A New Federal Action Transforms Trade Secrets Litigation

• Citation: Vol. 41 No. 4
• Publication year: 2016
• Author: JAIDEEP "JAY" VENKATESAN Bergeson, LLP

A New Federal Action Transforms Trade Secrets Litigation

JAIDEEP "JAY" VENKATESAN Bergeson, LLP

AFTER YEARS OF FAILED BILLS and stalled legislation, the United States government finally enacted the Defend Trade Secrets Act of 2016 on May 11, 2016 ("DTSA").¹ The new law creates a federal private right of action for parties alleging that other persons or entities have misappropriated their trade secrets. The DTSA was enacted against a backdrop of state trade secrets laws in forty-eight jurisdictions that are largely modeled on the Uniform Trade Secrets Act ("UTSA") published by the Uniform Law Commission in the 1980s.² Federal lawmakers believed that these numerous state laws had developed different standards governing trade secret protection, and the country would benefit from a national law.³ The enactment of the DTSA offers the potential for a uniformly applied federal trade secret law akin to the framework that exists for patent, copyright, and trademark law.

Complicating this development is the existence of a substantial body of state trade secrets law, modeled on the UTSA, which the DTSA itself is also modeled upon,⁴ including state and federal decisions interpreting those laws. In the few decisions involving the DTSA that have been issued subsequent to its enactment, plaintiffs have also asserted claims under concurrent state trade secret laws. This has caused courts to lean heavily on the existing precedent interpreting state law. In Henry Schein, Inc. v. Cook,⁵ the Northern District of California adjudicated a request for a temporary restraining order by a plaintiff asserting claims under both the California Uniform Trade Secrets Act⁶ ("CUSTA") and the DTSA. The court noted that the DTSA and the CUSTA included similar definitions of "trade secrets," and proceeded to apply earlier California decisions that had interpreted the CUSTA.⁷ Similarly, the Western District Court of Washington encountered claims under both the DTSA and Washington's trade secret act in Earthbound Corp. v. MiTek USA, Inc.⁸ The Earthbound court relied upon state and federal cases that interpreted Washington's trade secret law and other state laws modeled on the UTSA. In Berkley Risk Adm'rs Co. v. Accident Fund Holdings, Inc.,⁹ the District of Minnesota also examined claims brought under both the DTSA and Minnesota's trade secret act. It noted that the definition of trade secrets in the DTSA and the Minnesota act were substantially similar, and thus, "the court...construe[d] them as coextensive for purposes of [that] case."¹⁰

One can hardly blame courts for relying on a significant body of existing precedent interpreting laws similar to (indeed, based on the same model act as) the DTSA. As state and federal courts continue to rely on court interpretations of previously-enacted state laws in their local jurisdictions, the goal of creating a body of federal common law consistently applied across the nation has been frustrated.

Such preexisting local precedents may significantly affect application of the DTSA in California. The CUSTA has two particular requirements that are absent in the DTSA but may affect DTSA litigation: (1) the requirement that plaintiffs describe their trade secrets with particularity before taking discovery,¹¹ and (2) the CUSTA's preemption of common law claims that are based on acts of trade secret misappropriation.¹² This article summarizes the new DTSA and then addresses how those issues may impact attorneys litigating the DTSA in California.

THE FEDERAL DEFEND TRADE SECRETS ACT OF 2016

California litigators familiar with the CUSTA will recognize many elements of the DTSA, given that both acts are based on the Uniform Trade Secrets Act. Like the CUSTA, the DTSA defines a trade secret as information which "the owner has taken reasonable measures to keep...secret" and "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."¹³ An owner of trade secret information may bring a private action under the DTSA against a party it believes has misappropriated its trade secrets.¹⁴ As under the CUSTA, a plaintiff may obtain injunctive relief¹⁵ or damages for actual loss, unjust enrichment, or a reasonable royalty.¹⁶ The prevailing party can also recover its reasonable attorneys' fees if the other party has made a claim of misappropriation in bad faith or, conversely, is found to have willfully and maliciously misappropriated another's trade secret information.¹⁷

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The DTSA does contain a significant new provision that is absent in the CUSTA and other state trade secret laws - an ex parte civil seizure procedure to recover trade secret information and materials allegedly taken by another party. The seizure order provisions were modeled after the similar provisions for seizure of counterfeit marks in the Federal Lanham Act governing trademarks.¹⁸ Under this provision, a trade secret owner can apply ex parte under the DTSA for a court 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."¹⁹ Such an order can be obtained "only in extraordinary circumstances."²⁰ Through an affidavit or verified complaint, the applicant must establish that the information was a trade secret and was misappropriated, and that the person against whom the seizure order is to be enforced has actual possession of the trade secret information.²¹ The seizure order therefore cannot be obtained against a third party who was not involved in the misappropriation and/or does not possess the materials. The applicant must describe the materials (i.e., "matter") to be seized with reasonable particularity and identify the location of the matter to the extent reasonable under the circumstances.²² The applicant must establish that an ordinary injunction is inadequate to protect its trade secrets.²³ The applicant must also establish that it would suffer an immediate and irreparable injury if seizure is not ordered, and that...