Updates in Federal Trade Secret Law

A version of this article, which was written by Austin Champion, originally appeared in the April 2017 edition of Texas Lawyer.

With the enactment of the Defend Trade Secrets Act of 2016 (DTSA), federal courts are now wide open for trade secret litigation. Nearly a year later, courts have already started interpreting the act, providing valuable insights for practitioners. In 2016, the Fifth Circuit also clarified whether the Copyright Act preempts claims for trade secret misappropriation under state law, and in January 2017, the Supreme Court denied a petition for certiorari seeking to constrain the ITC's ability to bar importation of products derived from misappropriated trade secrets.

The Federal Defend Trade Secrets Act – Freshman Year in Review

The Federal Defend Trade Secrets Act of 2016 (DTSA) is an amendment to The Economic Espionage Act of 1996, which creates a federal civil remedy for trade secret misappropriation. The Act was designed to harmonize trade secret law in the United States, providing businesses with the same nationwide uniformity of the Lanham Act, Copyright Act, and Patent Act. Unlike the Copyright Act and Patent Act, however, the DTSA does not preempt existing state law.

Since May 11, 2016 – the effective date of the DTSA – nearly 100 cases have been filed asserting a claim under the act. The Northern District of California currently leads the country with roughly 11% of all DTSA cases. The District of New Jersey claims 8% of all cases, with the Southern District of New York and District of Delaware tied at 7% each. Notably, the Eastern District of Texas – a hotbed of activity for patent cases – still remains high on the list with 4% of all DTSA cases.

Even though the DTSA is modeled on the Uniform Trade Secrets Act, it is unique from state law in three notable respects. First, the DTSA confers original jurisdiction on federal courts so long as the asserted trade secret is related to a product or service used in or intended for use in interstate commerce. The interstate commerce requirement is a relatively small hurdle for most litigants, but a recent opinion from the District of Delaware, Hydrogen Master Rights, Ltd. v. Weston, No. 16-474-RGA (D. Del. Jan. 9, 2017), highlights the importance of alleging a nexus between interstate or foreign commerce and the alleged trade secrets in order to state a claim under the DTSA. Second, the DTSA provide a unique and powerful tool for ex parte seizures of property if necessary to prevent further dissemination of trade secrets. Finally, the DTSA offers whistleblower immunity to individuals who disclose a trade secret in confidence to their attorneys or the government for purposes of reporting or investigating a suspected violation of law.

A. Ex Parte Seizures Remain the Exception – Not the Rule

The ex parte seizure provision is arguably the most controversial aspect of the DTSA. Available only in "extraordinary circumstances," a term notably undefined in the Act, the ex parte seizure provision allows alleged victims of trade secret misappropriation to make uncontested applications for orders to seize property – such as computers or hard drives—without advanced notice where traditional relief, such as a TRO, is inadequate.

Based on available information, which is difficult to find because the applications and orders are often sealed, it appears courts are denying most applications for ex parte seizure. For example, in Dazzle Software II, LLC v. Kinney, 2:16-cv-12191 (E.D. Mich. 2016), the court denied the plaintiff's ex parte application because it was not persuaded that the defendants would not comply with an injunction. Other courts have denied ex parte applications on similar grounds, highlighting the high evidentiary hurdles for obtaining a seizure order. In Digital Assurance Certification, LLC v. Pendolino, No. 6:17-cv-72-Orl-31TBS (M.D. Fla. Jan. 23, 2017), the court denied the applicant's application for more mundane reasons—the plaintiff had not met its burden to show that the information is a trade secret.

On the other end of the spectrum, courts appear more willing to grant seizure orders where the applicant provides concrete evidence that the defendant will hide or destroy evidence or otherwise disregard the court's orders. For example, the court in Mission Capital Advisors, LLC v. Romaka, No. 1:16-cv-05878-LLS (S.D.N.Y July 29, 2016) granted an application for ex parte seizure when the defendant evaded service and then failed to appear for a show cause hearing on a TRO. The court concluded an order issued pursuant to Rule 65 would be inadequate because the defendant would evade, avoid, or otherwise not comply with such order.

Similarly, in OOO Brunswick Rail Management v. Sultanov, No. 5:17-cv-00017 (N.D. Cal. Jan. 6, 2017), the court granted-in-part an ex parte seizure where former employees had forwarded trade secret information to personal email accounts, deleted the sent messages, and emptied their trash folders. Interestingly, the court denied the plaintiff's request to seize certain electronic devices and instead ordered the defendants deliver the devices to the court. But the court ordered two third-party email providers to preserve the employees' email accounts in the interim.

B. Whistleblower Immunity Is Not an Absolute Shield to Litigation

Whistleblower immunity under the DTSA was addressed for the first time in Unum Group v. Loftus, No. 4:16-cv-40154 (D. Mass. Dec. 6, 2016). In Unum, a former employee removed numerous company documents from his employer's office without authorization and refused to return them. Unum sued, asserting claims for misappropriation of trade secrets under the DTSA and Massachusetts Trade Secret Act and for conversion. Unum filed a motion for injunctive relief, and Loftus opposed, arguing his actions were protected under the whistleblower immunity provision of the DTSA. Loftus also moved to dismiss Unum's complaint for the same reason.

The court denied Loftus's motion to dismiss and granted Unum's request for injunctive relief. In doing so, the court noted the record before it lacked any facts to support or reject Loftus's affirmative defense of immunity under the DTSA, and Loftus had failed to file any potential lawsuit that could be supported by information contained in Unum's documents. It was also unclear whether Loftus turned over all of Unum's documents to his attorney, which documents he took and what information they contained, or whether he used, is using, or has plans to use those documents for any purpose other than investigating a potential violation of law.

The Fifth Circuit Clarifies Copyright Preemption in Trade Secret Cases

In September 2016, the Fifth Circuit joined 10 other circuits in concluding the Copyright Act does not preempt state-law claims for trade secret misappropriation. In GlobeRanger Corp v. Software AG, No. 15-10121 (5th Cir. Sept. 7, 2016), the plaintiff obtained a $15M judgment on a trade secret claim directed solely to misappropriation of software that was eligible for copyright protection. The defendant appealed, arguing the plaintiff's trade secret claim was preempted by the Copyright Act. The Fifth Circuit disagreed, noting a trade secret claim requires a taking, use, or disclosure that occurs through some breach of a confidential relationship or other improper means. Applying the extra element test of preemption, the 5th Circuit concluded the Copyright Act does not preempt state trade secret law because the "improper means" element is not present in a copyright infringement claim.

The Supreme Court Declines to Restrict the ITC's Authority in Trade Secret Investigations

In 2011, the Federal Circuit held trade secret misappropriation is a form of unfair competition under paragraph (a)(1)(A) of Section 337, providing the ITC with a green light to bar importation of goods derived from misappropriated trade secrets. In In re Certain Rubber Resins and Processes for Manufacturing Same, (Inv. No. 337-TA-849), the ITC considered a similar question with a few twists. First, all alleged misappropriation occurred in China, and second, the complainant lost parallel trade secret misappropriation actions in Chinese court. Undeterred, the ITC issued a 10-year limited exclusion order against the respondent. The respondent appealed, and the Federal circuit entered a Rule 36 affirmance on December 11, 2015. The respondent filed a petition for certiorari, which the Supreme Court denied on January 9, 2017. Accordingly, the ITC remains a viable venue for international trade secret disputes involving goods imported to the United States, with remedies that may surpass injunctive relief available from a trial court.

Conclusion

The Defend Trade Secrets Act has ushered in a new era of federal uniformity in American trade secret law. In the Act's sophomore year, we will likely begin seeing orders on dispositive motions, jury verdicts, and more information to truly assess the impact of the Act on American trade secret law. While courts continue to interpret the DTSA, expect litigants to plead misappropriation claims under both state and federal law. And state-court claims for trade secret misappropriation will continue to thrive—for convenience, comfort, personal preference, or as a result of the numerous legal nuances that remain between the DTSA and each state's trade secret laws.