Questions remain 1 year into the DTSA

One year ago, when the Defend Trade Secrets Act (DTSA) was enacted, Forbes magazine christened it the "Biggest IP Development in Years." The DTSA created a new federal cause of action for trade secret violations, and introduced new procedural options in pursuing such claims. In the year since its enactment, approximately 70 cases asserting DTSA claims have been filed in California federal courts, but it is still too early to tell how much impact the DTSA actually is having on trade secret law in California.

Ex Parte Seizure Remedy Has Not Been Implemented

A potent remedy potentially available under the DTSA not available under the California Uniform Trade Secret Law (CTSA) other state Uniform Trade Secrets Acts is the ability to seek an ex parte order to seize stolen trade secrets in the defendants' possession "necessary to prevent the propagation or dissemination of the trade secret." 18 U.S.C. Section 1836(b)(2)(A)(i).

In order to order ex parte seizure, the court must find that: (i) another form of equitable relief would be inadequate because the party to be enjoined would evade, avoid, or otherwise not comply; (ii) immediate and irreparable injury will occur if the requested seizure is not ordered; (iii) the harm to the applicant outweighs the interests of the party to be enjoined and substantially outweighs potential harm to third parties; (iv) the applicant is likely to succeed on the merits; (v) the party to be enjoined has actual possession of the trade secret; (vi) the ex parte request specifically describes the items to be seized with reasonable particularity; (vii) the party to be enjoined would destroy, move, hide, or otherwise make the requested items inaccessible to the court; and (viii) the applicant has not publicized the requested seizure.

The first required showing - that a party would evade or otherwise fail to comply with another form of equitable relief - may well be the most significant hurdle for a plaintiff to clear. In California, only one court to date has addressed an ex parte request for seizure, and that court declined to order the seizure. In OOO Brunswick Rail Mgmt. v. Sultanov, 2017 U.S. Dist. LEXIS 2343, *5 (N.D. Cal. Jan. 6, 2017), the court found seizure under the DTSA unnecessary because it ordered defendant to deliver to the court all the devices plaintiff identified as containing trade secret materials and ordered the devices not to be accessed or modified prior to delivery to the court. Sultanov highlights the substantial difficulty in preparing an ex parte application sufficient to obtain the requested seizure relief. Plaintiffs seeking ex parte seizure relief should consider making a written demand on the defendant requesting forensic analysis of all devices reasonably believed to contain trade secret information.

Statute of Limitations Has Been Construed to Maximize Reach

Although the DTSA was only enacted a year ago, California federal courts have been willing to construe its limitations period to allow it to cover actions substantially predating its passage. The DTSA shares CUTSA's three-year statute of limitations, and - also like CUTSA - the DTSA provides that a continuing misappropriation constitutes a single claim of misappropriation, such that each new act of misappropriation does not restart the statute of limitations. Applying that provision, California federal courts have so far held that trade secrets that were allegedly misappropriated before DTSA's May 11, 2016, effective date can form the basis of a DTSA claim, so long as the plaintiff alleges that the trade secrets misappropriated were used after May 11, 2016. AllCells, LLC v. Jack Zhai, 16-cv-07323-EMC (N.D. Cal. Mar. 27, 2017).

Unclear If CCP 2019.210 Heightens DTSA Plaintiffs' Pleading Burden

California Code of Civil Procedure Section 2019.210 requires a trade secret plaintiff to identify the trade secrets it alleges are misappropriated with "reasonable particularity" before discovery can begin on any claim relevant to the allegedly misappropriated trade secret. The 9th U.S. Circuit Court of Appeals has not addressed whether Section 2019.210 applies in federal court, and the district courts within the circuit are split. The DTSA does not contain the express requirements of Section 2019.210. With one exception, every case out of the approximately 70 filed in California federal court with a DTSA claim or counterclaim also alleged a CUTSA claim which meant the plaintiffs had to meet Section 2019.210's pleading requirements, so there is no indication at this point as to whether a DTSA plaintiff who dies not also allege a CUTSA violation will be spared the duty of a Section 2019.210 disclosure.

How Whistleblower Protection Will Be Applied Is Uncertain

A new twist that was part of the negotiations leading to the DTSA's passage is a provision that whistleblowers are immune from criminal or civil liability for disclosing a trade secret in confidence to a federal, state, or local government official or attorney, when such disclosure is solely for the purpose of reporting or investigating a suspected violation of law.

The DTSA encourages employers to disclose the whistleblower immunity by providing that an employer cannot recover punitive damages or attorney fees in a DTSA action against an employee/consultant unless the employer protected notice of the DTSA whistleblower protections in its employment contract or agreement with the employee/consultant. There is nothing in the statute that suggests that this same immunity extends to new employers or others who were not in an employment relationship with the employer.

California federal courts have not yet addressed the DTSA's whistleblower provisions, The first reported decision applying the whistleblower immunity provision was issued on Dec. 6, 2016. Unum Group v. Loftus, 4:16-CV-40154-TSH (D. Mass. Dec. 6, 2016). In that case, the plaintiff sued an employee for federal and state trade secret misappropriation as well as state law conversion after the employee removed several boxes of information and a laptop computer from the plaintiff's offices after usual business hours. The employee asserted he had taken the materials in part because they may be relevant to a matter on which the employer was being subject to a government regulation, and asserted immunity under DTSA's whistleblower protections. In refusing to dismiss the action, the court treated the whistleblower provision as an affirmative defense, noting inter alia that the record lacked facts to support or reject his affirmative defense at the current stage of litigation. If other courts follow the Unum Group's lead in treating the whistleblower protections as simply another affirmative defense, then the provision's effect on trade secret litigation may be less than many initially anticipated.

Courts in California and elsewhere will continue to address and resolve issues relating to whistleblower immunity. Companies should assess their own risks and, in conjunction with counsel, make decisions regarding disclosure of the whistleblower protections in the DTSA.