On September 27, 2016, in Adams Arms, LLC v. Unified Weapon Systems, Inc., et al., the U.S. District Court for the Middle District of Florida issued one of the first substantive opinions concerning claims brought under the new Defend Trade Secrets Act (“DTSA”).
The DTSA, which became effective on May, 11, 2016, expanded the jurisdiction of federal courts by, among other things, creating a new federal civil cause of action for trade secret misappropriation when “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Although the DTSA has been hailed as the new “national standard for trade secret misappropriation,” with certain exceptions, its provisions are largely consistent with the well-known Uniform Trade Secrets Act (“UTSA”) currently adopted by 48 states, the District of Columbia and the U.S. Virgin Islands. The DTSA prohibits both the improper “acquisition” of a trade secret as well as its “disclosure.” As the DTSA continues to make its first impressions on federal courts around the country, threshold questions have arisen concerning the timing of misappropriations and what theories of recovery apply under the freshly minted law.
At issue in Adams Arms was whether a plaintiff can recover under the DTSA for trade secret misappropriations that occurred both before and after the DTSA’s effective date but within its three-year statute of limitations period. In resolving this issue, the Court relied on the plain language of the DTSA in limiting the applicability of the “continuing misappropriations”, “acquisition”, and “disclosure” theories of recovery.
Adams Arms involved a private arms deal to sell high-powered rifles to the Peruvian Army that was turned upside down by corporate intrigue and espionage. Adams Arms, LLC (“Adams”) specializes in manufacturing high-powered military riles and other small arms and markets its products to various military and law enforcement agencies around the world. Adams’ rifles allegedly achieved their high degree of reliability through a number of trade secrets involved in the manufacturing process and various components of the rifles. Defendants, Aguieus, LLC (“Aguieus”) and its subsidiary, Unified Weapon Systems, Inc. (“UWS”), approached Adams with an offer to jointly bid to sell rifles to the Peruvian Army. As part of the deal, Adams alleged, it had to disclose certain trade secrets to UWS and Aguieus, and the usual confidentiality and non-disclosure agreements ensued. Adams alleged, however, that, during this process, Defendant, Major General James W. Parker (“Parker”), approached Adams and offered his consulting services in negotiating the rifle contract with UWS. Adams accepted Parker’s offer but, alleged that it was unaware that Parker was a director and advisor to UWS and intended to share the additional trade secret information he obtained through his position with Adams with the rest of the UWS team.
What came next sparked a battle. After allegedly utilizing the trade secrets obtained from Adams to submit its bid, UWS received the arms contract award from the Peruvian Army. With the deal in hand, UWS then sought to exclude Adams from the transaction and manufacture the new rifles in the Peruvian Army’s existing facilities. Adams cried foul, alerted the Peruvian Army of UWS’ alleged conduct, and immediately brought suit.
UWS and the other named Defendants challenged Adams’ DTSA claims, arguing that the claims were barred under a “continuing misappropriation” theory. Because the DTSA provides that “a continuing misappropriation constitutes a single claim of misappropriation,” and because the Defendants allegedly acquired the trade secrets before the DTSA’s effective date, the Defendants argued that all of the misappropriation claims were barred as a matter of law. In other words, the Defendants argued for an all-or-nothing interpretation―i.e., because Adams’ claim was a single misappropriation that accrued before the DTSA’s effective date and the DTSA cannot be retroactively applied, Adams failed to state a claim. Defendants relied on the DTSA’s statute of limitations provision that states, in pertinent part:
A civil action under [18 U.S.C. § 1836(b)] may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been disclosed. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.
The Court rejected the Defendants’ argument and held that, based upon the “for purposes of this subsection” language in the last sentence of Subsection 1836(d), the DTSA limits the applicability of the “continuing misappropriations” theory to determinations of whether a claim falls within the DTSA’s three year statute of limitations period. In addition, the Court rejected the Defendants’ all-or-nothing interpretation and construed Section 2(e) of the DTSA to allow for partial recovery when an “act” of misappropriation occurring on or after the DTSA’s effective date is alleged. As support for its interpretation, the Court noted that the DTSA did not include the limiting language found in Section 11 of the UTSA, which prohibits application of the UTSA to continuing misappropriations occurring after its effective date.
With this interpretation in mind, the Court turned to Adams’ allegations and theories of recovery and made two conclusions: (1) Adams failed to state a claim under its “acquisition” theory of recovery because the Defendants acquired the trade secrets prior to the DTSA’s effective date; but (2) Adams did state a claim under its “disclosure” theory of recovery because the allegations supported an inference that the Defendants disclosed Adams’ trade secrets after the DTSA’s effective date.
The Court’s analysis and, most importantly, its interpretation of Section 2(e) of the DTSA leads to two significant observations:
- The “continuing misappropriations” theory is limited to determining whether a DTSA claim accrued within the three year statute of limitations period.
- The DTSA allows for separate “acquisition” and “disclosure” theories of recovery; however, to recover under either theory, the respective acquisition or disclosure must have taken place after the DTSA’s effective date.
Looking ahead, although Adams Arms represents the opinion of only one federal trial court, it may have lasting effects on federal courts and practitioners around the country as more and more litigants arm themselves with DTSA claims and wage battles in the war against trade secret misappropriation.