Just five years ago, on May 11, 2016, President Obama signed the Defend Trade Secrets Act (the “DTSA”). This important legislation created a new, federal civil cause of action for trade secret misappropriation. The DTSA came on the heels of the 2011 America Invents Act (the “AIA”)—the most significant overhaul of the U.S. patent laws in decades. Together, the DTSA and AIA are game changers for federal IP litigation.
While aspects of the AIA are well known, such as the momentous shift from a “first-to-invent” to a “first-to-file” patent system, the trade secret implications of the AIA are less familiar. For example, the AIA notably eliminated the failure to disclose the “best mode” as grounds for holding a patent claim invalid or otherwise unenforceable. The best mode requirement of 35 U.S.C § 112 mandates that an inventor set forth the “best mode contemplated by the [inventor(s)] for carrying out the invention.” In exchange for disclosing the details of how to practice a patented invention to the public, an inventor obtains the right to exclude others from practicing the claimed invention for a certain period. Pre-AIA, if an inventor withheld a trade secret preferred embodiment of the invention from a patent, an alleged infringer could argue the asserted patent claims were invalid for failure to disclose the best mode.
IP lawyers thus traditionally counseled their clients on the potential risks of too little disclosure (which could result in patent invalidity) or too much disclosure (which could negate trade secret protection). Many inventors grappled with the dilemma of having to disclose their IP to the world to seek a patent for a limited time or keeping the IP a secret and perpetually protecting it through state trade secret laws. Often, inventors therefore elected either patent protection or trade secret protection.
Post-AIA, inventors may not have the same predicament. While an inventor must still disclose the best mode to obtain a patent, the AIA has largely removed the consequences for failing to do so by eliminating it as an invalidity defense. Inventors may be able to enforce both patent and trade secret rights covering various aspects of an invention, without risking invalidation of the asserted patent claims for failing to disclose trade secret details as the best mode of practicing the claims. Although there are still other challenges to protecting and enforcing such dual IP rights, due to the AIA and DTSA, inventors who have both trade secrets and patents in their IP portfolio at least have the option to assert their patents, trade secrets, or both in federal litigation, without the pre-AIA best mode invalidity risk.
On the 5th anniversary of the enactment of the DTSA, here are 5 things to remember should one choose to assert IP as a trade secret under the DTSA:
- Ability to File Suit in Federal Court. Before Congress enacted the DTSA, trade secret plaintiffs could only proceed in federal court if diversity or supplemental jurisdiction existed. For the latter, a federal court could decide a state trade secret claim that was tied to a viable federal claim for which the court had original jurisdiction, such as patent infringement or a violation of the Computer Fraud and Abuse Act (“CFAA”). As such, federal claims were often drafted with the primary goal of securing supplemental jurisdiction for state trade secret claims, and there was commonly costly motion practice to try to dispose of the federal claim and the court’s supplemental jurisdiction.
Now, the DTSA provides trade secret owners with a direct ticket to federal court with a federal civil cause of action for trade secret misappropriation. This has resulted in trade secret filings in federal court to skyrocket. In 2015 (the year before the DTSA was enacted), federal courts only saw 1,075 trade secret cases, compared with 1,396 cases in 2017—representing a 30% increase in just 2 years.
While there are pros and cons to proceeding in federal court rather than state court, the DTSA undeniably has changed the landscape of trade secret litigation. Possible benefits from litigating trade secret cases in federal court result from federal courts having more resources and stricter procedures for more expedient management and resolution of large cases. Federal courts also have nationwide subpoena power, whereas state courts do not. The federal electronic discovery rules may be more favorable to plaintiffs than certain state rules. However, on the flip side, state courts can sometimes apply advantageous legal standards, such as old, common-law trade secret doctrines even when applying more modern trade secret laws (such as the Texas Uniform Trade Secrets Act). Proceeding in state court may also be advantageous to secure obtain quick injunctive relief, such as a temporary restraining order, depending on the particular state’s rules, and may garner a more local jury pool. It is important for claimants to weigh these and many other considerations in deciding whether to invoke the DTSA and proceed in federal court.
- Ex Parte Seizure of Misappropriated Trade Secrets is Permissible. The DTSA expressly authorizes court to enter orders without notice to the opposing party directing law enforcement to seize property to prevent further misappropriation. This unprecedented remedy is not authorized under state trade secret laws. However, note that it is only permitted in “extraordinary circumstances,” and only if the plaintiff satisfies all eight statutory requirements. Because of these rigid requirements, as well as the inherent delay between the time an application is filed and when it is granted by a court, few seizures have been sought or granted since 2016.
- Injunctions to Prevent Entry into an Employment Relationship are Not Permitted. Pursuant to some state trade secret laws, employers often seek injunctive relief against former employees who are subject to non-competition agreements solely on the basis that the employee allegedly has shared or disclosed the former employer’s trade secrets with his or her new employer. Although both the DTSA and state-based trade secret laws allow for injunctive relief to stop further misappropriation, the DTSA specifically prohibits an injunction that merely seeks to prevent a person from entering into an employment relationship.
- Inevitable Disclosure Doctrine is Not Recognized. Although the majority of states adopted a version of the Uniform Trade Secrets Act before the DTSA, state courts do not uniformly apply trade secret laws, including the use of the “inevitable disclosure doctrine.” In simple terms, this doctrine allows an employer to stop a departing employee from commencing work for a competitor under the theory that the employee would “inevitably” use or rely on the former employer’s trade secrets while working for the competitor. Many states do not follow the doctrine, but even among those that do, state courts vary in how they apply it.
Pursuant to the plain text of the DTSA, injunctive relief is not available to an employer based solely on information that the former employee solely knows in his mind. In practice, however—perhaps because federal courts are used to applying state trade secret laws—they have tended to continue to interpret the DTSA in the same way they interpreted the state trade secret laws.
- Whistleblower Protections. The DTSA expressly provides for whistleblower immunity—specifically, for the “confidential disclosure of a trade secret to the government or in a court filing” that is “solely for the purpose of reporting or investigating a suspected violation of law.” However, a defendant is required to submit to discovery and present evidence to justify his or her claim of immunity; simply claiming whistleblower immunity at the pleading stage is insufficient. Importantly, this immunity is limited, as it does not foreclose an employer’s actions under other legal schemes, such as the CFAA.
In sum, in the post-DTSA and post-AIA era, there are many considerations in deciding what types of IP to assert. If one chooses to bring a trade secret misappropriation claim, it is important to consider these and other relevant factors in deciding whether to bring a DTSA claim in federal court.