Today, President Obama signed the Defend Trade Secrets Act (DTSA), a substantial expansion of trade secrets law and the most significant piece of federal intellectual property legislation since the America Invents Act of 2011. The DTSA will strengthen the hand of trade secret plaintiffs while giving them a new array of strategic options and remedies for misappropriation, including a broad ex parte seizure right. It is also likely to increase the amount, complexity, and cost of trade secret litigation.
DUPLICATIVE FEDERAL CAUSE OF ACTION
The DTSA, codified in 18 U.S.C. § 1836, creates a federal cause of action for trade secret misappropriation, which was previously the exclusive domain of state law. It does not preempt state trade secret laws but instead provides a separate and distinct cause of action in federal court. In the wake of the DTSA, a plaintiff can choose its forum and may sue under either the applicable state law, federal law, or both.
Prior to the DTSA, forty-seven states and the District of Columbia had adopted the Uniform Law Commission’s model Uniform Trade Secrets Act, albeit with some variation in statutory language and judicial interpretation. The DTSA preserves the differences between these state laws and layers on top of them an additional regime of federal law whose language is itself very similar to that of the Uniform Trade Secrets Act but still reflects important differences.
For example, there is a division of authority as to who may bring a trade secret lawsuit. Some state courts have required that a plaintiff “own” the trade secret or at least have the legal right to prevent further dissemination, while others have allowed non-exclusive licensees or other mere possessors of the trade secret to file suit. The DTSA permits only “owners” of trade secrets to bring a federal cause of action. But federal trade secret law contains a broad definition of “owner” that includes “the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed.” 18 U.S.C. § 1839(4) (emphasis added). Unlike in the patent context, in which only exclusive licensees have standing to sue, this language seems to suggest that any non-exclusive licensee may file a federal trade secret suit (though the statute’s use of the singular term “the person” may cause courts to bar multiple, non-exclusive licensees from bringing suit).
In addition, different laws provide different measures of damages. In many state courts, for example, a plaintiff is required to elect either actual damages or unjust enrichment, but not both. The DTSA will allow a plaintiff to recover both its own actual damages and the defendant’s unjust enrichment, so long as the latter is not used to calculate the former. And if the term “owner” in the DTSA is interpreted to include both exclusive and non-exclusive licensees, multiple federal trade secret plaintiffs may each be able to recover a defendant’s unjust enrichment though their own damages are minimal.
These occasional differences between the duplicate federal and state regimes of trade secret law may complicate and inflate the cost of trade secret litigation. This is ironic given that a stated purpose of the DTSA was to provide uniformity in trade secret law. Instead, the DTSA further fragments trade secret law as most trade secret cases will now require interpretation of two separate statutes. While federal courts will likely look to existing state court decisions to interpret identical terms in the DTSA, there will be persistent questions as to which state law the DTSA mirrors and whether small language differences have substantive implications. As a result, most trade secret litigations will give rise to a steady stream of disputes as to whether the contours of the federal cause of action mirror or diverge from the applicable state law. Of course, any differences accrue to the advantage of the plaintiff, who need only prevail under state or federal law, not both.
The differences may be particularly significant for trade secret litigation brought in New York, which did not adopt the Uniform Trade Secrets Act. Enactment of the DTSA, which is modeled on the Uniform Trade Secrets Act, will give New York trade secrets plaintiffs access to the rights and remedies of trade secret plaintiffs in other states as well as those under New York law.
CHOICE OF FORUM
Enactment of the DTSA also gives trade secret plaintiffs their choice of a federal or state forum. The new federal trade secret cause of action will create federal subject matter jurisdiction over federal claims, but a trade secret plaintiff who believes that state court offers strategic or tactical advantages is free to bring his claims solely under state trade secret law. Unless a state court trade secret defendant meets the traditional requirements for diversity-based removal jurisdiction, it must remain in state court, notwithstanding the DTSA. Conversely, a federal DTSA plaintiff may bring its additional state law claims in federal court based on supplemental jurisdiction.
NEW SEIZURE RIGHT
The most significant difference between the DTSA and existing state trade secret protection is the DTSA’s drastic new ex parte seizure remedy, which allows seizure – by law enforcement – of a defendant’s computer systems or other property without notice or the opportunity to be heard. Based on the plaintiff’s “affidavit or verified complaint,” the DTSA permits a federal court to “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action,” with “law enforcement officials executing the seizure” using “force” – all “upon ex parte application.”
The “necessary” seizure may be very broad in the context of modern information technology. For example, if a file containing an alleged trade secret has been sent to a corporate email list, embedded in a file system, or stored on a corporate server, a court may decide it “necessary” to seize every device on which the information resides.
However, the DTSA does contain significant limitations on the circumstances in which a seizure order may issue. For example, a court may not grant a seizure order unless it “clearly appears” from “specific facts” that: (1) traditional preliminary injunctive relief or other equitable relief would be inadequate because the defendant would evade or not comply with such an order; (2) the plaintiff will suffer immediate and irreparable injury absent a seizure, that the balance of harms favors a seizure; (3) the defendant misappropriated or conspired to misappropriate a trade secret by improper means; (4) the defendant possesses the trade secret and the property to be seized; and (5) the defendant would destroy, move, or hide, the property to be seized if given advance notice. In addition, the seizure power is to be exercised only in “extraordinary circumstances.”
Properly enforced, these limitations may significantly reduce the availability of seizure orders. For example, the requirement that preliminary injunctions under Rule 65 “or another form of equitable relief” be inadequate should require that a Court consider alternative possibilities, including relief directed at third parties under the All Writs Act or other statute. Moreover, the requirement of “specific facts” should force plaintiffs to come forward with substantial, concrete evidence indicating that the defendant would seek to evade a court order, not just assertions or generalized concern. And the “extraordinary circumstances” language, properly applied, will ensure that seizure orders are not issued in the vast majority of cases.
However, there still remains a risk of misuse. Matters often appear clear when only one side has the chance to be heard. And it is possible to characterize many cases as “extraordinary.” Though the text of the statute and the final version of the legislative history indicate that the “extraordinary circumstances” requirement is intended to be a separate, additional limitation, courts may find that extraordinary circumstances exist whenever a plaintiff has made a showing that satisfies the DTSA’s list of specific prerequisites for a seizure order. If so, ex parte seizure orders may become a distressingly common aspect of trade secret litigation.
Indeed, federal law enforcement agencies already have the authority to seize stolen trade secret material after proper law enforcement investigation. See 18 U.S.C. §§ 1823, 2323. The key difference with the DTSA’s seizure right is that prior remedies operate based on the initiative and decision-making of disinterested and independent law enforcement. By contrast, the DTSA contemplates seizures that, while carried out by law enforcement, occur on the order of a judge with no investigative resources and in reliance on the averments of a competitor or other market participant.
It seems that Congress contemplated a remedy for espionage-type theft without considering the ways in which the seizure provision may be weaponized in the context of inter-corporate intellectual property litigation over improper but non-criminal dissemination of information. Unfortunately, in the espionage-type case the information will have been transmitted abroad, placing it outside the reach of law enforcement deputized to seize property under the DTSA. That leaves US entities as the primary de facto targets of the seizure provision. At the same time, enactment of the DTSA may induce foreign governments to pass similar laws that are used against US corporations operating abroad.
Another impact of trade secret law is to restrict the movement of employees who may have learned trade secrets in their previous job. Some states recognize an “inevitable disclosure” doctrine by which a new employee will be assumed to share with his or her new employer the trade secrets he or she learned in his previous position. This “inevitable disclosure” can be a basis for finding misappropriation and for injunctive relief against hiring an employee or placing conditions on his new employment. Other states, most prominently California, reject the “inevitable disclosure” doctrine and have substantial protections for employee mobility.
The DTSA seeks to leave matters as they are on this score and to avoid federalizing the “inevitable disclosure” doctrine. The law contains language intended to prevent federal injunctions against hiring another company’s employee and to defer to state law governing employee movement. The DTSA thus prohibits injunctions that prevent new employment relationships, that base conditions on such employment merely “on information the person knows” rather than “threatened misappropriation,” or that conflict with state law “prohibiting restraints on the practice of a lawful profession, trade, or business.” Conversely, as the legislative history makes clear, “if a State’s trade secrets law authorizes additional remedies, those State-law remedies will still be available.”
However, the DTSA’s language limiting federal relief to non-“inevitable disclosure” situations appear only in the subsections addressing injunctive relief and not those addressing damages. Thus, the DTSA may be interpreted to allow federal courts in a state such as California to award damages against a new employer and its employee based on an inevitable disclosure theory of misappropriation though no injunction may issue. If so, the practical effect will be to impose a substantial limitation on employee movement as a practical matter in derogation of the intent of laws in states such as California.