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Article: December 2018: Emerging Issues Under the Federal Defend Trade Secrets Act

December 01, 2018
Business Litigation Reports

The Defend Trade Secrets Act (DTSA) creates a federal civil claim for trade-secret misappropriation. 18 U.S.C. § 1836(b)(1) (2018). To state a DTSA claim, a plaintiff must allege trade-secret misappropriation in that:

  1. It has information subject to “reasonable
    measures” of secrecy, 18 U.S.C. § 1839(3)(A)
  2. That information has or had competitive,
    economic value from “not being readily ascertainable
    through proper means,” 18 U.S.C. § 1839(3)(B)
    (2018); and
  3. The defendant acquired, used or disclosed that
    information through “improper means,” 18
    U.S.C. § 1839(5) (2018).

These elements are familiar because the DTSA was modeled on the Uniform Trade Secrets Act (UTSA), which has been adopted in some form by every state except Massachusetts and New York.

To establish subject matter jurisdiction in federal court for trade-secret misappropriation, a plaintiff must show it has met the requirements for diversity or state a DTSA claim. The DTSA poses its own issues, especially if it is the sole basis for invoking the federal court’s jurisdiction. Because the DTSA has been in effect since only 2016, there is a paucity of federal appellate court decisions interpreting it.

Here, we explore three questions likely to arise in high-stakes litigation under the DTSA. First, we discuss the DTSA’s interstate-commerce requirement. Second, we consider whether before taking discovery on a DTSA defendant’s confidential information, a plaintiff must identify the allegedly misappropriated trade secrets with reasonable particularity – a kind of definiteness requirement for trade secrets. Finally, we note potential limits on the federal courts’ ability to enjoin defendants under the DTSA. According to experts on legal analytics, from 2016 to 2017, the number of tradesecret
cases filed in federal court increased 30%, likely as a result of the DTSA. Because of the DTSA’s complexities, parties bringing or facing DTSA claims should consult trial counsel with trade-secrets experience.

Interstate Commerce — An Issue of Subject MatterJurisdiction or Trade-Secret Validity?
By its terms, the DTSA applies only to trade secrets related to “interstate or foreign commerce” through an actual or intended product or service. Courts to date have varied on how concrete this showing must be. For example, one court rejected a trade secret’s putative relationship to interstate commerce because the information was not embodied in a product or service. Search Partners, Inc. v. MyAlerts, Inc., No. 17-1034 (DSD/TNL), slip op. at 3-4 (D. Minn. June 30, 2017). Others generally have considered any evidence of a trade secret’s relationship to interstate commerce as sufficient. E.g., Revolution FMO, LLC v. Mitchell, No. 4:17CV2220 HEA, 2018 WL 2163651, at *5 (E.D. Mo. May 10, 2018) (inferring interstate commerce from allegations that plaintiff, a California LLC, licensed materials to defendant, a Missouri resident, and reviewed its trade secrets to “ensure compliance with the various State[s’]” regulations). An open issue is the status of negative trade-secrets — information about what not to incorporate into a product or service. Still another is whether the trade secret alone or also the misappropriation thereof can properly relate to interstate commerce. See Yager v. Vignieri, No. 16CV9367 (DLC), 2017 WL 4574487, at *2 (S.D.N.Y. Oct. 12, 2017) (“Congress specifically crafted the commerce language in the DTSA to reach broadly in protecting against the theft of trade secrets.” (internal quotation marks omitted)).

The procedurally more interesting issue is when a defendant can attack a trade secret’s relationship to interstate commerce. The jurisdictional view allows defendants to challenge DTSA claims on a 12(b)(1) motion, which cannot be waived and which puts a burden on the plaintiff to prove facts as of filing. See Gov’t Employees Ins. Co. v. Nealey, 262 F. Supp. 3d 153, 172 (E.D. Pa. 2017) (dismissing for lack of interstate commerce because the “requirement is jurisdictional”). Adopting this view, some courts have questioned a trade secret’s relationship to interstate commerce on their own motion. E.g., Progressive Sols., Inc. v. Stanley, No. 16-CV-04805-SK, 2018 WL 2585374, at *2 (N.D. Cal. Apr. 24, 2018).

Other courts have ruled that the trade-secret’s relationship to interstate commerce “does not implicate subject matter jurisdiction.” Yager, 2017 WL 4574487, at *2. Still other courts view interstate commerce as an issue for which jurisdiction and merits are intertwined. E.g., Garfield Beach CVS LLC v. Mollison Pharmacy, No. 17-CV-00879-AJB-MDD, 2017 WL 3605452, at *3 (S.D. Cal. Aug. 22, 2017). Because of this intertwining, these courts have ruled that “the typical Rule 12(b)(1) standard applicable to factual motions would not be proper.” Id. But they have invited the issue on an “appropriately timed motion for summary judgment.” Id. (denying motion to dismiss for lack of jurisdiction without prejudice).

Without appellate treatment of the interstate-commerce issue, federal district courts will continue to entertain arguments about how concretely a trade secret needs to be linked to a product or service and about when the court must decide the issue.

Reasonable Particularity—When Is It Required?
One question that has not yet been addressed by any federal appellate court is whether a trade-secrets plaintiff asserting a claim under the DTSA must identify the allegedly misappropriated trade secrets with reasonable particularity before taking discovery on the defendant’s confidential information. Such identification is required under the laws of several states, including California. Applying Federal Rule of Civil Procedure 26, a number of district courts have considered this issue in the context of state law trade secret claims and have reached differing conclusions.

For example, in Vesta Corp. v. Amdocs Mgmt. Ltd., No. 3:14-CV-1142-HZ, 2016 WL 8732371, at *2 (D. Or. Apr. 1, 2016), the court denied the plaintiff’s motion to compel discovery of the defendant’s confidential information under the proportionality requirements of Rule 26 in connection with a trade secrets claim asserted under Oregon law because the plaintiff had failed to identify its alleged trade secrets with reasonable particularity in its own discovery responses. Among other things, the court found that the plaintiff only described “what various systems and strategies are designed to do, not how they do it,” when identifying its asserted trade secrets. Id. at 6; see also L3 Commc’n Corp. v. Jaxon Engineering & Maintenance, Inc., Case No. 10-cv-02868-MSK-KMT, 2011 WL 10858409, at *2 (D. Colo. Oct. 12, 2011) (“general allegations and generic references to products or information are insufficient to satisfy the reasonable particularity standard”).

On the other hand, in Global Advanced Metals USA, Inc. v. Kemet Blue Powder Corp., 2012 WL 3884939, at *7 (D.Nev. Sept. 6, 2012), the court affirmed the magistrate judge’s decision not to require the plaintiff to identify its trade secrets “because of their voluminosity” and noting that “a listing of every trade secret would draw an objection from Defendant that they must be narrowed, leading to additional discovery disputes and delays, and that a protective order against disclosure would protect Defendant’s interests”). See also St. Jude Med. S.C., Inc. v. Janssen-Counotte, 305 F.R.D. 630, 641 (D. Or. 2015) (granting trade-secrets plaintiff’s motion to compel compliance with third-party subpoena over objection that it had failed to identify the asserted trade secrets with sufficient particularity even though court in underlying action stated that it was “not clear on what specific trade secrets are at issue” and that it could not “assess whether the information is a trade secret at all.”).

Competing rationales have emerged from cases under the DTSA. One court identified various policies that support delaying discovery from a defendant until the plaintiff has identified the asserted trade secrets with reasonable particularity. E.g., BioD, LLC v. Amnio Technology, LLC, 2014 WL 3864658, at *4-5 (D. Ariz. Aug. 6, 2014) (citing DeRubeis v. Witten Technologies, Inc., 244 F.R.D. 676, 680-681 (N.D. Ga. 2007)). First, “if discovery of the defendant’s trade secrets were automatically permitted, lawsuits might regularly be filed as ‘fishing expeditions’ to discover trade secrets of the competitor.” Id. Second, “until the trade secret plaintiff has identified the secrets at issue, there is no way to know whether the information sought [from the defendant] is relevant.” Id. Third, “it is difficult, if not impossible, for the defendant to mount a defense until it has some indication of the trade secrets allegedly misappropriated.” Id. Fourth, “requiring the plaintiff to state its claimed secrets prior to engaging in discovery ensures that it will not mold its cause of action around the discovery it receives.” Id.

Other articulated reasons support allowing a trade secret plaintiff to take discovery from the defendant prior to identifying the assert trade secrets with particularity. Id. at *5. First, some courts highlight “a plaintiff’s broad right to discovery under the Federal Rules of Civil Procedure.” Id. Second, “the trade secret plaintiff, particularly if it is a company that has hundreds or thousands of trade secrets, may have no way of knowing what trade secrets have been misappropriated until it receives discovery on how the defendant is operating.” Id. Third, “if the trade secret plaintiff is forced to identify the trade secrets at issue without knowing which of those trade secrets have been misappropriated, it is placed in somewhat of a ‘Catch-22’” – namely, if too general, the list will encompass material that the defendant will be able to show cannot be a trade secret” but if too specific, “it may miss what the defendant is doing.” Id.; see also Uni-Sys., LLC v. U.S. Tennis Ass’n, No. 17 CV 147 (KAM) (CLP), 2017 WL 4081904, at *4 (E.D.N.Y. Sept. 13, 2017) (“Courts have recognized that a very general showing may be sufficient, particularly in the common scenario where the trade secrets plaintiff may not know which parts of its trade secrets have been misappropriated or cannot determine the full scope of its claims until it gains a better understanding of how a defendant operates.”).

Some state courts require reasonable particularity. For example, California statute requires a plaintiff asserting a state law claim to identify its trade secrets with reasonable particularity before allowing discovery. Cal. Civ. Proc. Code § 2019.210 (2018). Other states, including New York, Massachusetts, Delaware and Illinois, have adopted similar common law rules. E.g., MSCI Inc. v. Jacob, 945 N.Y.S.2d 863, 866 (N.Y. App. Div. 2010). These are popular jurisdictions for trade-secret litigation and, notably, include a number of UTSA states. For some courts, UTSA-style codification, like the DTSA, does not bar common-law reasonable particularity. Compare, e.g., Engelhard Corp. v. Savin Corp., 505 A.2d 30, 33 (Del. Ch. 1986), approved in SmithKline Beecham Pharm. Co. v. Merck & Co., 766 A.2d 442, 447 (Del. 2000), with 63 Del. Laws, c. 218 (1982) (Delaware’s Uniform Trade Secrets Act). These courts have so held “to assure that there will be no disclosure of an adversary litigant’s trade secrets beyond what is necessary.” 766 A.2d at 447.

Limits on the Federal Court’s Power to Enjoin Misappropriation
A potential trade-secrets plaintiff also should consider the DTSA’s specific and the federal courts’ general limitations on injunctive relief. A federal injunction can be enforced nationwide. But, even with that prospect, a plaintiff still should consider whether an appropriate state court is more likely to enjoin a liable defendant in the first place.

The DTSA cannot support injunctions that would “prevent a person from entering into an employment relationship” or “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” 18 U.S.C. § 1836(b)(3)(A) (i)(I-II). As to the former limitation, courts have differed on what it means. Favoring a defendant employee’s mobility, one court vacated a temporary restraining order insofar as it restricted defendant’s employment with a competitor with regard to products manufactured and sold by plaintiff because, under the DTSA, an injunction cannot “effectively prevent him from competing as an employee” of plaintiff’s competitor. JJ Plank Co., LLC v. Bowman, No. CV 18-0798, 2018 WL 3579475, at *4 (W.D. La. July 25, 2018). Other courts have interpreted the proemployment provision more narrowly. For example, one district court enjoined defendant’s employment relationship with plaintiff’s competitor because, among other reasons, there was other “employment for which Defendant appears qualified.” Exec. Consulting Grp., LLC v. Baggot, No. 118-CV-00231CMAMJW, 2018 WL 1942762, at *8 (D. Colo. Apr. 25, 2018). Another court saw fit to enter a preliminary injunction because it did not constitute a “blanket prohibition preventing Defendants from entering into any employment relationships but rather enjoined employment relationships “only” within a particular industry. T&S Brass & Bronze Works, Inc. v. Slanina, No. CV 6:16-03687-MGL, 2017 WL 1734362, at *13 (D.S.C. May 4, 2017).

In determining whether state law would bar the injunction as sought, courts have looked to a variety of sources, not just the DTSA’s state-law analogs. For example, one court incorporated state law on when non-compete agreements are unenforceable, reasoning that “one may not obtain by way of an injunction what one could not obtain in a contract.” Engility Corp. v. Daniels, No. 16-CV-2473-WJM-MEH, 2016 WL 7034976, at *10 (D. Colo. Dec. 2, 2016). That particular state law was relevant to the court’s determination of whether injunctive relief was available under the DTSA, even though “no actual written covenant not to compete was executed by the parties,” because it expressed “Colorado’s policy in this circumstance.” Id.

To enter an injunction, a federal court must also, among other things, find that the plaintiff would suffer irreparable harm. The Tenth Circuit has held that a federal court may not presume irreparable harm under the DTSA or its UTSA analogs. First W. Capital Mgmt. Co. v. Malamed, 874 F.3d 1136, 1143 (10th Cir. 2017). Those statutes “merely authorize and do not mandate injunctive relief,” that decision reasoned, and ”thus do not allow a presumption of irreparable harm.” Id. Some courts have extended it to preliminary injunctions by requiring the plaintiff to show that the irreparable harm will occur “during the pendency of the litigation.” JJ Plank Co., LLC v. Bowman, No. CV 18-0798, 2018 WL 4291751, at *9 (W.D. La. Sept. 7, 2018). Other federal courts have disagreed and presume irreparable harm from trade-secret misappropriation. E.g., G.W. Henssler & Assocs., Ltd. v. Marietta Wealth Mgmt., LLC, No. 1:17-CV-2188-TCB, 2017 WL 6996372, at *6 (N.D. Ga. Oct. 23, 2017) (“Loss of confidential and proprietary information is per se irreparable harm.”).

When irreparable harm is not presumed, some courts have considered loss of market share and goodwill to be irreparable. Id. at 6. And they have allowed plaintiffs to infer future irreparable harms from evidence of past harm caused by misappropriation. Heralds of Gospel Found., Inc v. Varela, No. 17-22281-CIV, 2017 WL 3868421, at *6 (S.D. Fla. June 23, 2017). Plaintiffs may also be able to prove irreparable harm by proffering future injuries. Exec. Consulting Grp. at *8 (finding irreparable harm due to difficulty in quantifying “damages that might accrue years later due to lost follow-on work”).

Trial counsel with experience litigating trade-secrets disputes can help parties navigate the DTSA’s special questions, particularly when state trade-secrets law or policy is implicated. Trade-secrets plaintiffs should seek their advice not only on those issues, but also where to sue and whether federal court is the superior choice of forum. Careful consideration also should be given to the numerous other potential differences between federal court and state court, including, to name just a few examples, the number of jurors, whether unanimous verdicts at trial are required, time to trial, size of monetary awards, summary judgment success rates and limits on discovery.