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Courts will refuse to grant trade secret protection under the Defend Trade Secret Act (DTSA) when an employer has not taken certain basic precautions to create and maintain the secrecy of the subject information.
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With increasing employee mobility, employers will likely face the threat of a key, former employee entering the market with crucial trade secret information in their memory.
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For the purposes of stating a claim under the DTSA, a plaintiff must be able to point to specific, concrete, confidential information.
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Plaintiffs may be able to petition a court to order the seizure of property without the defendant receiving prior notice (an ex parte seizure).
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To assert a claim under the DTSA, the employee needs to have committed a misappropriation, improper disclosure or use after the enactment of the DTSA.
Trade secrets misappropriation cases often involve an employer whose former employee acquired confidential information and then used it without permission, for example, by leaking the trade secrets to a new employer or using the information to open a competing business. The DTSA provides federal legal recourse to the wronged employer. However, as the first DTSA cases are litigated, a number of key lessons can be gleaned from decisions arising from these matters.
1. Employers Bear the Initial Burden
While the underlying congressional intent of the DTSA is to better protect trade secrets, courts have been clear that trade secret protection arises from the trade secret owner’s vigilance in keeping what they claim to be a secret, secret. Courts will not grant trade secret protection where basic precautions to maintain secrecy have not been taken.
For example, a number of decisions under the DTSA emphasize the importance of a strong non-disclosure agreement (NDA). A federal court in New York denied an injunction under the DTSA concluding that the owner of the information did not take “reasonable measures to protect the trade secrets.”
[1] In that case, the employer had explained the company’s confidentiality policy to its employee, installed a password-protected internal computer system and had taken certain cybersecurity precaution to protect against third-party computer interlopers. However, the court still deemed the information inadequately protected because the employee failed to sign an NDA, and the employer failed to terminate or limit the employee’s access in response to this failure.
It is clear that the NDA is the cornerstone of any successful trade secret protection strategy. NDAs must be kept current and responsive to changes in business needs and technology over time. This means the NDA should clearly explain that the employee will see, and possibly create, trade secret information. Further, the NDA should specify that this information, whether created by the employee, co-worker, superior, subordinate, or vendor, is the property of the employer. Of course, an employee’s refusal or failure to sign an NDA must be met with decisive action to wall off the employee from the confidential information.
2. Accept the Inevitable . . . But Know When to Act
The DTSA strikes a balance between protecting trade secrets and respecting the trend toward increasingly uninhibited employee movement. As it remains impossible to ask an employee to leave behind with their business cards, the knowledge they have gained during their employment, employers will likely face the threat of a key, former employee entering the market with crucial trade secret information in their memory (if not in their briefcase). Although the general skills and knowledge acquired during the course of employment are not often trade secrets, key employees by their very nature are increasingly exposed to proprietary, confidential information.
Under the DTSA, an employer cannot stop an employee from taking a new job simply because the employee has been exposed to, and may retain memory of, confidential information. The DTSA, as well as courts in Massachusetts and New York, reject the idea that employees will “inevitably disclose” confidential information simply because they are going to work for a competitor. The question then becomes: at what point will a court intervene?
In bringing a DTSA claim for trade secret misappropriation, employers must be able to point to a clear and present risk of harm. To avoid a court concluding that the employer’s fears are mere suspicion or conjecture, the employer is typically required to ground that fear in one or two common scenarios. The first is where the employee has acquired the information by impermissible means such as emailing it to a personal account or downloading it to private cloud storage. Predictably, the second is where an employee or former employee has already disclosed confidential information to a new employer or used it to form a competing business. Both of these criteria share an important trait: they would violate any competent NDA and information management scheme. An employer that can point to a clear violation of company policy will be in a better position to argue that fear of improper disclosure is justified.
3. Know Your Information and Be Prepared to Explain its Importance
After it’s established that confidential information is at risk, the employer must be able to clearly identify the information implicated. For the purposes of stating a claim under the DTSA, a plaintiff must be able to point to specific, concrete, confidential information (such as detailed client lists, product designs, bidding or trading strategies, prototype software, etc.). Interestingly, a federal court recently dismissed a DTSA claim because it only pointed to general classes of protected information while failing to specify the actual information subject to misappropriation.
[2] For employers seeking an injunction against a former employee, this is particularly important. Courts have been clear that such a plaintiff must be able to show that it will suffer irreparable injury if the confidential information at issue were leaked or destroyed. Therefore, the employer will find it difficult to demonstrate risk of irreparable injury without a clear picture of the information at issue and its value to the employer.
These requirements indicate the importance of a clear and functional information management scheme. While the specifics of these procedures will vary depending on the organization’s size and the industry in which it operates, the procedure should speak to creation, ownership, identification, storage, retrieval, and destruction of company information. If properly followed, a solid information management policy will place an employer in a stronger litigating position if the need arises - being able to quickly identify and communicate the significance of material that has been inappropriately accessed or misappropriated.
4. An Ex Parte Seizure is Available . . . but it's the Last Resort
As a potential avenue for preliminary relief, plaintiffs may be able to petition a court to order the seizure of property without the defendant receiving prior notice (an “ex parte” seizure). This provision is available only in extraordinary circumstances to prevent the propagation or dissemination of a trade secret.
While this provision looks attractive, some courts have narrowed it to apply only when typical seizure methods have failed (commonly a temporary restraining order or preliminary injunction). Courts may also use the ex parte provision when there is a clear danger that evidence will be destroyed.
[3] However, in circumstances where an employee has retained confidential information, but has not given any indication that the information will be destroyed or immediately disseminated, courts are likely to deny an ex parte motion.
5. The DTSA will Offer the Most Help Moving Forward, Not Back
The DTSA has become an attractive option for potential plaintiffs. However, the DTSA is still a relatively new law that gives rise to the question: Is the DTSA retroactive?
The law itself states that it applies to an act of misappropriation that occurs on or after the date of the enactment. Courts have determined that the DTSA will clearly apply to acquisition and dissemination of confidential information after May 11, 2016. However, it also appears as though the DTSA can be applied to cases where an employee has acquired the information prior to enactment, but used (misappropriated) it after enactment. At least one court has ruled that where one party “continues to use [the other party’s] Intellectual Property to directly compete, the wrongful act continues to occur after the date of the enactment of DTSA.”
[4]
Therefore, when evaluating a potential DTSA claim, the employer must determine whether the employee committed an act proscribed by the DTSA after its enactment, including:
• If the employee took and disseminated confidential information after enactment, the DTSA will provide a cause of action.
• If the employee took the information prior to enactment but used it or leaked it after enactment, the DTSA will provide a cause of action.
• If the employee took and leaked the information prior to enactment, but someone is continuing to use the information to compete, the DTSA may provide a cause of action.
6. Conclusion
The DTSA is a valuable tool for employers. Indeed, it is clear that the DTSA provides employers with an effective avenue into federal court for trade secret disputes. However, employers must be aware of what the DTSA does not do. It does not relieve the employer’s burden to defend its information, manage its information, or articulate the importance of its information. While the DTSA is an effective tool, courts will first look to the steps the plaintiff took to avoid the necessity of using it at all.
[1] Art and Cook, Inc. v. Abraham Haber, No. 17-CV-1634-LDH-CLP (E.D.N.Y. Oct. 3, 2017); 18 U.S.C. § 1839(3)(A)-(B).
[2] Segredahl Corp. v. Ferruzza et al., No 17-cv-3015, 2018 WL 828061 (N.D. Ill. Feb. 10, 2018).
[3] Dazzle Software II v. Kinney, Case No. 2:16 CT 12191 (E.D. Mich. July 18, 2016).
[4] Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group, Inc., No. 15CV211LGSRLE, 2016 WL 5338550, at *6 (S.D.N.Y. Sept. 23, 2016).
