasonable measures to keep it secret; and that there was no misappropriation because no “improper means” were used as required by the statute.

The key takeaway is that, in any joint venture or other strategic partnership where trade secrets are or may be in play, there should be careful and comprehensive documentation to avoid misunderstandings that could give rise to litigation. This is all the more important given that, depending on the terms and conditions in the operative agreements, DTSA provides a powerful new tool for an aggrieved party and significant challenges for a company that may have misused the trade secret information that was provided to it as part of the venture.

Coauthors Christopher Pelham and Frederick D. Friedman are Of Counsel in the Los Angeles office of Jones Day. They can be reached at [email protected] and [email protected], respectively. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated