Help! What Are My (Immediate) Defenses to a Federal Trade Secret Claim?

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  • September 9, 2016

[Originally published as Help! What Are My (Immediate) Defenses to a Federal Trade Secret Claim?, by Lily Li and Andrea Paris, in Orange County Lawyer Magazine, September 2016, Vol. 58 No.9 on page 52.]

The Defend Trade Secrets Act of 2016 (DTSA), signed into law by President Obama on May 11, 2016 creates a new federal cause of action for trade secret theft. Not only does the DTSA open the doors of the U.S. district courts to trade secret plaintiffs, it weaponizes complaints. Now, upon a showing of immediate and irreparable injury, plaintiffs in trade secret cases can request extraordinary relief: court-ordered seizure of the misappropriated trade secrets without notice to the defendant. This relief is above and beyond what is provided for by the Uniform Trade Secrets Act (UTSA), the trade secret law adopted by most states, including California, and copies many of the civil seizure remedies previously available to copyright, trademark, and patent plaintiffs for infringing and counterfeit goods.

This extraordinary relief comes with several safeguards. Defendants, faced with the prospect of a U.S. Marshal knocking on (or down) their doors, have several options at their disposal to combat, modify, or remedy improper seizure requests—many of which should be implemented immediately to prevent any disruption to business. Prospective plaintiffs should also keep these procedural and substantive hurdles in mind, prior to proceeding with an application for civil seizure.

What the DTSA Protects

Congress enacted the DTSA with strong bipartisan support. The law allows companies to address growing levels of interstate trade secret theft, develop a coherent federal litigation strategy across all forms of intellectual property, and take advantage of the broad subpoena powers of the federal rules of civil procedure. The DTSA’s definitions of “trade secret” and “trade secret misappropriation” are modeled after the UTSA, with a few notable differences.

The UTSA’s definition of a trade secret is a “formula, pattern, compilation, program, device, method, technique, or process.” Under the DTSA, the definition of a “trade secret” is broadened to include “all forms and types of financial, business, scientific, technical, economic, or engineering information . . . whether tangible or intangible . . . .” These broad categories of information are protected regardless of how, where, or even whether they are stored at all. 18 U.S.C. § 1839.

To maintain trade secret protection under the DTSA, owners of the trade secret must make reasonable efforts to maintain its secrecy, and the information must derive independent economic value by not being known to other persons who can obtain economic value from its disclosure or use (i.e., competitors). This is a different, and arguably broader, standard from the UTSA, which limits trade secrets to those secrets not known by “the public.”

Requirements for Civil Seizure

The most distinguishing feature of the DTSA, when compared to the UTSA, is the civil seizure remedy. This remedy is intended for very limited circumstances, where trade secret “pirates” pilfer information for immediate dissemination, or intend to whisk it away to foreign jurisdictions beyond the subpoena power of the states. The seizure order is not intended as a means to prevent the normal movement of employees amongst competitors, nor as a means to disrupt the legitimate operations of competitors. Consequently, this remedy has stringent requirements.

To obtain a seizure order, a DTSA plaintiff must file an affidavit or complaint showing the following:

  • The trade secret misappropriation will cause immediate and irreparable injury, which cannot be addressed by injunctive or other relief;
  • The harm to the applicant outweighs the harm to the DTSA defendant, and substantially outweighs the harm to any third parties;
  • The applicant is likely to succeed in showing that trade secret misappropriation occurred;
  • The DTSA defendant has actual possession of the trade secret, and the application describes “with reasonable particularity” where it is located;
  • The DTSA defendant will destroy or hide the trade secret, if given notice; and
  • The applicant has not publicized the seizure.

See 18 U.S.C. § 1836(b)(2)(A)(ii).

It remains to be seen how often courts will order this “extraordinary” relief. There are comparable seizure remedies present in federal copyright law (17 U.S.C. § 503), trademark law (15 U.S.C. § 1116(d)(1)(A)), and ITC actions for copyright, trademark, and patent infringers (19 U.S.C. § 1337(i)), and courts will likely look to these precedents in order to interpret the DTSA requirements listed above. Unlike these other intellectual property rights, however, trade secrets lose their value as soon as they are disseminated. Thus, the potential immediate “harm” of such dissemination will likely outweigh the harm caused by other forms of intellectual property theft, weighing in favor of this seizure remedy for trade secrets.

Procedural Defenses

A. Seizure Hearings & Ex Parte Motions

Once a court issues an order for civil seizure under the DTSA, that same court must schedule a hearing within seven days. Defendants should not wait to act, however, if the seizure (or potential seizure) will disrupt legitimate business operations in the interim. Under the DTSA, defendants have the opportunity to move the court for an order dissolving or modifying a seizure order “at any time,” upon notice to the plaintiff. If defendants move quickly, and request ex parte relief as soon as they become aware of a DTSA complaint or subsequent seizure order (through a litigation alert service or other source), defendants may obtain relief prior to a civil seizure. Here, time is of the essence.

B. Confidentiality vs. Publicity

The DTSA requires the court to protect the confidentiality of all seized materials and to protect the target of the seizure order from publicity “by or at the behest of the person obtaining the order.” These protections are designed to prevent DTSA plaintiffs from using the seizure order purely as a means to obtain defendants’ trade secrets, or as a means to tarnish the reputations of these defendants through a court-ordered raid. These protections, however, are limited. The DTSA does not protect a defendant from publicity by the press or other third parties, and First Amendment protections may insulate anonymous tip-offs to the press—even if they originate from DTSA plaintiffs. The legislative history of the DTSA shows considerable attention paid to freedom of the press, so courts will probably be wary of any attempts to curtail such freedoms. See H.R. Rep. No. 114-529, at 10, fn. 2. (Committee on the Judiciary) (“The Act’s protections against the misappropriation of trade secrets—and the remedies it provides against such misappropriation—are not intended to displace or restrict protections for members of the press recognized under the First Amendment.”).

Given the probability of exposure, it is imperative for defendants to address confidentiality and publicity concerns at the seizure hearing, or better yet, at an early ex parte hearing described above. If defendants agree to an immediate turnover of the disputed trade secrets, or show that the requested seizure is harmful and excessive, then the court may limit the scope of the seizure order or dispense with it entirely. This seizure hearing or ex parte hearing is also a good time for defendants to move for encryption of any seized assets, under 18 U.S.C § 1836 (b)(2)(H), to further protect their privacy.

C. Cross-Complaint for Damage Caused by Wrongful Seizure

Should a “wrongful or excessive seizure” occur, despite the protections above, defendants have the option to countersue for damages as a result of the seizure. The DTSA provides the same remedies for a wrongful seizure as those available under the Trademark Act of 1964 (15 U.S.C. § 1116(d)(11)), which include lost profits, cost of materials, loss of goodwill, punitive damages in instances where the seizure was sought in bad faith, and, in most circumstances, reasonable attorney’s fees. Since the DTSA cites directly to these Trademark Act remedies, cases in the trademark arena are illustrative of what courts consider to be “wrongful seizure.” These include situations where “the items seized are predominantly legitimate” or where plaintiff “sought the seizure knowing it was baseless.” Martin’s Herend Imports, Inc. v. Diamond & Gem Trading United States of Am. Co., 195 F.3d 765, 773 (5th Cir. 1999). Given these considerations, defendants should consider doing the following immediately after a DTSA seizure: (1) inventory all missing and damaged property, (2) record all disruptions in business, and (3) develop a record of the DTSA plaintiff’s motivations and any misstatements at the seizure hearing.

D. Bonding Requirements

One of the most important procedural defenses for defendants is the bonding requirement of the statute. If a court authorizes a DTSA seizure order, it must require the person obtaining the order to post a security “determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure.” 18 U.S.C. § 1836(b)(2)(B)(vi). Thus, in order to execute quickly on a seizure order, DTSA plaintiffs will need to negotiate with a bonding company for the estimated amounts of a required security, and figure out a way to timely deliver it to the court. These procedural hurdles may delay the actual seizure raid, providing time for defendants to move quickly with an ex parte hearing in the interim.

Employment-Based Defenses

Misappropriation of trade secrets claims often arise in the employment context, such as when a key employee with access to trade secrets leaves and starts a competing business or joins a competitor. In an effort to address concerns that injunctive relief under the DTSA would hinder employee mobility, the legislature included certain limitations on the court’s power to grant injunctive relief.

A. Restrictions on Injunctive Relief

A defendant opposing plaintiff’s request for injunctive relief may successfully challenge the request on various anti-competition grounds. In addition to meeting the federal standards for granting an injunction, the DTSA allows a court to grant an injunction “to prevent any actual or threatened misappropriation” only if the injunction would not: (1) prohibit defendant from entering into an employment relationship, (2) place conditions on defendant’s employment based merely on defendant’s knowledge of trade secret information without evidence of threatened misappropriation, and/or (3) violate applicable state anti-competition laws (e.g., Cal. Bus. & Prof. Code § 16600 et al.—voiding contracts that restrain a person from engaging in a lawful profession, trade, or business). 18 U.S.C. § 1836(b)(3)(A)(i).

The DTSA’s rejection of the inevitable disclosure doctrine, which prevents an employee from working for a competitor merely because disclosure of trade secrets is a likely possibility, is notable. Although courts interpreting California’s UTSA have rejected the inevitable disclosure doctrine, choice of law provisions could otherwise subject a California employee to another state’s UTSA that recognizes the inevitable disclosure doctrine. Compare PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995) (recognizing the inevitable disclosure doctrine), with Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1447 (Cal. Ct. App. 2002) (rejecting explicitly the inevitable disclosure doctrine under California law).

B. Failure to Provide Notice of Immunities

Employee defendants who are bound by a nondisclosure or confidentiality agreement should review those agreements for plaintiff’s compliance with the DTSA’s notice of immunities requirement. Pursuant to the DTSA, employers must provide employees (defined to include contractors and consultants) with notice of certain available immunities or be precluded from an award of exemplary damages and/or attorney’s fees under Section 1836(b)(3). The notice of immunities must be present in any contract that governs an employee’s use of trade secret or other confidential information entered into, or updated, after May 11, 2016. Referencing a policy document setting forth the employer’s reporting policy for a suspected violation of law constitutes sufficient notice. 18 U.S.C. § 1833(b)(3).

C. Whistleblower Immunity

The DTSA broadened the civil and criminal immunity available to whistleblowers who disclose trade secret information if the disclosure is made: (1) in confidence to a federal, state, or local government official, directly or indirectly, or to an attorney; and (2) solely for the purpose of reporting or investigating a suspected violation of law. 18 U.S.C. § 1833(b)(1)(A). Defendants may broadly invoke this immunity even if the disclosure of trade secret information was made to a governmental entity that had no authority over the alleged violation of which defendants complain. Additionally, defendants will not be held liable for disclosing trade secret information in a complaint or other document filed in a lawsuit or other proceeding as long as such filing is made under seal. 18 U.S.C. § 1833(b)(1)(B). This provision of the DTSA preempts state laws. 18 U.S.C. § 1833(b).

D. Anti-Retaliation Lawsuits

Additionally, employees who suffer retaliation as a result of reporting an employer’s suspected violation of the law may disclose trade secret information to their attorneys and use the information in court. The DTSA immunizes such disclosure as long as the document containing the trade secret is filed under seal, and not disclosed except pursuant to court order. 18 U.S.C. § 1833(b)(2). Thus, the DTSA allows employees to prosecute retaliation and whistleblower claims where trade secret information is at issue, while protecting businesses’ legitimate interests in their intellectual property.

Conclusion

As we move ever closer towards a global, knowledge-based economy, the importance of trade secrets will only grow over time. Businesses and their employees must operate across state lines and work in the “cloud,” yet still protect their core intellectual assets in this milieu. For this to work, it is critical that all businesses and managers create an effective protection and defense strategy that works in tandem with federal and state intellectual property and employment laws.

- Lily Li is a commercial and IP litigator at Brown Wegner McNamara LLP. She can be reached at lli@bwmllp.com. Andrea Paris is an employment litigator and advisor at the Law Office of Andrea W. S. Paris. She can be reached at ap@andreaparislaw.com.

*Disclaimer* This article is not legal advice or legal opinion, and the contents are intended for general informational purposes only. Circumstances may differ from situation to situation. All legal and other issues must be independently researched.

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