Federal trade secrets law: year in review

In May 2016, the Defend Trade Secrets Act was enacted, and since that time, the DTSA has been used to assert federal jurisdiction in over 125 lawsuits. (Currently, Public Access to Court Electronic Records does not provide a numerical designation for trade secret cases as it does with other kinds of cases, so tracking DTSA lawsuits remains imprecise). Since May, early filing trends and rulings show that although courts have started to answer some DTSA questions, others remain, and practitioners will need to continue to monitor as the practice and case authority evolves.

Although the DTSA opened the door to federal court for civil trade secret misappropriation claims, thus far, it has not rendered state court trade secret claims obsolete. Indeed, since the DTSA's enactment, the number of trade secret complaints filed in California state courts, 42, is on par with California federal courts, 45. There could be many reasons why some litigants have continued to opt for state court, including a more developed body of law under California's Uniform Trade Secrets Act (CUTSA), greater comfort with the state courts' approach to trade secret claims and uncertainty about the DTSA, such as whether the DTSA even covers the trade secret violations at issue and its inability to meet the seemingly easy interstate/foreign commerce jurisdictional predicate. In any event, it is probably too early to tell whether this filing pattern will continue or whether federal court will eventually become the predominant forum for trade secret litigants.

The DTSA also has not rendered CUTSA obsolete in federal court. Of the cases asserting DTSA claims in California federal courts, about a third, 17, have also asserted claims under CUTSA. Again, it is difficult to discern, at this stage, if strategic considerations have driven whether or not parties have pleaded a parallel CUTSA claim. Aside from ex parte seizure, the remedies under CUTSA and the DTSA are very similar, as are their definitions of trade secret and misappropriation, making the claims largely redundant. There are procedural hurdles for plaintiffs pursuing CUTSA claims to commence discovery (namely, the identification of trade secrets with reasonable particularity), which in theory could influence pleading strategy. In the opinions that have addressed both CUTSA and DTSA claims, courts have analyzed the misappropriation issues the same, as Judge Jon Steven Tigar of the U.S. District Court for the Northern District of California did in the first opinions evaluating a temporary restraining order (TRO) and preliminary injunction under the DTSA in Henry Schein Inc. v. Cook, 3:16-cv-3166 (N.D. Cal. June 9, 2016), Dkt. Nos. 12, 19.

There has been limited motion practice on the jurisdictional question of whether the DTSA covers misappropriation that started before its enactment but continued after. The DTSA states that it only applies to misappropriation acts occurring on or after May 11, 2016. Misappropriation, however, is typically not a one-time act, and instead often involves improper acquisition followed by use or disclosure. Many of the early DTSA complaints plead misappropriation tracing to activity that occurred before May 11, but that also continues or is threatened after that date.

In California, it appears four defendants have challenged jurisdiction under the DTSA, but no courts have ruled yet. Outside California, there have been three pertinent decisions. The court in Dazzle Software II, LLC v. Kinney, 2:16-cv-12191 (E.D. Mich. 2016), simply dismissed without prejudice, with little analysis, and gave the plaintiff leave to re\assert a DTSA claim if it pleaded with specificity misconduct post-dating the DTSA. The two others, Adams Arms LLC v. Unified Weapon Systems Inc., 8:16-cv-1503 (M.D. Fla. 2016), which denied dismissal and Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group Inc., 1:15-cv-211 (S.D.N.Y. 2015), which granted leave to add a DTSA counterclaim, are more informative.

In Adams Arms, the plaintiffs alleged misappropriation based on improper acquisition before the DTSA's enactment and disclosure activity that continued after. The defendants argued that any continuity of a misappropriation should be treated as one misappropriation, relying on the DTSA's statute of limitations which notes that continuing misappropriation is treated as a single misappropriation claim. Therefore, defendants argued, any misappropriation occurred when defendants first acted, regardless of further activity after that. The court disagreed, finding the statute of limitations section inapplicable, and held that the DTSA applies to "any misappropriation ... for which any act occurs" after the effective date. The court did note that the plaintiffs could not proceed under an acquisition theory because that conduct occurred before May 11, but practically, this likely had little consequence, if any, on the plaintiffs' claim.

Thus, the early decisions lend support for finding jurisdiction so long as some misappropriation activity took place after the DTSA's enactment.

One of the most-hyped aspects of the DTSA, the ex parte seizure remedy, has had little impact so far. Although the prospect of a seizure remedy held allure for plaintiffs, there were concerns it could be abused. The seizure provisions that were ultimately adopted are mindful of those concerns and impose a high bar, with stringent requirements above those for other, traditional forms of early injunctive relief. Among other things, a plaintiff must demonstrate that a TRO would be inadequate because the perpetrator would evade it and would destroy, move or hide the item if notice were provided.

Thus far, only one party has pursued an ex parte seizure and was denied. In Dazzle Software, the plaintiffs alleged the defendant copied the entire contents of a computer onto external storage devices. When the defendant refused the plaintiffs' demands for the return of the computer and copied information, the plaintiffs pursued seizure, but the court declined and instead ordered expedited discovery and negotiation of a stipulated preservation order - a familiar path for trade secret litigants.

This decision reinforces that courts may view ex parte seizure as reserved for only unusual and extreme scenarios. Before the DTSA's enactment, the Senate and House Judiciary Committees noted "the ex parte seizure provision is expected to be used in instances in which a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately." It appears that practitioners have heeded the cautionary commentary and have opted for more traditional remedies, such as TROs, preservation orders and expedited discovery, in common trade secret fact patterns, such as employee taking employer's trade secret information to new employer.