What You Need To Know About The Defend Trade Secrets Act Of 2016

Ed. note: This is a sponsored article by Lake Whillans.

Many of the investments that we make at Lake Whillans involve supporting innovators and entrepreneurs who are seeking to protect trade secrets. We have found this group to be particularly vulnerable to more well-heeled competitors seeking to gain an unfair advantage in the market place. Naturally, we were curious about the new rights enacted by Congress in the Defend Trade Secrets Act of 2016. We turned to Jonathan Patchen and Max Twine of Taylor & Company Law Offices, LLP, named to our recently published list of the White Sandal Elite: The Go-To Law Firm Firms of the Silicon Valley, to educate us and ATL readers on the basics of the new legislation.

In the midst of a chaotic campaign season and the usual partisan gridlock on Capitol Hill, Congress has quietly enacted the Defend Trade Secrets Act of 2016 (“DTSA”), 18 U.S.C. § 1836, legislation which some commentators are calling the biggest development in IP law in years.

Although trademarks, patents, and copyrights have long been deemed worthy of federal protection (the latter two since 1787), trade secrets have remained civilly actionable only under state law. DTSA — which was enacted to create a uniform federal scheme to address concerns over increasing misappropriation by foreign companies — changes that, creating for the first time a federal cause of action for trade secret misappropriation.

Perhaps the most significant feature of DTSA is its creation of federal jurisdiction. Formerly, trade secret cases only found their way to federal court under diversity or supplemental jurisdiction — now, a trade secret claim may “arise under” federal law as long as it meets the low threshold of relating “to a product or service used in, or intended for use in, interstate or foreign commerce.” § 1836(b)(1) (emphasis added). DTSA enables almost all trade secret plaintiffs to sue in federal court; defendants sued under DTSA will always have the option to remove.

Substantively, DTSA will be immediately familiar to any lawyer who has litigated under the Uniform Trade Secrets Act (“UTSA”), some version of which has been adopted by all states except New York and Massachusetts. For example, DTSA shares UTSA’s three-year statute of limitations, § 1836(d), and DTSA’s definitions of “misappropriation” and “improper means” are intentionally identical to their UTSA counterparts. S. Rep. 114-220 at *10. While DTSA’s definition of a “trade secret” differs slightly from UTSA, those differences are not intended to be meaningful. Id.

Given the substantial overlap between the two laws, there is no reason to expect that courts will treat DTSA misappropriation claims any differently than they would under UTSA. However, DTSA does not preempt state law misappropriation claims. See § 1838. Hence, it is possible that, as courts begin to interpret DTSA, the two parallel legal frameworks could diverge in unpredictable ways.

The remedies available under DTSA also closely track UTSA, with two very important exceptions:

• Civil Seizure: DTSA contains a provision that empowers a court, in extraordinary circumstances, to issue an ex parte order directing law enforcement to seize property “necessary to prevent the propagation or dissemination of a trade secret.” See 1836(b)(2). The seized material is taken into the court’s custody and, if it is stored electronically, the court is directed to prohibit the storage medium from being connected to a network or the Internet pending a hearing. The standard for seizure is very high, and it is unlikely that courts will employ this extraordinary remedy more than sparingly. Still, a federal statute that expressly provides for a “motion for encryption” is noteworthy if only because it represents, for courts and practitioners alike, a dramatic lurch into the 21st century.
• Inevitable Disclosure: Under UTSA, some states have allowed injunctions barring an employee from taking a new job with a competitor on the theory that the employee would “inevitably disclose” its former employer’s trade secrets to the competitor. See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) (applying Illinois law). DTSA expressly rejects the so-called “inevitable disclosure doctrine” by requiring that any injunction preventing a person from entering into an employment relationship be “based on evidence of threatened misappropriation and not merely on the information the person knows” and also not “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” § 1836(b)(3)(A)(i) (emphasis added). Those provisions represent a nod to states like California, which have strong public policies in favor of employee mobility.

Because the substantive differences between DTSA and UTSA are relatively few, the major consequence of the new legislation may be to introduce an important strategic question into the beginning stages of many trade secret cases. Counsel for plaintiffs — and, to a lesser degree, defendants — will now more often have to decide whether they are better off litigating in state or federal court.

Depending on the jurisdiction, and how the DTSA case law develops, a party’s choice of forum could prove quite significant. For example, conspicuously absent from DTSA is any language requiring plaintiffs to identify their trade secrets with “reasonable particularity” before obtaining discovery. California has codified that requirement in Code of Civil Procedure § 2019.210, and several jurisdictions, including Delaware, have adopted a similar common law rule. See, e.g., SmithKline Beecham Pharm. Co. v. Merck & Co., 766 A.2d 442, 447 (Del. 2000). As a practical matter, many plaintiffs do not know whether, let alone which, trade secrets have been misappropriated without first obtaining discovery, so pre-discovery identification can be a powerful weapon for defendants and a formidable obstacle for plaintiffs. If, in a state like California, federal courts in DTSA cases permit pre-identification discovery while state courts continue to bar it, plaintiffs will often have a strong incentive to file in federal court.

However, it is not obvious that all trade secret plaintiffs will want to rush to the federal courthouse. A plaintiff with the option of suing in a state court that does not require unanimous civil jury verdicts might reasonably elect to forgo the federal claim and the attendant risk of having to convince a unanimous jury if the case is removed. See Fed. R. Civ. P. 48(b). And with the recently amended Federal Rules of Civil Procedure emphasizing greater proportionality in discovery, see Fed. R. Civ. P. 26(b)(1), some plaintiffs might conclude that they are better off in state court.

There are several other interesting aspects of DTSA (e.g., its creation of new immunities to misappropriation claims under both federal and state law) that we simply cannot discuss in the limited space available here. Thus, we encourage all business and employment lawyers — even those who do not litigate — to promptly delve further into this important new law. DTSA became effective on May 11, 2016, and the first wave of DTSA claims is coming to a courthouse near you!

                                                                                                                                     

This column is brought to you by Lake Whillans Litigation Finance. To learn more about us, and litigation finance generally, visit us at our website at lakewhillans.com, Twitter, or LinkedIn.