Early impressions of the Defend Trade Secrets Act

The Defend Trade Secrets Act (DTSA) was enacted on May 11, 2016 in the hope of smoothing differences in the US states’ separate implementation of trade secret laws under the Uniform Trade Secrets Act (UTSA), particularly in view of the ever-broadening scope of national and global commerce. Owing to the lack of retroactive effect of the DTSA, US district courts have so far issued only a handful of rulings addressing the law, and there have not yet been any decisions from the US appellate courts.

Many of these early judgments have come in the context of a request for a temporary restraining order and/or a preliminary injunction seeking to enjoin a former employee from taking trade secrets to their new employer—requests which tend to incorporate state law issues relating to employee mobility—as well as interpretation and modification of non-disclosure and non-compete agreements. Despite the relatively small sample size, some trends appear to be developing.

The DTSA explicitly does not preempt state trade secret laws, and plaintiffs have consistently included claims under the DTSA and the relevant state law in their complaints. This strategy allows plaintiffs to rely on well-developed case law addressing state trade secret laws, and then to argue that conclusions based on state law are applicable to the undeveloped DTSA due to the similarities between the DTSA and state trade secret laws in important areas such as the definitions of a “trade secret” and “misappropriation”.

The courts thus far have followed this path laid out before them by plaintiffs, lending credence to the argument that the DTSA will ultimately be seen as nothing more than a federalisation of existing state trade secrets laws. However, as previously noted, many of the DTSA rulings to date have come in the context of employee-related matters. These matters typically include other issues such as breach of a non-disclosure and/or non-compete agreement, which are subject to the relevant state laws and not the DTSA.

This has given rise to an overarching state law presence in these cases regardless of the similarities between the DTSA and the relevant state trade secret laws.

As the body of DTSA law addressing non-employee trade secret misappropriation grows, we expect that the courts will address the unique provisions of the DTSA, including the DTSA’s broader definition of a “trade secret”. The courts will also develop case law addressing the requirements for triggering the unique seizure provisions of the DTSA, which we expect will rely heavily on the case law addressing the seizure of counterfeit goods.

The DTSA does not allow for retroactive application; rather, the claimed misappropriation must have occurred on or after May 11, 2016 to be actionable under the DTSA. This, along with the lack of direction from the courts so far, has prevented many plaintiffs from bringing an action under the DTSA.

One court recently relied on a distinction within the DTSA’s definition of “misappropriation” to allow a claim to proceed even though some of the relevant allegations occurred before May 11, 2016. In Adams Arms v Unified Weapon Systems, in September, the plaintiff had disclosed to the defendant in 2014 and 2015 numerous trade secrets pursuant to a series of non-disclosure agreements.

According to the complaint, the defendant improperly disclosed those trade secrets to a foreign government in “late May or early June 2016”. The defendant argued that the alleged misappropriation occurred before the enactment date of the DTSA and, therefore, the DTSA claim should be dismissed. The defendant relied on the DTSA’s statute of limitations provision, which directs that “a continuing misappropriation constitutes a single claim of misappropriation”.

“The ex parte provision of the DTSA provides a powerful weapon that is not available under the UTSA.”

The court rejected this argument, holding instead that the “disclosure” that allegedly occurred after May 11, 2016 was a separate misappropriation from the “acquisition” of the trade secrets, ie, there was no “ongoing misappropriation” stretching back to pre-May 11, 2016. The court dismissed the DTSA claim insofar as it was based on an “acquisition” theory because any such acquisition occurred before May 11, 2016, but allowed the claim to proceed in connection with the post-May 11, 2016 “disclosure” theory.

Pre- and post-May 11

Based on Adams Arms, plaintiffs who can present this type of “split” misappropriation may consider focusing their DTSA claim on the post-May 11, 2016 allegations while including a misappropriation claim under the relevant state law to recover for pre-May 11, 2016 improper activities. The shelf life of this strategy is dwindling as May 11, 2016 drops further back in time but, at least for the near future, it may prove useful to plaintiffs who otherwise could not file their lawsuit in federal court because there is no diversity of citizenship between the parties.

This strategy, where applicable, would also allow plaintiffs to make use of the unique ex parte seizure provision in the DTSA, which is not found in the UTSA. The requirements for obtaining a seizure order are quite specific, and all must be met. They are:

(1) Another form of equitable relief would be inadequate because the party to be enjoined would avoid, evade, or otherwise not comply;

(2) Immediate and irreparable injury will occur unless the seizure is ordered;

(3) The harm to the trade secret owner outweighs the interests of the party to be enjoined and substantially outweighs any harm to third parties;

(4) The request for a seizure order describes the matter to be seized with reasonable particularity;

(5) The party to be enjoined has actual possession of the trade secret;

(6) The request for a seizure order describes the matter to be enjoined with reasonable particularity;

(7) The party to be enjoined would destroy, move, hide, or otherwise make such matter inaccessible to the court; and

(8) The party seeking the seizure order has not publicised the request for seizure.

These are potentially daunting requirements,  as befitting an order that is granted without allowing the opposing party to be heard, but if they can be shown, the ex parte provision of the DTSA provides a powerful weapon that is not available under the UTSA. Such a strong remedy, in view of Adams Arms, which identifies separate misappropriations, may provide the strategic basis for proceeding under the DTSA coupled with a claim under the relevant state trade secret laws.

Although there have not yet been many cases addressing the DTSA, the Adams Arms ruling, which is one of the first substantive decisions addressing the DTSA outside of the context of an employee-related case, shows that the courts will have to address unique issues in the DTSA, rather than simply rely on case law interpreting the UTSA.

The DTSA provides advantages for plaintiffs, including that plaintiffs do not have to disclose their trade secrets at the outset of litigation, as many states require, and we expect that parties will begin relying on the DTSA more and more as the May 11, 2016 effective date moves further into the past.

The courts will soon begin issuing substantive rulings setting out the metes and bounds of the DTSA, including developing the requirements for an ex parte seizure order. Nevertheless, even at this early stage, the DTSA is proving to be an effective tool for establishing uniformity in trade secrets law.

This article is intended for general information purposes only and does not, and is not intended to, constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed here apply to the reader’s specific circumstances.

Kevin O’Shea is a partner at  Ice Miller. He can be contacted at: kevin.oshea@icemiller.com

Michael Hopkins is an associate at Ice Miller. He can be contacted at: michael.hopkins@icemiller.com