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Article: August 2016: Seizures as a Remedy Under the New Federal Trade Secrets Act

August 01, 2016
Business Litigation Reports

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA), creating a new federal cause of action for the misappropriation of trade secrets. Prior to the DTSA, trade secret claims were governed by state law. State trade secret laws, except in Massachusetts and New York, are based on the Uniform Trade Secrets Act (UTSA). Because the DTSA is also based on the UTSA, much of it is similar to existing states’ laws. One significant difference, however, is that the DTSA adds a new remedy that allows for ex parte seizures of products embodying misappropriated trade secrets.

Under the DTSA, seizure may be authorized if: 1) other forms of equitable relief would be inadequate to prevent the dissemination of the trade secret; 2) immediate and irreparable injury will occur if the seizure is not ordered; 3) the harm to the applicant of denying the application outweighs the harm of granting the application to the person against whom seizure would be ordered and substantially outweighs the harm to any third parties; 4) the applicant is likely to succeed on the merits; 5) the person against whom the seizure would be ordered actually has possession of the trade secret and any property to be seized; 6) the applicant describes the matter to be seized with reasonable particularity and identifies its location when reasonable; 7) the person against whom the seizure would be ordered would make the matter inaccessible if the applicant were to proceed on notice to the person; and 8) the applicant has not publicized the requested seizure. 18 U.S.C. § 1836(b)(2)(A)(ii).

The DTSA further requires that a seizure order must provide for the narrowest seizure of property to prevent dissemination of the trade secret, have an accompanying order protecting the seized property from disclosure, clearly delineate the authority of seizing officials, set a date for a hearing as early as possible, and require a security deposit from the applicant against any excessive or wrongful seizure. 18 U.S.C. § 1836(b)(2)(B).

Though the DTSA expressly does not preempt state trade secret law, 18 U.S.C. § 1836(f), it adds a potentially important new tool for plaintiffs because most states do not provide for seizures of trade secrets. For example, under the California Uniform Trade Secrets Act (CUTSA), a party may seek equitable relief through an injunction to prevent the actual or threatened use of a trade secret. To decide whether to grant an injunction, a court must weigh “the likelihood the moving party ultimately will prevail on the merits against the relative interim harm to the parties from the issuance or nonissuance of the injunction.” DVD Copy Control Ass’n Inc. v. Bunner, 10 Cal. Rptr. 3d 185, 191 (2004). However, under California law, evidence of the misappropriation of a trade secret, on its own, has long been held to be insufficient to support the issuance of an injunction. Cont’l Car-Na-Var Corp. v. Moseley, 24 Cal. 2d 104, 107 (1944).

Notably, while injunctive seizures of trade secrets are almost unheard of in California, in the past courts would enjoin “[a]ctual or threatened misappropriation” by prohibiting a former employee from working for a competitor, reasoning that trade secrets will inevitably be disclosed during the course of employment. Electro Optical Indus., Inc. v. White, 76 Cal. App. 4th 653, 90 Cal. Rptr. 2d 680, 683 (1999), ordered not to be officially published (Apr. 12, 2000). More recently, California courts have conclusively rejected this “inevitable disclosure” doctrine. See, e.g., Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1446 (2002).

As under California law, the DTSA rejects the inevitable disclosure doctrine. Nonetheless, by providing a specific means to provisionally recover allegedly misappropriated trade secrets, plaintiffs will now have a means for seeking the return of valuable materials that have been taken by ex-employees or others with access to those materials.

Likewise, as another example, the DTSA’s seizure provisions will potentially provide an important new tool for New York plaintiffs, who previously also had to rely upon injunctive relief when seeking a provisional remedy for misappropriated trade secrets. In the past, applying New York’s trade secret common law, lower courts held that evidence of misappropriation may be sufficient to establish a presumption of irreparable harm and support an injunction. However, more recently, in Faiveley Transp. Malmo AB v. Wabtec Corp., the Second Circuit Court of Appeal vacated an injunction because, even though there was ample evidence that the defendant was using the plaintiff’s trade secret, there was no evidence that the defendant was disseminating or irreparably impairing “the value of the secrets.” 559 F.3d 110 (2d Cir. 2009). Accordingly, the court held that there was no evidence of irreparable harm to support the injunction. Id. at 118. Similarly, recent New York decisions considering the “inevitable disclosure” doctrine have held that, by itself, the doctrine cannot support injunctive relief unless the employee is also subject to an enforceable non-competition agreement. Compare Payment Alliance Int’l, Inc. v. Ferreira, 530 F. Supp. 2d 477, 482 (S.D.N.Y. 2007) (enforcing restrictive covenant under “inevitable disclosure” doctrine) with Janus et Cie v. Kahnke, 2013 WL 5405543 (S.D.N.Y. 2013) (refusing to enforce “inevitable disclosure” doctrine in absence of agreement).

The DTSA potentially fills in these gaps in New York state law by providing that an aggrieved plaintiff can seek the immediate return of misappropriated trade secret materials. Indeed, with its new ex parte seizure provisions, the DTSA could very well provide a powerful provisional remedy for trade secrets plaintiffs in every state. As the courts begin to interpret the DTSA, new case law regarding the use and implementation of these seizure provisions will provide much needed insight into what impact these seizure provisions will ultimately have.