Despite The Cheers, The Defend Trade Secrets Act Bill Has Holes: What’s A Plaintiff To Do If It Passes?

http://blogs.orrick.com/trade-secrets-watch/files/2014/05/7May2014-200x150.jpgState court or federal court?  If the Defend Trade Secrets Act of 2014 (DTSA) (S. 2267, introduced on April 29, 2014) becomes law, then trade secrets plaintiffs—not just those who can maintain diversity jurisdiction—could proceed in federal court under new federal law.  But would they want to?  While the knee-jerk reaction of many litigants is a resounding “Yes!,” we wonder whether federal court under the DTSA would be preferable to the well-known Uniform Trade Secrets Act (UTSA), which is available in forty-eight of the fifty states.

Let’s first look at where DTSA and the UTSA appear the same or similar.  Both statutes provide nearly identical definitions of trade secrets and misappropriation.  Both also offer similar remedies for injunctive relief, actual damages, unjust enrichment, reasonable royalties, punitive damages, and attorneys’ fees.

But DTSA appears to have some potential advantages over the UTSA.  The most distinguishing feature of DTSA is that plaintiffs would be able to seek an ex parte order for “seizure of any property used, in any manner or part, to commit or facilitate the commission of a violation.”  This section mirrors the requirements for injunctive relief available under the Lanham Act to seize counterfeit goods.  It appears that plaintiffs would be able to obtain an order to seize a computer, external device, or other instrument that a defendant had allegedly used to misappropriate plaintiffs’ trade secrets.  The materials would be under the custody of the court and a hearing would be set no later than fifteen days after the seizure to determine whether the seizure order should remain in effect.

In contrast, UTSA plaintiffs can ask a state court to order the return of the trade secrets in a TRO or preliminary injunction proceeding, but, as a practical matter, it may be difficult to convince a court to order a mandatory injunction like this, and it would be highly unusual for a state court to take custody over the trade secrets.  (State courts will often grant a TRO or preliminary injunction requiring defendants to preserve evidence, similar to the language found in the DTSA.)  For plaintiffs whose crown jewels have been misappropriated, seeking a DTSA seizure order could provide a clear and direct path for some peace of mind.

Also, while both DTSA and the UTSA provide for punitive damages, DTSA permits punitive damages up to three times actual damages, as compared to a cap of two times under the UTSA.  And the DTSA statute of limitations is a generous five years from discovery of the misappropriation whereas the UTSA statute of limitations runs out after three years.

DTSA also may lack some defendant-friendly aspects of the UTSA.  For example, many UTSA state courts have held that the UTSA bars any common law and some similar statutory claims, such as California’s unfair competition statute, that arise from the same “nucleus of facts” as the UTSA misappropriation claim.  In contrast, DTSA expressly states that DTSA does not displace or pre-empt state common law remedies, thus, DTSA plaintiffs might be able to tack on a number of common law claims, which are unavailable in a UTSA lawsuit.

It is also unclear whether DTSA has similar protections for defendants against unscrupulous plaintiffs seeking a peek at a competitor’s trade secrets.  Some UTSA states, like California and Florida, require trade secrets plaintiffs to identify their trade secrets with reasonable particularity before conducting any discovery related to the trade secrets.  This discovery prerequisite was enacted to help ward off the unsavory plaintiff, but the DTSA is silent on this requirement.

At this point, it would seem like proceeding in federal court under DTSA is a no-brainer.  Not so fast.  The path to federal courts has its own limitations.

First, federal jurisdiction is not automatic.  Plaintiffs would need to show that the misappropriated trade secret relates to a product or service used in, or that was intended for use in, interstate or foreign commerce (consistent with the Commerce Clause) or was for the benefit of a foreign government or agent.  One might imagine in today’s world that every product or service would meet this test, but there could be cases where the trade secrets in issue are far more localized, such as a local newspaper company’s trade secret customer list for sale of newspapers in the same town.

Second, we wonder if all federal district courts and district judges are prepared or set up to provide the emergency relief often available in state courts.  Many state court jurisdictions offer ex parte calendars, where a trade secrets plaintiff can appear before a judge and secure a TRO upon 24 hours’ notice and the same day as when they file a complaint.  In some state counties, no notice is required.  This is important because preserving the status quo is imperative for trade secret plaintiffs, and any delay in obtaining such relief could mean that they suffer irreparable harm at the hands of their competitors.

In contrast, some federal courts decide ex parte applications for a TRO on the papers and sometimes not for many days after filing.  Some federal judges are extremely reluctant to grant TROs as a matter of principle or practice and tend to decide only preliminary injunction motions.  When valuable trade secrets are on the line and a competitor seeks to gain unfair advantages with another’s trade secrets, the benefit of quick access to the courts may outweigh those benefits that DTSA offers.  And while some lawyers may believe that federal judges know the body of law best, depending on the jurisdiction—such as in the San Francisco Bay Area, where tech companies commonly assert trade secret actions—the state court judges may be just as familiar, if not more, with the relevant trade secrets law.

Additionally, judges in some state courts might be more comfortable with granting expedited relief and moving the case along quickly, particularly as discovery progresses.  A trade secrets plaintiff is almost guaranteed to face discovery battles and obstacles in obtaining necessary evidence and may have to bring a slew of discovery motions.  Federal magistrate judges often require the parties to jump through a variety of hoops before a party can bring a motion to compel, such as requiring an in-person meet and confer or a joint motion to compel.  Those hoops are often lower to the ground and far less numerous in many state courts.

If DTSA passed today, the choice between DTSA and UTSA would not necessarily be a slam-dunk in favor of the new federal right.  Both statutes offer pros and cons.  Careful consideration would be required as to the goals of litigation, the expected lifespan of the case, and the strengths of the state court venue.  Regardless of the jurisdiction, the passage of DTSA would provide additional protections to trade secrets owners, giving plaintiffs more options to protect their trade secrets.

Topics:  Commerce Clause, Federal Jurisdiction, Jurisdiction, Lanham Act, Proposed Legislation, Trade Secrets, TRO, UTSA

Published In: Civil Procedure Updates, Civil Remedies Updates, Conflict of Laws Updates, Intellectual Property Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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