Emerging Issues In the DTSA's Second Year

To curtail potential abuse, the DTSA requires stringent proof of the necessity and propriety of a civil seizure. For example, the DTSA prohibits copying seized property and requires that ex parte orders provide specific instructions for federal marshals performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas. Moreover, a party seeking an ex parte order must be able to establish that other equitable remedies, such as a preliminary injunction, are inadequate.

The DTSA cases to date involving ex parte seizure requests reflect that courts are treating the remedy as intended — only in extraordinary circumstances. For example, a federal district court in the Eastern District of Michigan denied an ex parte seizure request because the court was not “persuaded that there has been a showing that the defendants would not comply with an order [] issued by way of an injunction under Rule 65.” See, Dazzle Software II, LLC v. Kinney, No. 2:16-cv-12191-MFL-MLM (E.D. Mich. 2016). Other courts have applied similar reasoning in denying such requests. See, e.g., OOO Brunswick Rail Mgt. v. Sultanov, No. 5:17-cv-00017-EJD, 2017 WL 67119 (N.D. Cal. Jan. 6, 2017) (finding seizure under the DTSA unnecessary and instead ordering the defendant to preserve and deliver the electronic devices at issue).

Courts have also denied ex parte seizure requests where the plaintiff fails to substantiate its claims that ex parte seizure is needed to avoid the destruction of evidence. See, Balearia Caribbean Ltd. Corp. v. Calvo, No. 1:16-cv-23300-KMV (S.D. Fla. Aug. 5, 2016) (“a plaintiff may not rely on bare assertions that the defendant, if given notice, would destroy relevant evidence”).

Nonetheless, a few courts have ordered the ex parte seizure of property in DTSA cases. For example, the court in Mission Capital Advisors, LLC v. Romaka, No. 1:16-cv-05878-LLS (S.D.N.Y. July 29, 2016) ordered the U.S. Marshall to seize the defendant's computer at his residence and then copy and delete the plaintiff's trade secret files at issue. Notably, the court issued its seizure order only after the defendant had purportedly ignored the court's initial TRO (which did not order the seizure of property) and order to show cause.

Other courts that have ordered the seizure of property in DTSA cases, however, have relied on Federal Rule of Civil Procedure 65 (i.e., Injunctions and Restraining Orders) to authorize the seizure instead of the DTSA. See, e.g., Earthbound Corporation v. MiTek USA, Inc., C16-1150 RSM, 2016 WL 4418013, at 11 (W.D. Wash. Aug. 19, 2016) (granting a TRO requiring defendants to turn over to a neutral third-party expert all flash drives, SD cards, cell phones, and other external devices for forensic imaging); Panera, LLC v. Nettles, 4:16cv1181-JAR, 2016 WL 4124114, at 2-4 (E.D. Mo. Aug. 3, 2016) (granting a TRO requiring defendant to turn over his personal laptop and any other materials that may have housed plaintiff's materials for review and inspection). See also, Magnesita Refractories Co. v. Mishra, 2:16-cv-524, 2017 WL 365619, 2 (N.D. Ill. Jan. 25, 2017) (“[Earthbound] and [Panera] had no problem relying on a Rule 65 temporary restraining order, rather than the DTSA, to accomplish the seizure.”).

We expect the federal district courts to continue the trend in awarding ex parte seizure orders only in extraordinary, emergency, and substantiated circumstances.

Determining the Timeliness Of DTSA Claims

A rising development with the DTSA concerns its application to misappropriation that occurs both before and after the statute's May 11, 2016 effective date. The decision in Adams Arms, LLC v. Unified Weapons Sys., No. 16-cv-01503, 2016 WL 5391394 (M.D. Fla. Sep. 27, 2016) best illustrates this issue.

The plaintiff in Adams Arms alleged that the defendant mislead it in 2014 about defendant's intent to enter into a commercial relationship in order to induce the plaintiff to disclose trade secrets. The plaintiff further alleged that that defendant wrongfully disclosed and used the plaintiff's trade secrets on and after May 16, 2016 to enter into and exclude plaintiff from a purchasing contract with a third party.

The defendant in Adams Arms moved to dismiss the plaintiff's DTSA claim on the ground that the alleged misappropriation occurred before the enactment of the statute. The defendant explained that the DTSA has a three year statute of limitations and contains language that provides: “[f]or purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.” 18 U.S.C. 1836(d). In other words, the defendant argued that any alleged acts of continuing misappropriation should be measured at the time of the initial misappropriation, which in this case occurred before the DTSA's enactment.

The court rejected the defendant's argument. The court highlighted: “Section 2(e) specifies that [the] DTSA applies to 'any misappropriation … for which any act occurs' after the effective date.” Adams Arms, 2016 WL 5391394, at 6. Thus, the court found that plaintiff had sufficiently alleged a claim for relief based on the unlawful disclosure of trade secrets after the DTSA's effective date. Notably, the court limited plaintiff's DTSA claim to a disclosure theory as the Complaint's allegations and inferences reflected that any unlawful acquisition of trade secrets occurred well before the DTSA's effective date.

Other courts have adopted Adams Arms' reasoning and allowed plaintiffs to proceed with DTSA claims, at least partially, when the plaintiffs can sufficiently alleged that any wrongful misappropriation occurred after the data of the enactment of the DTSA. See, e.g., Syntel Sterling Best Shores Mauritius Ltd v. Trizetto Group, Inc., Case No. 15-CV-211 (S.D.N.Y. Sept. 23, 2016) (“as Defendants allege that Syntel continues to use its Intellectual Property to directly compete with Trizetto, the wrongful act continues to occur after the date of the enactment of DTSA”). But see, Avago Techs. United States Inc. v. NanoPrecision Products, No. 16-cv-03737, 2017 U.S. Dist. LEXIS 13484 (N.D. Cal. Jan. 31, 2017) (dismissing DTSA claim because alleged trade secrets were disclosed before the DTSA came into effect); (dismissing DTSA claim because “plaintiff makes no specific allegations that defendant used the alleged trade secrets after the DTSA's May 11, 2016 enactment”).

Accordingly, DTSA claimants should ensure they sufficiently allege acts of misappropriation occurring after the DTSA's enactment date to increase the likelihood of surviving early pleading challenges.

Federal Courts Turning to State Courts for Guidance

Another emerging issue with the DTSA is whether it is fostering its underlying goals of uniformity in trade secret law. In enacting the DTSA, Congress sought to create a uniform standard for trade secret misappropriation, harmonize the differences in trade secret law under the UTSA, and provide uniform discovery.

Because the DTSA does not preempt state laws, trade secret plaintiffs have the option to plead claims under both federal and state laws. Federal district courts that are tasked with analyzing such claims simultaneously are finding similarities between the federal and state statutes, such as the definitions of trade secrets, improper use, or misappropriation. With an often abundance of state decisions addressing these similarities under their respective form of the UTSA, federal courts have turned to these state court decisions for guidance on interpreting the DTSA. See, e.g., Kuryakyn Holdings, LLC v. Ciro, LLC, No. 15-cv-703-jdp, 2017 WL 1026025, at 5 (W.D. Wisc. Mar. 15, 2017) (“the court's analysis will use Wisconsin's UTSA, but the analysis would apply as well to the DTSA.”); Henry Schein v. Cook, No. 16-cv-03166-JST, 2016 WL 3418537 (N.D. Cal. June 22, 2016) (applying California law in its DTSA analysis).

To the extent federal courts continue to look at their respective state courts' decisions for guidance in interpreting the DTSA, the DTSA may ultimately duplicate and amplify the already existing patchwork of differences in state trade secret laws.

Whistleblower Immunity Remains Largely Untested

One of the unique provisions of the DTSA is that it provides protection to “whistleblowers who disclose trade secrets to law enforcement in confidence for the purpose of reporting or investigating a suspected violation of law,” and the “confidential disclosure of a trade secret in a lawsuit, including an anti-retaliation proceeding.” One of the early concerns with this whistleblower immunity provision is that employees who have wrongfully misappropriated trade secrets and other confidential information may use it as an after-the-fact defense. For example, an employee accused of trade secret misappropriation may later attempt to disclose the trade secret information to an attorney or government official solely to invoke the DTSA's whistleblower protections and not for true whistleblowing.

After one year, the whistleblower immunity provisions remain largely untested. Only one published decision has addressed this immunity provision, which the court characterized as an affirmative defense and declined to rule on the merits of the defense — at least at the pleading stage — before discovery and the presentation of evidence. See, Unum Group v. Loftus, No. 4:16-CV-40154-TSH, 2016 WL 7115967 (D. Mass. Dec. 6, 2016).

Employers should also be mindful that the DTSA places an affirmative duty on them to provide employees notice of the whistleblower immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Employers that fail to comply with this disclosure requirement are precluded from recovering attorneys' fees or exemplary damages under the DTSA.

We expect the whistleblower immunity provision to be a closely followed topic in the DTSA's second year.

Conclusion

The most significant takeaway after a year of the DTSA is that it provides trade secret holders with a new option in pursuing their claims. Trade secret holders have an additional mechanism to get their case into federal court and newly available remedies, but also an affirmative obligation to notify employees of the whistleblower immunity provision. Nonetheless, it is yet to be seen whether federal courts will become the overwhelmingly favorite forum for trade secret litigation.

*****
Robert B. Milligan is a Partner in the Los Angeles office of Seyfarth Shaw LLP. He co-chairs the firm's Trade Secrets, Computer Fraud & Non-Competes practice group. His practice encompasses a wide variety of commercial litigation and employment matters, including trade secret misappropriation and other intellectual property theft. He can be reached at [email protected]. D. Joshua Salinas is an attorney, also in the L.A. office of Seyfarth Shaw, and a member of the firm's Commercial Litigation Department. He can be reached at [email protected].

One year after its enactment, the Defend Trade Secrets Act (DTSA) continues to be one of the most significant and closely followed developments in trade secret law. The statute provides for a federal civil cause of action for trade secret theft, protections for whistleblowers, and new remedies (e.g., ex parte seizure of property), that were not previously available under state trade secret laws. The less than 70 reported DTSA cases to date provide an early glimpse into how courts may interpret the statute going forward and what early concerns about the statute may have been exaggerated.

Overstated Ex Parte Seizure Concerns

The ex parte seizure provision of the DTSA was one of the most controversial provisions of the statute during its drafting. The provision allows a trade secret holder to request, without notice to the alleged wrongdoer, that a district judge order federal law enforcement officials to seize property to prevent the propagation or dissemination of trade secrets. Opponents of the DTSA argued that the ex parte seizure provision would open the door to abuse by purported “trade secret litigation trolls” and increase litigation costs. The cases to date involving the seizure provision suggest that those early concerns may not materialize.

To curtail potential abuse, the DTSA requires stringent proof of the necessity and propriety of a civil seizure. For example, the DTSA prohibits copying seized property and requires that ex parte orders provide specific instructions for federal marshals performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas. Moreover, a party seeking an ex parte order must be able to establish that other equitable remedies, such as a preliminary injunction, are inadequate.

The DTSA cases to date involving ex parte seizure requests reflect that courts are treating the remedy as intended — only in extraordinary circumstances. For example, a federal district court in the Eastern District of Michigan denied an ex parte seizure request because the court was not “persuaded that there has been a showing that the defendants would not comply with an order [] issued by way of an injunction under Rule 65.” See, Dazzle Software II, LLC v. Kinney, No. 2:16-cv-12191-MFL-MLM (E.D. Mich. 2016). Other courts have applied similar reasoning in denying such requests. See, e.g., OOO Brunswick Rail Mgt. v. Sultanov, No. 5:17-cv-00017-EJD, 2017 WL 67119 (N.D. Cal. Jan. 6, 2017) (finding seizure under the DTSA unnecessary and instead ordering the defendant to preserve and deliver the electronic devices at issue).

Courts have also denied ex parte seizure requests where the plaintiff fails to substantiate its claims that ex parte seizure is needed to avoid the destruction of evidence. See, Balearia Caribbean Ltd. Corp. v. Calvo, No. 1:16-cv-23300-KMV (S.D. Fla. Aug. 5, 2016) (“a plaintiff may not rely on bare assertions that the defendant, if given notice, would destroy relevant evidence”).

Nonetheless, a few courts have ordered the ex parte seizure of property in DTSA cases. For example, the court in Mission Capital Advisors, LLC v. Romaka, No. 1:16-cv-05878-LLS (S.D.N.Y. July 29, 2016) ordered the U.S. Marshall to seize the defendant's computer at his residence and then copy and delete the plaintiff's trade secret files at issue. Notably, the court issued its seizure order only after the defendant had purportedly ignored the court's initial TRO (which did not order the seizure of property) and order to show cause.

Other courts that have ordered the seizure of property in DTSA cases, however, have relied on Federal Rule of Civil Procedure 65 (i.e., Injunctions and Restraining Orders) to authorize the seizure instead of the DTSA. See, e.g., Earthbound Corporation v. MiTek USA, Inc., C16-1150 RSM, 2016 WL 4418013, at 11 (W.D. Wash. Aug. 19, 2016) (granting a TRO requiring defendants to turn over to a neutral third-party expert all flash drives, SD cards, cell phones, and other external devices for forensic imaging); Panera, LLC v. Nettles, 4:16cv1181-JAR, 2016 WL 4124114, at 2-4 (E.D. Mo. Aug. 3, 2016) (granting a TRO requiring defendant to turn over his personal laptop and any other materials that may have housed plaintiff's materials for review and inspection). See also, Magnesita Refractories Co. v. Mishra, 2:16-cv-524, 2017 WL 365619, 2 (N.D. Ill. Jan. 25, 2017) (“[Earthbound] and [Panera] had no problem relying on a Rule 65 temporary restraining order, rather than the DTSA, to accomplish the seizure.”).

We expect the federal district courts to continue the trend in awarding ex parte seizure orders only in extraordinary, emergency, and substantiated circumstances.

Determining the Timeliness Of DTSA Claims

A rising development with the DTSA concerns its application to misappropriation that occurs both before and after the statute's May 11, 2016 effective date. The decision in Adams Arms, LLC v. Unified Weapons Sys., No. 16-cv-01503, 2016 WL 5391394 (M.D. Fla. Sep. 27, 2016) best illustrates this issue.

The plaintiff in Adams Arms alleged that the defendant mislead it in 2014 about defendant's intent to enter into a commercial relationship in order to induce the plaintiff to disclose trade secrets. The plaintiff further alleged that that defendant wrongfully disclosed and used the plaintiff's trade secrets on and after May 16, 2016 to enter into and exclude plaintiff from a purchasing contract with a third party.

The defendant in Adams Arms moved to dismiss the plaintiff's DTSA claim on the ground that the alleged misappropriation occurred before the enactment of the statute. The defendant explained that the DTSA has a three year statute of limitations and contains language that provides: “[f]or purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.” 18 U.S.C. 1836(d). In other words, the defendant argued that any alleged acts of continuing misappropriation should be measured at the time of the initial misappropriation, which in this case occurred before the DTSA's enactment.

The court rejected the defendant's argument. The court highlighted: “Section 2(e) specifies that [the] DTSA applies to 'any misappropriation … for which any act occurs' after the effective date.” Adams Arms, 2016 WL 5391394, at 6. Thus, the court found that plaintiff had sufficiently alleged a claim for relief based on the unlawful disclosure of trade secrets after the DTSA's effective date. Notably, the court limited plaintiff's DTSA claim to a disclosure theory as the Complaint's allegations and inferences reflected that any unlawful acquisition of trade secrets occurred well before the DTSA's effective date.

Other courts have adopted Adams Arms' reasoning and allowed plaintiffs to proceed with DTSA claims, at least partially, when the plaintiffs can sufficiently alleged that any wrongful misappropriation occurred after the data of the enactment of the DTSA. See, e.g., Syntel Sterling Best Shores Mauritius Ltd v. Trizetto Group, Inc., Case No. 15-CV-211 (S.D.N.Y. Sept. 23, 2016) (“as Defendants allege that Syntel continues to use its Intellectual Property to directly compete with Trizetto, the wrongful act continues to occur after the date of the enactment of DTSA”). But see, Avago Techs. United States Inc. v. NanoPrecision Products, No. 16-cv-03737, 2017 U.S. Dist. LEXIS 13484 (N.D. Cal. Jan. 31, 2017) (dismissing DTSA claim because alleged trade secrets were disclosed before the DTSA came into effect); (dismissing DTSA claim because “plaintiff makes no specific allegations that defendant used the alleged trade secrets after the DTSA's May 11, 2016 enactment”).

Accordingly, DTSA claimants should ensure they sufficiently allege acts of misappropriation occurring after the DTSA's enactment date to increase the likelihood of surviving early pleading challenges.

Federal Courts Turning to State Courts for Guidance

Another emerging issue with the DTSA is whether it is fostering its underlying goals of uniformity in trade secret law. In enacting the DTSA, Congress sought to create a uniform standard for trade secret misappropriation, harmonize the differences in trade secret law under the UTSA, and provide uniform discovery.

Because the DTSA does not preempt state laws, trade secret plaintiffs have the option to plead claims under both federal and state laws. Federal district courts that are tasked with analyzing such claims simultaneously are finding similarities between the federal and state statutes, such as the definitions of trade secrets, improper use, or misappropriation. With an often abundance of state decisions addressing these similarities under their respective form of the UTSA, federal courts have turned to these state court decisions for guidance on interpreting the DTSA. See, e.g., Kuryakyn Holdings, LLC v. Ciro, LLC, No. 15-cv-703-jdp, 2017 WL 1026025, at 5 (W.D. Wisc. Mar. 15, 2017) (“the court's analysis will use Wisconsin's UTSA, but the analysis would apply as well to the DTSA.”); Henry Schein v. Cook, No. 16-cv-03166-JST, 2016 WL 3418537 (N.D. Cal. June 22, 2016) (applying California law in its DTSA analysis).

To the extent federal courts continue to look at their respective state courts' decisions for guidance in interpreting the DTSA, the DTSA may ultimately duplicate and amplify the already existing patchwork of differences in state trade secret laws.

Whistleblower Immunity Remains Largely Untested

One of the unique provisions of the DTSA is that it provides protection to “whistleblowers who disclose trade secrets to law enforcement in confidence for the purpose of reporting or investigating a suspected violation of law,” and the “confidential disclosure of a trade secret in a lawsuit, including an anti-retaliation proceeding.” One of the early concerns with this whistleblower immunity provision is that employees who have wrongfully misappropriated trade secrets and other confidential information may use it as an after-the-fact defense. For example, an employee accused of trade secret misappropriation may later attempt to disclose the trade secret information to an attorney or government official solely to invoke the DTSA's whistleblower protections and not for true whistleblowing.

After one year, the whistleblower immunity provisions remain largely untested. Only one published decision has addressed this immunity provision, which the court characterized as an affirmative defense and declined to rule on the merits of the defense — at least at the pleading stage — before discovery and the presentation of evidence. See, Unum Group v. Loftus, No. 4:16-CV-40154-TSH, 2016 WL 7115967 (D. Mass. Dec. 6, 2016).

Employers should also be mindful that the DTSA places an affirmative duty on them to provide employees notice of the whistleblower immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Employers that fail to comply with this disclosure requirement are precluded from recovering attorneys' fees or exemplary damages under the DTSA.

We expect the whistleblower immunity provision to be a closely followed topic in the DTSA's second year.

Conclusion

The most significant takeaway after a year of the DTSA is that it provides trade secret holders with a new option in pursuing their claims. Trade secret holders have an additional mechanism to get their case into federal court and newly available remedies, but also an affirmative obligation to notify employees of the whistleblower immunity provision. Nonetheless, it is yet to be seen whether federal courts will become the overwhelmingly favorite forum for trade secret litigation.

*****
Robert B. Milligan is a Partner in the Los Angeles office of Seyfarth Shaw LLP. He co-chairs the firm's Trade Secrets, Computer Fraud & Non-Competes practice group. His practice encompasses a wide variety of commercial litigation and employment matters, including trade secret misappropriation and other intellectual property theft. He can be reached at [email protected]. D. Joshua Salinas is an attorney, also in the L.A. office of Seyfarth Shaw, and a member of the firm's Commercial Litigation Department. He can be reached at [email protected].