UPDATE: The Federal Defend Trade Secrets Act vs. The California Uniform Trade Secrets Act

by Sheppard Mullin Richter & Hampton LLP
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We first wrote on this topic nearly a year ago[1]. Since then, courts have had an opportunity to interpret some of the provisions of the federal Defend Trade Secrets Act (DTSA). Indeed, since it was signed into law, more than 360 DTSA claims have been filed, with more than 343 complaints filed in federal court. California has seen more of these cases than any other state, finding itself host to over 15% of all DTSA claims.

As we addressed in our previous blog, there are some key distinctions between the DTSA and California’s Uniform Trade Secret Act (CUTSA) that may inform companies how to run their businesses and prepare for litigation should it be necessary. Some of these distinctions have come into greater focus as courts have interpreted the DTSA, at times with surprising results.

Inevitable Disclosure. When enacted, the DTSA was generally thought to reject the doctrine of inevitable disclosure like CUTSA. The doctrine of inevitable disclosure enables a plaintiff to “prove a claim of threatened misappropriation by demonstrating that the nature of a former employee’s new employment will ‘inevitably’ lead him to rely on the plaintiff’s trade secret.”[2] The DTSA provides that a court may enjoin “any actual or threatened misappropriation . . . provided the order does not prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation.” 18 U.S.C. § 1836(b)(3)(A)(i)(I)).

Nevertheless, some courts have issued inevitable disclosure injunctions under the DTSA. For example, in Mickey’s Linen v. Fischer, the district court for the Northern District of Illinois granted a preliminary injunction, finding that the defendant-former employee would “inevitably use or disclose [the plaintiff’s] trade secrets during his employment with [a competitor].[3] Thus, notwithstanding DTSA’s prohibition on injunctions that preclude employment, there may be jurisdictions where it is possible to obtain an injunction based on inevitable disclosure (although California is unlikely to be one of them).[4] This is somewhat ironic since one of the purposes in enacting DTSA was uniformity across jurisdictions.

Whistleblower Immunity.[5] Unlike CUTSA, the DTSA expressly provides for whistleblower immunity. The thought was that whistleblowers would be more likely to whistleblow if they did not have to worry about the cost and burden of a resulting DTSA lawsuit. But that is not how it has turned out, at least based on Unum Group v. Loftus.[6] There, defendant employee moved to dismiss the plaintiff employer’s trade secret misappropriation claims on whistleblower immunity grounds. He claimed that he had turned over the documents that he took to his attorney in order to report and investigate a violation of law. The court denied the motion, reasoning that such defense cannot be adjudicated at the pleading stage and, instead, a defendant must submit to discovery and present evidence to justify the whistleblower immunity. Although this requirement may burden the putative whistleblower defendant, it may also prevent a defendant from evading litigation based on a mere cry of whistleblowing.

Ex Parte Seizure Order. Unlike CUTSA, the DTSA expressly allows a plaintiff to request – without any notice to the defendant — a court order directing enforcement officials to seize property to prevent further misappropriation. Given the potential power and disruptive nature of such a remedy, there was a lot of talk and concern about this aspect of the DTSA before and after its enactment. But, with the DTSA having over a year under its belt, practice shows that ex parte seizures are rarely sought and courts almost never issue them. The remedy is treated as truly extraordinary. Mission Capital Advisors LLC v. Romaka, [7] is one of the few cases where a DTSA ex parte seizure order was actually granted. The court there reasoned that the requisite extraordinary circumstances were present in light of the forensic evidence and misrepresentations about data deletion. The result in OOO Brunswick Rail Management v. Sultanov [8] – denial of an ex parte seizure order — is more the norm. There, the plaintiff argued that the seizure was necessary to stop data deletion and destruction of the evidence.[9] In denying the seizure requests in that case, the court instead ordered document preservation and delivery of devices to the court at the time of a scheduled preliminary injunction hearing.[10]

Sheppard Mullin attorneys have extensive experience litigating trade secret disputes, as well as navigating clients through the nuances of trade secret law outside of litigation.

[1] The Federal Defend Trade Secrets Act vs. The California Uniform Trade Secrets Act. Ms. Edelson is an editor and contributing author to TRADE SECRET LITIGATION AND PROTECTION IN CALIFORNIA (Defend Trade Secrets Act Supplement (State Bar of California 2017). Mr. Kim is a contributing author. Mr. Salen is a contributor to that Supplement.

[2] Rebecca Edelson and Jesse Salen, Federal DTSA versus California UTSA, California Business Law Practitioner, Vol. 32, No. 2, p. 38 (Spring 2017).

[3] No. 17 C 2154, 2017 WL 3970593, at *12-13 (N.D. Ill. Sept. 8, 2017); see also Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16 C 03545, 2017 WL 1954531, at *5 (N.D. Ill. May 11, 2017)(denying motion to dismiss because there was “enough to trigger the circumstantial inference that the trade secrets inevitably would be disclosed by [the former employee] to [the defendant-competitor].”); see also Panera, LLC v. Nettles, No. 4:16-cv-1181-JAR, 2016 WL 4124114 (E.D. Mo. Aug. 3, 2016) (finding the doctrine helpful for understanding why an employee’s duties at Papa John’s would almost certainly require him to draw upon and use Panera’s trade secrets).

[4] The DTSA prohibits injunctions that conflict with applicable state law precluding restraints on employment. 18 U.S.C. §1836(b)(3)(A)(i).

[5] A whistleblower is ordinarily thought to be someone who brings to light illegal activity of her company (e.g., by disclosing the matter to the attention of the authorities). Without laws to protect them, whistleblowers may risk reprisal and retaliation. The DTSA’s whistleblower immunity provision is one such law.

[6] No. 16-cv-40154-TSH (D. Mass. December 6, 2016)

[7] No. 1:16-cv-05878-LLS (S.D.N.Y. July 29, 2016)

[8] No. 5:17-cv-00017-EJD, 2017 WL 67119 (N.D. Cal. Jan. 6, 2017); see also Balearia Caribbean Ltd., Corp v. Calvo, No. 16-23300-CIV-WILLIAM, (S.D. Fla. Aug. 5, 2016) (denying a DTSA seizure request for failure to satisfy the “extraordinary circumstances” test and instead issuing a temporary restraining order).

[9] Id. (Plaintiff sought seizure of a laptop, mobile phone, and digital copies of Google and Rackspace email accounts of two former employees which allegedly contained plaintiff’s trade secrets.).

[10] Id.

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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