The federal Defend Trade Secrets Act (DTSA) was enacted in May 2016 in large part to create a uniform national standard for trade secrets litigation, and to provide businesses with a remedy against foreign misappropriators. A number of interesting issues should begin to emerge in 2017 as courts begin to interpret the DTSA.
How Will Courts Applying the DTSA Handle Varying UTSA Case Law?
The House Judiciary Committee Report states that one goal of the Act was to “provide a single, national standard for trade secret misappropriation with clear rules and predictability for everyone involved.” Absent any DTSA case law, Congress expects courts interpreting the Act will look to case law under the similar terms of the Uniform Trade Secrets Act that has been in place for years in many states. The interesting question, however, is what state’s UTSA law should be persuasive. Should a federal court look primarily to the law of the state in which the court sits? What if that state law is in a minority on an important issue? Would it matter if the local legislature modified its version of the UTSA in a way that makes it less analogous for DTSA language than other states? There are some important differences between existing state trade secrets laws even among UTSA jurisdictions, such as the treatment of alleged trade secret information residing solely in a former employee’s memory; or the scope of injunctive relief available in cases involving trade secret customer lists. If federal courts in different states adopt varying nuances of their home states’ trade secrets law, how does that square with the Congressional intent to create a “single, national standard?”
What Does It Mean That DTSA Injunctions Must Not Be Inconsistent With State Laws?
Congress made clear that the DTSA does not preempt other federal or state remedies. The Act goes even further by providing in §1836(b)(3)(A)(i)(II) that any injunction issued under the Act must not “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” This was designed to accommodate state laws such as California Business & Professions Code §16600, which prohibits contractual restraints on practicing a lawful trade. Still to be answered is whether this section has broader effect. Does it mean that DTSA injunctions must follow state restrictive covenant laws? How far into the details of state covenant law must a DTSA court go? And which state’s covenant law should the court look to—the location of the court, the employee’s work site, the company’s headquarters, or the employee’s residence? Should a choice of law provision in a related agreement have any impact for this issue?
Threatened Disclosure Versus Inevitable Disclosure Injunctions
The DTSA prohibits so-called “inevitable disclosure” injunctions. Yet §1836(b)(3)(A)(i)(I) does not completely bar injunctions that impact the nature or scope of a defendant’s employment with a competitor. The Act provides that such an injunction must be based on evidence sufficient to show “threatened misappropriation,” and not simply on the basis of “information the person knows.” Very few cases colloquially described over the years as “inevitable disclosure” cases have been pure “knowledge” cases. Far more often, “inevitable disclosure” injunctions have been based on at least some finding that the defendant’s actions suggest an express or implied threat of misuse. Court decisions will begin to flesh out this distinction under the DTSA.
Will Seizure Provisions Impact Day-to-Day Litigation?
A much-debated provision of the DTSA authorizes ex parte seizure of property in extraordinary circumstances if such a seizure is necessary “to prevent the propagation or dissemination of the trade secret” at issue. The Act requires a showing that normal Federal Rule of Civil Procedure 65 remedies would not be adequate. Most courts have been hesitant to issue ex parte restraining orders under existing Rule 65 procedures. How often will courts be ready to issue an even more drastic order of ex parte seizure? Will this be a factor in domestic trade secrets litigation, which likely will represent the majority of DTSA activity? Or will it only be relevant where there is a risk that property will be spirited across international borders and away from the reach of U.S. courts?
Will the Ex Parte Seizure Provisions Relating to ‘Publicity’ Draw First Amendment Challenges?
The ex parte seizure portion of the Act says that the court “shall” take action to protect the defendant against whom an ex parte seizure is granted from “publicity” about the fact of such an order or seizure that is created “at the behest of the person obtaining the order.” The UTSA long has provided for closing proceedings and sealing records to protect alleged trade secrets during litigation. Yet the anti-publicity aspects of the DTSA go further by prohibiting any action to publicize the fact of a seizure. Indeed, an element of a claim for ex parte relief is that “the applicant has not publicized the requested seizure.” This could draw First Amendment challenges based both on the public’s right of access to court proceedings and litigants’ right of free speech.
The new DTSA will change how practitioners proceed with litigation, both in pure trade secrets cases, and in those involving both restrictive covenants and trade secrets claims. Access to a federal forum now is guaranteed under the DTSA. Yet beyond choice of forum, it remains to be seen whether the Act brings substantive change in trade secrets practice. The ex parte seizure provisions have drawn much attention, but that procedure will see limited use. By opting not to preempt state law, and providing that injunctions under the Act must not conflict with existing state laws regarding restraints on the practice of a trade or profession, Congress may have undermined its own stated intent of creating a uniform national standard for trade secrets litigation. If courts apply this provision aggressively, then the DTSA may further cement existing inconsistencies rather than usher in a uniform national approach. Court decisions in 2017 will begin to answer these questions.
Christopher Stief is managing partner of the Philadelphia office of Fisher & Phillips, co-chair of the employee defection and trade secrets practice group, and a core member of the international employers practice group.