Update: Evolving Case Law under the Federal Defend Trade Secrets Act of 2016

Michael J. Betts LLC

The enactment of the federal Defend Trade Secrets Act of 2016 (DTSA) was a highly significant development in trade secrets law. as it for the first time provided a federal cause of action for trade secret misappropriation, beyond certain misappropriation claims that have been allowed to proceed under the federal Computer Fraud and Abuse Act, 18 U.S.C. § 1030. DTSA provides companies that desire to pursue claims for trade secret misappropriation to do so in federal court, and since it became effective on May 11, 2016, a variety of cases have been decided under the Act.

DTSA Overview

The DTSA was enacted as an amendment to the Economic Espionage Act of 1996, 18 U.S.C. §§ 1831,  et seq. In addition to providing for criminal penalties related to the theft of trade secrets, the DTSA establishes a federal cause of action for trade secret misappropriation if the trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  18 U.S.C. § 1836(b)(1). The DTSA incorporates many of the elements of the Uniform Trade Secrets Act (UTSA), which has been adopted in full or in part by virtually all states, including Pennsylvania.

The overlapping provisions of the DTSA and UTSA include similar definitions of “trade secret” and “misappropriation” as well as remedial provisions making available injunctive relief and recovery of actual damages, exemplary damages and attorneys’ fees.  See DTSA at 18 U.S.C. §§ 1836(b)(3), 1839(3),(5). The statute also authorizes ex parte seizure orders in certain circumstances, if necessary to prevent immediate and irreparable injury. 18 U.S.C. § 1836(b)(2). A party asserting a claim under the DTSA in federal court may include in its complaint claims under the UTSA as well as state common law claims (e.g., conversion, breach of fiduciary duties), as DTSA provides that it is not intended to preempt to displace other remedies available under federal or state law. 18 U.S.C. § 1838.

The DTSA includes immunity protection for certain whistleblower disclosures, and it requires employers to provide notice of the statute’s immunity provisions to employees, contractors and consultants in any contract entered into after May 11, 2016. An employer’s failure to provide such notice is precluded from recovering exemplary damages or attorneys’ fees under DTSA in any action against a person to whom the notice was not provided. 18 U.S.C. § 1833.

Case Law to Date Under the DTSA

Given the relatively short period of time that the DTSA has been effective, there is a limited number of reported cases under the statute to date. Because of the substantial overlap between the material provisions of the DTSA and the UTSA, it can be expected that federal courts applying the DTSA will do so in reliance on principles that have been established under state law for deciding trade secret misappropriation claims. For example, in a recently decided case in New York, the court evaluated misappropriation claims under the DTSA and New York law and noted the similarity of the standards applicable to the two sets of claims. Free Country Ltd. v. Drennen, No. 16 CV 8746 (JSR), 2016 U.S. Dist. LEXIS 180755 (S.D.N.Y. Jan. 3, 2017). Judge Rakoff described the plaintiff’s burden under DTSA as showing an “unconsented disclosure or use of a trade secret by one who (i) used improper means to acquire the secret, or, (ii) at the time of disclosure, knew or had reason to know that the trade secret was acquired through improper means, under circumstances giving rise to a duty to maintain the secrecy of the trade secret, or derived from or through a person who owed such a duty,” citing Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp., Inc., No. 15CV211LGSRLE, 2016 U.S. Dist. LEXIS 130918, at *18-19 (S.D.N.Y. Sept. 23, 2016), but then relied on cases applying New York law in determining whether the plaintiff in Free Country was entitled to the requested temporary restraining order.

Several decisions address the applicability of the DTSA to continuing conduct that could be regarded as having occurred both before and after the effective date of the statute, May 11, 2016. In the Syntel Sterling case cited above, the court granted defendants leave to amend their counterclaims to include claims under the DTSA, where the statute had become effective during the pendency of the case. The court rejected the plaintiff’s argument that the proposed amendment would be futile because the statute by its terms applies only to misappropriations that occur on or after May 11, 2016.

The court noted that the proposed counterclaims alleged that the plaintiff continued to use the defendants’ alleged trade secrets after the effective date of the statute and that this was sufficient because the DTSA defines misappropriation to include “disclosure or use of a trade secret without the consent of another.”  18 U.S.C. § 1839(5). Similarly, the court in Adams Arms, LLC v. Unified Weapons Systems, Inc., No. 8:16-cv-1503-T-33AEP, 2016 U.S. Dist. LEXIS 132201 (M.D. Fla. Sept. 27, 2016), found that the plaintiff stated a claim under the DTSA where it alleged that the defendant had disclosed its trade secrets after the effective date of the statute. The court rejected the defendant’s argument, based on DTSA’s statute of limitations provision that states that “a continuing misappropriation constitutes a single claim of misappropriation,” relying on the plaintiff’s allegation that an act prohibited by the statute (disclosure) had occurred after the effective date.

Finally, in Dazzle Software II, LLC v. Kinney, No. 16-cv-12191, 2016 U.S. Dist. LEXIS 155993 (E.D. Mich. Aug. 22, 2016), the court dismissed claims under the DTSA, but in its order provided that the plaintiffs could seek leave to amend their complaint if discovery showed that the defendants engaged in conduct violating DTSA after its effective date; the court stated that if the plaintiffs desired to reassert a DTSA claim, they “shall plead with specificity any alleged conduct by Defendants post-dating the effective date of the DTSA that … constitutes a violation of DTSA or otherwise makes the DTSA applicable to Defendants.”

In Unum Group v. Loftus, No. 4:16-CV-40154-TSH, 2016 U.S. Dist. LEXIS 168713 (D. Mass. Dec. 6, 2016), a company asserted claims for trade secret misappropriation against a former employee. The former employee moved to dismiss the DTSA claims, arguing that he was entitled to invoke the statute’s immunity provisions (18 U.S.C. § 1833), in that he had removed company documents and provided them to his attorney for the purpose of pursuing claims against the employer for suspected violations of law. The court granted the plaintiff’s motion for a preliminary injunction on claims under the DTSA and ordered the return of materials that a former employee of the plaintiff had removed from the plaintiff’s offices. The court denied without prejudice the former employee’s the motion to dismiss, noting that no claims had yet been asserted by the former employer and that there were facts of record to support (or reject) the immunity defense.

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