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The Federal Defend Trade Secrets Act -- Emerging Case Law in the Third Circuit

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The federal Defend Trade Secrets Act (DTSA) was enacted by Congress in May 2016 to provide, for the first time, a federal statutory claim for misappropriation of trade secrets.  18 U.S.C. §§ 1831, et seq.  Until the DTSA became effective, claims of trade secret misappropriation were litigated exclusively in state courts under state trade secret law.  Most states have enacted the Uniform Trade Secrets Act.  Pennsylvania’s version is the Pennsylvania Uniform Trade Secrets Act (PUTSA), found at 12 Pa.C.S. §§ 5301-5308.

 

A post earlier this year provided an overview of the DTSA and discussed some of the more significant cases that had been decided under the statute.  Now that the DTSA has been in effect for approximately two and one-half years, the case law under the statute is becoming more developed and various decisions have been issued within the Third Circuit under the DTSA.  This post discusses those decisions.  As the Court of Appeals for the Third Circuit has not yet issued any opinions substantively addressing the provisions of the DTSA, the cases discussed in this post are all district court decisions within the Third Circuit. 

Pleading a Claim under DTSA 

In order to pursue a claim under the DTSA for misappropriation of a trade secret, the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  18 U.S.C. §§ 1836(b)(1).  In Marimar Textiles, Inc. v. Jude Clothing & Accessories Corp., No. 17-2900 (JLL), 2017 U.S. Dist. LEXIS 163458, at *18-19 (D.N.J. Oct. 2, 2017), the court ruled that allegations that the defendants improperly used plaintiff's trade secrets to create infringing goods, which were intended to be sold throughoutthe United States, were sufficient to survive a motion to dismiss.  On the other hand, two district court rulings in the Third Circuit illustrate that the courts will enforce compliance with this jurisdictional requirement.  For example, in Government Employees Ins. Co. v. Nealey, No. 17-807, 262 F. Supp. 3d 153 (E.D. Pa. June 13, 2017), the court dismissed a DTSA claim because the plaintiff had failed to allege a nexus between the trade secrets that were the subject of its claim and interstate commerce.  Similarly, in Hydrogen Master Rights, Ltd. v. Weston, 228 F. Supp. 3d 320 (D. Del. 2017), the court dismissed a DTSA claim without prejudice where the plaintiff failed to allege a nexus between the alleged trade secret and interstate commerce. 

Applicability of the DTSA to Pre-Enactment Conduct and the DTSA’s Statute of Limitations 

Numerous district court cases in the Third Circuit have addressed the issue of whether a claim may be pursued under the DTSA where the alleged trade secret misappropriation occurred beforethe effective date of the statute (May 11, 2016) but where the defendant allegedly wrongfully used the trade secret afterthe effective date.  The cases in the Third Circuit have uniformly held that such allegations state a claim under the DTSA.  E.g., 123 Exteriors, Inc. v. N. Star Exteriors, LLC, No. 17-4337, 2018 U.S. Dist. LEXIS 128748, at *20-22 (E.D. Pa. Aug. 1, 2018); PDC Machines Inc. v. Nel Hydrogen A/S, No. 17-5399, 2018 U.S. Dist. LEXIS 100506, at *9-11 (E.D. Pa. June 15, 2018); Teva Pharmaceuticals USA, Inc. v. Sandhu, 291 F. Supp. 3d 659, 674-75 (E.D. Pa. 2018); Quintiles IMS Inc. v. Veeva Systems, Inc., No. 17-00177 (CCC), 2017 U.S. Dist. LEXIS 177328, at *11 (D.N.J. Oct. 26, 2017); Marimar Textiles,2017 U.S. Dist. LEXIS 163458 at *17-18; Brand Energy & Infrastructure Servs. v. Irex Contracting Group, No. 16-2499, 2017 U.S. Dist. LEXIS 43497, at *11-19 (E.D. Pa. Mar. 24, 2017).  In Brand Energy, Judge Stengel observed that while the Uniform Trade Secrets Act provides that it does not apply to “continuing misappropriation that occurs after the effective date,” the DTSA does not contain such a provision.

At least one court has used a similar approach in determining whether a claim is barred by the DTSA’s three-year statute of limitations.  Marimar Textiles, 2017 U.S. Dist. LEXIS 163458 at *18 (denying motion to dismiss based on statute of limitations, where plaintiff alleged that there were continuing violations and that wrongful use of the misappropriated trade secrets occurred within three years of the filing of suit).

 Proving a Claim under DTSA 

The most basic element of a claim under DTSA is a showing that the allegedly misappropriated information qualifies as a “trade secret.”  As Judge Cercone observed earlier this year, although DTSA and PUTSA define trade secrets in a different manner, the statutes protect the same information – i.e., information that: (i) the owner has taken reasonable means to keep secret; (ii) derives independent economic value, actual or potential, from being kept secret; (iii) is not readily ascertainable by proper means; and (iv) cannot be readily accessed by others and would obtain economic value from its disclosure or use.  Pharmerica Corp., Sturgeon, No. 2:16cv1481, 2018 U.S. Dist. LEXIS 43236, at *10-11 (W.D. Pa. Mar. 16, 2018); accord,123 Exteriors, 2018 U.S. Dist. LEXIS 128748 at *22. 

Judge Stengel in Brand Energyidentified various ways in which an actionable misappropriation can be established the DTSA, including (i) the acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means, and (ii) when one discloses or uses another’s trade secret without the consent of the trade secret owner.  Brand Energy, 2017 U.S. Dist. LEXIS 43497 at 8-9, citing18 U.S.C. § 1839(5)(A), (B). 

Remedies Available under DTSA 

No cases have been decided within the Third Circuit to date that analyze the remedies available under DTSA. This should not be surprising, as few, if any, DTSA claims have proceeded to trial.  In general, the DTSA provides for potential awards of both equitable relief and various forms of monetary damages.  18 U.S.C. § 1836(b)(3).  The primary types of damages that may be awarded are:  (i) actual losses, i.e., the plaintiff’s lost profits from the misappropriation; and (ii) unjust enrichment damages, to the extent not duplicative of actual loss damages.  The third category of potential damages is a reasonable royalty for the unauthorized disclosure or use of the trade secret.  18 U.S.C. § 1836(b)(3)(B).  Given the language of the statute as well as its legislative history, it can be anticipated that the courts will not regard this category of potential damages as the preferred remedy and that an award of royalty damages will be considered only if the plaintiff cannot be made whole through an award of the other forms of damages.  

Like the Uniform Trade Secrets Act, the DTSA also contains provisions authorizing awards of exemplary damages (up to two times the amount of actual loss and unjust enrichment damages awarded).  18 U.S.C. § 1836(b)(3)(C).  The DTSA also parallels the Uniform Act by providing that attorneys’ fees are recoverable (i) by a prevailing plaintiff if the trade secret was willfully and maliciously misappropriated, and (ii) by a prevailing defendant if the claim of misappropriation was made in bad faith.  18 U.S.C. § 1836(b)(3)(D).

About the Author

Michael J Betts is a Pittsburgh Lawyer with 35+ years experience in handling Commercial Litigation, Securities Litigation and Financial Services Litigation cases. Mr. Betts is also an experienced alternative dispute resolution neutral and has served as a mediator in numerous cases.

 

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Michael Betts