The troubling intersection of the DTSA and state caselaw

The most common sentiment in federal trade secret opinions is that the Defend Trade Secrets Act is "substantially similar" to the forum-state's Uniform Trade Secrets Act. Perhaps they are similar; but they are not the same. Yet, because of a dearth of federal cases on federal trade secret law, courts often use this "similarity" as a gloss to apply a wealth of state trade secret caselaw to federal trade secret cases. That gloss has -- and will continue to have -- an impact on the development of federal trade secret law, including as a source of conflict as the DTSA matures.

With the third anniversary of the enactment of the DTSA approaching, this article seeks to elucidate issues with this reliance on state trade secrets caselaw in federal DTSA cases. Without taking substantive positions, the article suggests that the source of substantive DTSA law should come less from its state-law cousins and more from the DTSA itself (and the DTSA's sister statutes).

Recognizing the Shadows Cast By Similarity

The DTSA provides trade secret owners with a federal civil cause of action for misappropriation. The Uniform Trade Secrets Act, which is the template for many state trade secret regimes, formed the nucleus of the DTSA. But, the DTSA and its state- (and uniform-) law counterparts are not identical. For one, the DTSA has many unique elements, such as an interstate commerce jurisdictional nexus requirement; a civil seizure provision; and parallel federal criminal elements giving rise to predicate acts under RICO. For another, the DTSA did not simply provide for a federal forum for state trade secret cases: it is an independent federal civil cause of action over which federal district courts have original jurisdiction.

Nonetheless, federal courts often rely on state trade secret caselaw to interpret the DTSA. For example, one perennial question in trade secret litigation is whether compilations of otherwise public data -- often in the form of lists of customers or investors or business opportunities -- constitute trade secrets. Courts encountering this question under the DTSA have tended to rely on definitions or tests provided under state law. In Radiant Global Logistics, Inc. v. Furstenau, CV-12783 (E.D. Mich. 2019) (presently on appeal), the district court looked to substantive Michigan law to determine whether a customer list constituted trade secrets in proceedings for a preliminary injunction under the DTSA. Similarly, in RV Horizons, Inc. v. Smith, CV-02780 (D. Colo. 2019), the district court looked to cases interpreting state law to conclude that whether an investor list constitutes a trade secret is a "mixed question of law and fact" precluding summary judgment.

State law also shows up in pleading standards. Federal courts have generally confirmed that the DTSA is not subject to the heightened pleading requirements of Rule 9(b). But, where this conflicts with local state-law requirements, courts have generally required more particularity. For instance, in Teradata Corp. v. SAP S.E., CV-03670 (N.D. Cal. 2018), the court dismissed the plaintiff's first amended complaint because it did not "describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade." The imposition of this requirement (of pleading a trade secret with particularity) was rooted entirely in California state trade secret law. Other states appear to have similar requirements, which could end up bleeding into pleading standards. Cf. Radian Global (Michigan law requires trade secrets "must be identified clearly, unambiguously, and with specificity").

Additionally, state procedural law has been applied to some trade secret cases in California federal court. California Code of Civil Procedure Section 2019.210 prevents discovery from commencing under California's UTSA until the plaintiff "identif[ies] the trade secret with reasonable particularity." Federal courts sitting in California split on the applicability of Section 2019.210 in DTSA cases. Some courts, such as Alta Devices, Inc. v. LG Elecs., Inc., CV-00404-LHK (N.D. Cal. 2019), have required federal plaintiffs to identify its trade secrets with particularity under Section 2019.210. Others, such as Swarmify, Inc. v. Cloudflare, Inc., CV-06957 (N.D. Cal. 2018), have questioned "whether or how this provision should apply" in federal actions.

Seeing Through the Shadows

It may very well be that there are good reasons to require intermediate (or even heightened) pleading for trade secret cases, or to require the plaintiff to identify its trade secret(s) with "reasonable particularity" early in the lawsuit, or to rely on state law to define the protectability of a list. But the question remains: on what basis? The DTSA alone does not appear to necessarily require heightened pleading or early disclosure of trade secrets. Notably, the Swarmify court justified its Section 2019.210 Order under its inherent authority to manage discovery and its docket, suggesting that local rules, protective orders, scheduling orders, or standing orders may be appropriate and effective tools.

Similarly, we should be cautious of over-reliance on state law to gloss over substantive issues in the DTSA, particularly regarding definitional issues of "misappropriation" and "trade secrets." Certainly, it may be that compilations or lists of otherwise public information are protectable (indeed, the DTSA explicitly lists "compilations" in its definition of "trade secret"). And, it may be that whether a list is a trade secret is entirely a matter for the fact finder and not amenable to summary judgment. But we should be cognizant of the fact that these may not be necessary conclusions dictated by the DTSA. Particularly where law may differ state-to-state (and whether a list or compilation is protectable is one such area), we must continue to scrutinize the basis for these rules. So, while it may be acceptable for the same information to constitute a trade secret under the Michigan UTSA but not the Texas UTSA, it may not be acceptable for the information to be a protected as a federal trade secret in the Eastern District of Michigan but not protected in the Eastern District of Texas.

Conclusions

State law will cast long shadows over the DTSA. Some of this is by design. For instance, the DTSA left inevitable disclosure doctrine alone, instead leaving that injunctive remedy to interpretation by state law. See 18 U.S.C. Section 1836(b)(3)(A)(i). Other issues may likewise be resolved under state law, including whether and to what extent a duty not to disclose arises under state contract or fiduciary law. State contract, fiduciary and trade secret law in such instances may be entirely dispositive of misappropriation and injunctions under the DTSA.

I will close with an example: In an important opinion from the Northern District of California, Judge Alsup addressed the question of whether a corporate director or officer could be held personally liable for trade secret misappropriation. Genentech, Inc. v. JHL Biotech, Inc., CV-06582 (N.D. Cal. 2019). Presented with a request for a preliminary injunction under both the California UTSA and the DTSA, Judge William Alsup adopted the test set out by California courts interpreting California's UTSA regarding director and officer liability. Without in any way commenting on the result, one may question why California law should necessarily supply the rule for an injunction under the DTSA. The DTSA itself includes a host of clues regarding how to approach these issues, including within the definitions of "misappropriation" and "improper means" as well as the creation of new predicate acts for conspiracy theories of liability under civil-RICO. And further, the interpretation of similar federal statutes (such as copyright, trademark and patent statutes) provide fertile ground for developing law on secondary, contributory, and vicarious misappropriation, even without reference to the law of the states in which the court sits.

The DTSA is still in its infancy. Certainly, there is a lot to learn from its state trade secret law. But the DTSA is an independent federal statute and we should beware of creating a fifty-headed chimera where, for instance, officer and director liability is predicated on one of fifty state rules. 