§ 6.03 Misappropriation Under the DTSA

• Jurisdiction: United States
• Publication year: 2020

§ 6.03 Misappropriation Under the DTSA

[1] Introduction

The definition of misappropriation under the DTSA is almost identical to that in the UTSA. Therefore, federal courts are likely to look to state decisions involving that state's version of the UTSA for guidance. In particular, Section 1839(5) defines misappropriation as:

"(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(B) disclosure or use of a trade secret of another without express or implied consent by a person who—

(i) used improper means to acquire knowledge of the trade secret;

(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

(I) derived from or through a person who had used improper means to acquire the trade secret;¹³⁸
(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

(iii) before a material change of the position of the person, knew or had reason to know that—

(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or mistake."¹³⁹

In turn, "improper means" "includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and . . . does not include reverse engineering, independent derivation, or any other lawful means of acquisition."¹⁴⁰

[2] Elements

To state a claim under the DTSA, the plaintiff must establish that it "owned" the trade secret. Very few UTSA decisions address whether legal ownership is necessary to support a claim for trade secret misappropriation. The Third Circuit in Advanced Fluid Systems, Inc. v. Huber,¹⁴¹ addressed whether Advanced Fluid Systems (AFS), "by virtue of its Agreement with [a third party] —a contract that explicitly designates the confidential information at issue in this case as the [third party's] 'exclusive property'—can maintain a trade secret misappropriation claim under Pennsylvania law."¹⁴² The Third Circuit affirmed that AFS did not have to own, in the traditional sense, the trade secret on which it brought suit. Rather, "[a] per se ownership requirement for misappropriation claims is flawed since it takes into account neither of the substantial interest that lawful possessors of the secrets have in the value of that secrecy, nor the statutory language that creates the protection for trade secrets while saying nothing of ownership as an element of a claim for misappropriation."¹⁴³ The court also agreed with the Fourth Circuit's holding in DTM Research, LLC v. AT&T Corp.¹⁴⁴ "of why lawful possession of a trade secret can, under circumstances like this, be sufficient to maintain a misappropriation claim, even absent ownership."¹⁴⁵ The AFS court stated: "The point is that it is not the sole kind of interest that is relevant and subject to protection. Appellants' briefing is devoid of any serious challenge to DTMs reasoning. Their argument, such as it is, lacks merit, and we reject it."¹⁴⁶

The court also rejected appellant's argument that because AFS's agreement with a third party included the transfer of any right to possess those trade secrets, AFS was "foreclosed" "lawfully possessing them."¹⁴⁷ However, "this ignores the uncontro-verted record that AFS not only physically retained possession of the drawings and other information constituting the trade secrets; it also was required to use, and in fact did use, those trade secrets to fulfill its obligations under the Agreement and in contracts that AFS and [the third party] entered into after the Agreement. Moreover, despite necessarily being aware that AFS physically retained and was using the trade secrets to fulfill its contractual obligations, the 'owner'[ ] of those secrets never once objected to, or even so much as questioned, AFS's retention or use of those secrets. It did not even push back when AFS affixed to documents containing the secrets a confidentiality notice asserting that AFS had an ownership interest in them."¹⁴⁸ Finally, while recognizing that ownership of a trade secret "undoubtedly imbues the owner with the authority to give others lawful possession including by merely consenting to that possession. Such possessory rights were given to AFS, even if a full ownership interest was not. The course of conduct evident in the record shows that AFS clearly had permission to hold and use the secrets."¹⁴⁹

In contrast, in order to bring suit under the DTSA, the plaintiff must be the owner of a trade secret that has been misappropriated, meaning the person has a "rightful legal or equitable title" to the trade secret. Where the plaintiff "explicitly extinguished" any right to the trade secret, a court may dismiss the claim.

Next, under 18 U.S.C. § 1836, a plaintiff must in general allege facts showing that (1) the plaintiff possessed a "trade secret," (2) the plaintiff "took reasonable measures" to protect the trade secret, and (3) the defendant misappropriated the trade secret. Another court has found that the elements required to establish a claim for misappropriation are: "(1) the existence of a trade secret; (2) the acquisition, use, or disclosure of the trade secret without consent; and (3) that the individual acquiring, using, or disclosing the trade secret knew or should have known the trade secret was acquired by improper means."¹⁵⁰ Some courts have held that the DTSA requires "use," although this understanding appears to be questionable.¹⁵¹ "Use" has been defined as "marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret . . . all constitute 'use.'"¹⁵² The plaintiff must also prove that the trade secret was used in interstate commerce¹⁵³ and that defendant's acquisition, disclosure or use of plaintiff's trade secret caused an injury.¹⁵⁴ This does not mean, however, that the plaintiff is entitled to monetary damages since the DTSA also provides for injunctive relief.¹⁵⁵ "To be personally liable, a corporate director or officer must have known or had reason to now of the misappropriation and then unreasonably participated in the unlawful conduct."¹⁵⁶ The DTSA provides immunity for the disclosure of a trade secret "in confidence . . . to an attorney . . . solely for the purpose of reporting or investigating a suspected violation of law."¹⁵⁷

Courts have held that a plaintiff has stated a plausible DTSA claim against the competitor-defendant where the plaintiff alleged that (1) its former employee acted as the defendant's agent in taking the plaintiff's trade secrets while still employed with the plaintiff and (2) the defendant later incorporated the trade secrets into its business.¹⁵⁸

[3] Categories of Misappropriation

Misappropriation under the DTSA includes three general categories: (1) unauthorized acquisition, (2) unauthorized disclosure, and (3) unauthorized use.¹⁵⁹ The disclosure or use must be by a person who knew or had "reason to know"¹⁶⁰ that the knowledge of the trade secret was derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret.¹⁶¹ Though the DTSA distinguishes between acquisition, use, and disclosure as separate activities which may constitute a misappropriation, these separate activities may be taken together to constitute a single misappropriation if the misappropriations are related.¹⁶² On the other hand, this also suggests that unauthorized acquisition, disclosure, and use can constitute separate claims under the DTSA. In comparison, under the California Uniform Trade Secrets Act (CUTSA), "a claim for misappropriation against a defendant arises only once, when the trade secret is initially misappropriated, and each subsequent use of the secret augments the initial claim rather than arises as a separate claim."¹⁶³ To survive a motion to dismiss a trade secret misappropriation claim, the plaintiff must allege facts that plausibly support the claim that the defendant "'acquired the trade secrets by one of the improper means listed [under the statute].'"¹⁶⁴

However, the Eleventh Circuit in Compulife Software, Inc. v. Newman-¹⁶⁵ held that the Florida Uniform Trade Secrets Act (FUTSA), and by extension other state statutes based on the UTSA, including the DTSA, do not provide an exhaustive list of what constitutes improper means. Compulife and the defendants are direct competitors in the business of generating life insurance quotes. Compulife obtains rate tables from insurance companies, which are publicly available, compiles this information, and makes them publicly available on a website that allows visitors to obtain life insurance quotes at no cost. Defendants using bots "scrapped" every possible combination of demographic data, totaling more than 42 million quotes. This is far more than the amount of information that could have been obtained through any other process, which the court found significant.¹⁶⁶ Compulife alleged that the defendants then used the scrapped data as a basis for generating quotes on their own websites. According to Compulife, these facts establish a claim of misappropriation under the FUTSA.

With regard to the "improper means" holding, the Eleventh Circuit "paused to unpack" this concept and noted that the FUTSA "may apply in both the acquisition and use contexts" and " 'improper means' is defined to include 'theft, bribery, misrepresentation, breach or inducement or a breach of a duty to maintain secrecy or other means.'"¹⁶⁷ The court...