Defend Trade Secrets Act: signed, sealed, delivered

For many years, litigants have had original federal court jurisdiction for patent, trademark and copyright cases, while trade secrets have been governed by state law. No longer. On Wednesday, President Barack Obama signed the Defend Trade Secrets Act (DTSA) to "provide a single, national standard for trade secret misappropriation with clear rules and predictability" in federal court.

Claims for trade secret theft originally developed from common law cases and Restatement pronouncements. The American Bar Association approved the Uniform Trade Secret Act (UTSA) in 1979, and 46 states have adopted all or substantially all of the UTSA. In adopting the act, many states made material changes to their own UTSA. For example, the California Legislature adopted certain pleading rules for identification of trade secrets prior to obtaining discovery. California also determined that certain elements of the trade secret claim which under the UTSA would have to be established by the plaintiff, instead would be affirmative defenses on which the defendant has the burden of proof. The result was a patchwork of differing state laws.

Congress passed the DTSA in part to recognize the importance of trade secrets to businesses and to address the fact that trade secret theft has become increasingly common. But while the DTSA should not result in significant changes to the substantive law of trade secrets, the new act does raise many questions which will have to be addressed by courts. As they build their own body of case law, federal courts likely will follow state courts ? at least at first.

Here are a few differences in the new law to note:

Civil seizures. In a key difference from the UTSA, the DTSA provides for a civil seizure procedure, including "in extraordinary circumstances," ex parte applications for seizure of property by federal law enforcement officials where it can be established that the defendant "would destroy, move, [or] hide" the property if given notice. A seizure order will only be granted if the applicant can show a likelihood of success on the merits of the trade secret claim, similar to the injunctive standard under Rule 65. Any property seized under this procedure shall be taken into custody by the court, with no access provided to either the plaintiff or the defendant, and a hearing on the seizure shall be held within seven days. The plaintiff will be required to post security for the seizure and will be liable for damages, not limited to the amount of the security, for wrongful seizure. The court may also appoint an independent special master to examine and isolate the alleged trade secrets, facilitating the return of excessively seized property.

This seizure section appears to be one of Congress' prime motivations for passing the DTSA: providing a speedy and powerful federally sanctioned remedy to immediately stop further theft and distribution of trade secrets. Note that under California law, ex parte temporary restraining orders are available in trade secret cases where facts can be established that requiring notice would result in irreparable injury. But the specific trade secret seizure procedure provided by the DTSA ? under the authority of a federal marshal and the court ? provides an especially dramatic and sweeping tool, particularly when facing imminent foreign espionage and theft.

No inevitable disclosure. Critically, the DTSA appears to prohibit application of the "inevitable disclosure doctrine" to these federal trade secret claims. Many of the UTSA state courts have adopted laws allowing a plaintiff seeking an injunction to avoid having to establish actual or threatened misappropriation of trade secrets where it appears that a former employee will "inevitably" use his or her former employer's trade secrets in a new job. These cases normally involve former employees working in the same field or technology on a competitive product where it can be established that the employee should not be trusted. A majority of the UTSA states have adopted the inevitable disclosure doctrine in some form although California, Virginia and Florida have rejected it.

In the Senate's consideration of the DTSA, Sen. Dianne Feinstein added a provision that precludes an injunction which prevents "a person from entering into an employment relationship" based on "the information the person knows" as opposed to actual or threatened misappropriation. The DTSA also prohibits injunctions that conflict with state law restraints on profession, trade or business. In other words, the inevitable disclosure doctrine should not be available under the DTSA as a substitute for proof of actual or threatened misappropriation.

No preemption; dual forums. The DTSA does not preempt the states' enactments of trade secret laws under the UTSA or otherwise. Thus, an aggrieved trade secret holder will be able to choose its forum. In a standard trade secret case not involving foreign theft or the extraordinary need for immediate seizure, most trade secret holders likely will continue to opt for state court. Normally, injunctive relief is more readily available in state court, and these courts may offer the advantages of faster calendars, simpler procedural and pretrial rules, and non-unanimous juries. Federal judges are also more likely to grant motions to dismiss and motions for summary judgment. These differences may make a state court trade secret forum more attractive, especially where immediate civil seizure is not required.

Declaratory judgment action. In one of its most important ? and largely overlooked ? benefits, by establishing a federal cause of action for trade secret misappropriation, the DTSA may provide grounds for a person or company threatened with a trade secret suit to immediately file a declaratory judgment action in federal court. Pursuant to the Declaratory Judgment Act, "In a case of actual controversy within its jurisdiction ... any court in the United States ... may declare the rights and other legal relations of any interested party seeking such declaration." While declaratory judgment actions are common in patent and trademark litigation ? especially after the U.S. Supreme Court eased the threshold to include any case with a "substantial controversy ... of sufficient immediacy and reality" in MedImmune Inc. v. Genentech Inc., 549 U.S. 118,127 (2007) ? the DTSA now provides a declaratory judgment path for potential trade secret defendants to initiate a federal action in their choice of forum.

While trade secret holders may opt to continue to file cases in more lenient state courts, a former employee or its new employer, threatened with a trade secret claim may now elect to file a preemptive suit in its local federal court under the DTSA. For example, if the former employer is from a jurisdiction which adheres to the inevitable disclosure doctrine, on receipt of a demand letter a former employee and/or its new company may choose to immediately file a case in federal court under the DTSA. The decision to start litigation is always difficult, but when faced with an imminent state claim, the prospect of curtailing the application of the inevitable disclosure doctrine or other state court theories and/or securing a local federal court makes the DTSA a powerful weapon.

Preemption of alternative civil claims? Federal judges will have to grapple with many of the same issues that state courts are still considering. The UTSA provides for preemption of tort or other non-contractual civil remedies for misappropriation of trade secrets, although not all states have adopted these provisions. For example, in California, civil common law claims for unfair competition, interference, conversion, etc. are preempted if they arise out of the same facts as the claim for misappropriation of trade secrets. Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210 (2010). Alternative claims for breach of contract, express civil statutory claims and criminal claims are not preempted.

The DTSA has no corollary to the UTSA preemption language. Existing federal law to which the DTSA was appended expressly states that there will be no preemption of other civil remedies for misappropriation of trade secrets. Does this mean that in federal court a plaintiff could assert both a claim under the DTSA and these alternative common law claims, but could not assert these other claims in California state court? The better view may be that the state UTSA law preempts these alternative common law causes of action based on the same misappropriation facts regardless of the forum or whether a DTSA claim is brought.

Identification of trade secrets? California and some federal courts have adopted strict pleading rules for identification of trade secrets prior to the plaintiff obtaining discovery. This requirement seeks to avoid "fishing expeditions" by a plaintiff who files suit but wishes to craft its definition of the trade secrets based on what discovery shows the defendant is doing. California and other courts require filing this disclosure under seal before discovery and before any injunctive relief may be considered or granted. The trade secrets must be disclosed with "particularity," often leading to intense and prolonged battles at the beginning of the case as to the adequacy of the identification. Will these strict pleading requirements also be required in California federal courts construing the DTSA? Will they spread across the country? Significantly, the Senate Report accompanying the DTSA states that before granting ex parte seizures, courts will likely "require applicants to describe the trade secret ... with sufficient particularity so that the court may evaluate the request."

The DTSA federalizes the last major area of intellectual property law, trade secrets. Absent extraordinary circumstances, trade secret holders may prefer to rely on established UTSA state law. But those threatened with a trade secret case in an unfriendly state law jurisdiction now have the important tool of bringing a preemptive declaratory judgment action under the DTSA in federal court.

Benjamin K. Riley is a principal in Bartko Zankel Bunzel & Miller.