Seizure Issues To Consider in Federal Trade Secrets Act

Given the high burden, the overwhelming approach of choice for DTSA plaintiffs continues to be the standard procedures of seeking a temporary restraining order and preliminary injunction to prevent further misappropriation. Although there are few reported decisions attempting to implement the DTSA seizure provision, a recent opinion from the U.S. District Court for the Eastern District of Michigan underscored the very real difficulties a plaintiff faces when seeking this extraordinary remedy and should alleviate some of the concerns regarding potential for abuse of the seizure provision. As intended, practitioners should expect seizures to be granted in only rare and unusual circumstances.

In Dazzle Software II LLC v. Kinney, 16-cv-12191 (E.D.Mich. 2016) — the first case interpreting the seizure provision of the DTSA — the plaintiffs alleged, in a verified complaint and declaration from a forensic expert, that the defendants copied files which contained trade secrets owned by the plaintiffs.

The Dazzle Software plaintiffs contended that a forensic examination confirmed that defendants in fact copied all the files and data from a specific computer to certain external hard drives, which their expert was able to specifically identify. The plaintiffs alleged that, after requesting return of their trade secrets, the defendants initially lied about their actions and failed to comply. The defendants ultimately turned over two external hard drives, which the plaintiffs' experts concluded were not the same hard drives used for the initial misappropriation.

Accordingly, upon filing their verified complaint, the plaintiffs also filed an ex parte application requesting seizure of the external storage devices as well as “any computers or computer storage devices that may have been used by [d]efendants to store, copy, review, disseminate or otherwise access any of the data copied by [d]efendants.”

The Dazzle Software plaintiffs argued that defendants had showed their willingness to engage in deceptive and subterfuge by: 1) vastly exceeding their permitted access of the computer housing the relevant trade secrets; 2) falsely representing that their copying was limited to licensed conduct and not the entire contents of the computer; and 3) falsely representing that two external storage devices delivered to the plaintiffs' counsel were the same devices connected to the computer when, in fact, they were two entirely different devices.

In addition, the plaintiffs argued that given the defendants' demonstrated willingness to misappropriate valuable intellectual property, their demonstrated willingness to lie and engage in deceptive activity to cover up their wrongdoing, and their continued disregard for the plaintiffs' intellectual property rights, there was significant risk that the defendants would evade, avoid or otherwise not comply with a preliminary injunction or temporary restraining order or an order granting other equitable relief. The plaintiffs argued there was significant risk the defendants would destroy, further conceal or further disseminate the trade secrets at issue and/or the devices on which those trade secrets were stored if notice were provided to the defendants.

In support of their claim of irreparable harm, the Dazzle Software plaintiffs also argued that they would be deprived of evidence essential to their trade secret and other claims against the defendants, and their ability to determine whether their trade secrets may have been disseminated if notice were provided and the defendants were to destroy or further conceal the devices. The plaintiffs also argued that further use or dissemination of the subject trade secrets could jeopardize their status as trade secrets, resulting in the destruction of the economic value of the trade secrets.

Without much commentary, the district court declined the plaintiffs' request for ex parte relief, instead ordering them to serve the defendants with the complaint and the ex parte application. At the subsequent hearing, the district court underscored that it would not step onto the slippery slope of ordering seizure of the defendants' property when the Dazzle Software plaintiffs did not know exactly what needed to be seized and how it would solve their problem.

Among other things, the Dazzle Software plaintiffs' request for seizure of “any computers or computer storage devices that may have been used by defendants to store, copy, review, disseminate or otherwise access any of the data copied by defendants” ultimately doomed their application. At the hearing, the district court noted that the plaintiffs admitted many unanswered questions remained about where the proprietary information may be located. The court noted that even if the court ordered seizure of every single computer of the defendants, it would not give the plaintiffs the assurances that the seizure would prevent continued misappropriation.

Rather than ordering the seizure, the court ordered the parties to negotiate the terms of a stipulated preservation and ordered expedited discovery to allow the parties to determine what happened to the taken data. Essentially, the case found its way back onto the well-travelled path of a typical misappropriation case.

Conclusion

Although the Dazzle Software case is not necessarily indicative of how courts will rule on seizure provisions moving forward, it does reinforce that plaintiffs need to know exactly what specific items need to be seized and be ready to explain why it would matter before asking the court to grant this extraordinary relief —or it might not be worth the effort and expense as opposed to seeking a temporary restraining order and getting expedited discovery.

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Christopher J. Cox, a partner in Weil, Gotshal & Manges' Silicon Valley office, leads the firm's California complex commercial litigation practice and is a member of the cybersecurity, data privacy and information-management group. Bambo Obaro is an associate in the firm's Silicon Valley office, where he focuses on complex commercial litigation.

Both before and after the passage of the Defend Trade Secrets Act (DTSA) in May 2016, which created a federal civil cause of action for trade secrets misappropriation, much ink was spilled over the controversial “seizure” provision, which allows a plaintiff to initiate an ex parte proceeding to seize any property “necessary to prevent the propagation or dissemination of the trade secret that is subject to the action.”

Because ex parte seizures by definition are one-sided, cries of alarm arose over the potential for companies abusing the process to effectively shut down or chill legitimate competition. Changes to the final draft of the DTSA built in protections to guard against abuse and clarify that the ex parte procedure process was to be used sparingly and only in extraordinary circumstances.

Like other applicants, entertainment companies that want to obtain a seizure order bear a significant burden and must show that:

• A preliminary injunction, temporary restraining order or other form of equitable relief would be inadequate because the party to which the order would be issued would evade, avoid or otherwise not comply with such an order;
• Immediate and irreparable injury will occur if such a seizure is not ordered;
• The applicant is likely to succeed on the merits;
• The party against whom seizure would be ordered has actual possession of the trade secret and property to be seized;
• The party against whom seizure would be ordered, or parties acting in concert with that party, would destroy, move, hide or otherwise make such matter inaccessible to the court, if the applicant were to proceed with notice to the party; and
• The applicant has not publicized the requested seizure.

An ex parte order applicant also needs to describe with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the location where the matter is to be seized.

Given the high burden, the overwhelming approach of choice for DTSA plaintiffs continues to be the standard procedures of seeking a temporary restraining order and preliminary injunction to prevent further misappropriation. Although there are few reported decisions attempting to implement the DTSA seizure provision, a recent opinion from the U.S. District Court for the Eastern District of Michigan underscored the very real difficulties a plaintiff faces when seeking this extraordinary remedy and should alleviate some of the concerns regarding potential for abuse of the seizure provision. As intended, practitioners should expect seizures to be granted in only rare and unusual circumstances.

In Dazzle Software II LLC v. Kinney, 16-cv-12191 (E.D.Mich. 2016) — the first case interpreting the seizure provision of the DTSA — the plaintiffs alleged, in a verified complaint and declaration from a forensic expert, that the defendants copied files which contained trade secrets owned by the plaintiffs.

The Dazzle Software plaintiffs contended that a forensic examination confirmed that defendants in fact copied all the files and data from a specific computer to certain external hard drives, which their expert was able to specifically identify. The plaintiffs alleged that, after requesting return of their trade secrets, the defendants initially lied about their actions and failed to comply. The defendants ultimately turned over two external hard drives, which the plaintiffs' experts concluded were not the same hard drives used for the initial misappropriation.

Accordingly, upon filing their verified complaint, the plaintiffs also filed an ex parte application requesting seizure of the external storage devices as well as “any computers or computer storage devices that may have been used by [d]efendants to store, copy, review, disseminate or otherwise access any of the data copied by [d]efendants.”

The Dazzle Software plaintiffs argued that defendants had showed their willingness to engage in deceptive and subterfuge by: 1) vastly exceeding their permitted access of the computer housing the relevant trade secrets; 2) falsely representing that their copying was limited to licensed conduct and not the entire contents of the computer; and 3) falsely representing that two external storage devices delivered to the plaintiffs' counsel were the same devices connected to the computer when, in fact, they were two entirely different devices.

In addition, the plaintiffs argued that given the defendants' demonstrated willingness to misappropriate valuable intellectual property, their demonstrated willingness to lie and engage in deceptive activity to cover up their wrongdoing, and their continued disregard for the plaintiffs' intellectual property rights, there was significant risk that the defendants would evade, avoid or otherwise not comply with a preliminary injunction or temporary restraining order or an order granting other equitable relief. The plaintiffs argued there was significant risk the defendants would destroy, further conceal or further disseminate the trade secrets at issue and/or the devices on which those trade secrets were stored if notice were provided to the defendants.

In support of their claim of irreparable harm, the Dazzle Software plaintiffs also argued that they would be deprived of evidence essential to their trade secret and other claims against the defendants, and their ability to determine whether their trade secrets may have been disseminated if notice were provided and the defendants were to destroy or further conceal the devices. The plaintiffs also argued that further use or dissemination of the subject trade secrets could jeopardize their status as trade secrets, resulting in the destruction of the economic value of the trade secrets.

Without much commentary, the district court declined the plaintiffs' request for ex parte relief, instead ordering them to serve the defendants with the complaint and the ex parte application. At the subsequent hearing, the district court underscored that it would not step onto the slippery slope of ordering seizure of the defendants' property when the Dazzle Software plaintiffs did not know exactly what needed to be seized and how it would solve their problem.

Among other things, the Dazzle Software plaintiffs' request for seizure of “any computers or computer storage devices that may have been used by defendants to store, copy, review, disseminate or otherwise access any of the data copied by defendants” ultimately doomed their application. At the hearing, the district court noted that the plaintiffs admitted many unanswered questions remained about where the proprietary information may be located. The court noted that even if the court ordered seizure of every single computer of the defendants, it would not give the plaintiffs the assurances that the seizure would prevent continued misappropriation.

Rather than ordering the seizure, the court ordered the parties to negotiate the terms of a stipulated preservation and ordered expedited discovery to allow the parties to determine what happened to the taken data. Essentially, the case found its way back onto the well-travelled path of a typical misappropriation case.

Conclusion

Although the Dazzle Software case is not necessarily indicative of how courts will rule on seizure provisions moving forward, it does reinforce that plaintiffs need to know exactly what specific items need to be seized and be ready to explain why it would matter before asking the court to grant this extraordinary relief —or it might not be worth the effort and expense as opposed to seeking a temporary restraining order and getting expedited discovery.

****
Christopher J. Cox, a partner in Weil, Gotshal & Manges' Silicon Valley office, leads the firm's California complex commercial litigation practice and is a member of the cybersecurity, data privacy and information-management group. Bambo Obaro is an associate in the firm's Silicon Valley office, where he focuses on complex commercial litigation.