As we have written about and discussed extensively on this blog over the past year, the Defend Trade Secrets Act (“DTSA”) – enacted on May 11, 2016 – provides the first private federal cause of action for trade secret misappropriation, allowing parties to sue in federal court for trade secret misappropriation regardless of the dollar value of the trade secrets at issue. Given that the law is less than a year old, federal courts seeing DTSA cases for the first time are still parsing through its language and clarifying its scope. Although it is still a developing issue, two recent decisions reveal a limitation and viable defense to DTSA claims: a plaintiff asserting a DTSA claim must allege facts showing that acts of misappropriation occurred after DTSA came into effect.
The first case is a September 27, 2016 decision from the Middle District of Florida, Tampa Division: Adams Arms, LLC v. Unified Weapons Sys., No. 16-cv-01503, 2016 U.S. Dist. LEXIS 132201 (M.D. Fla. Sep. 27, 2016). Plaintiff Adams Arms, LLC, a manufacturer of military rifles, sued defendant Unified Weapons (and other affiliates and individuals) in federal court – asserting a misappropriation claim under DTSA – for allegedly using Adams Arms’ own trade secrets to enter into an agreement to supply rifles to a foreign country’s military after the companies had agreed to work together to supply the rifles. The defendants moved to dismiss the DTSA claim relying solely on DTSA’s statute-of-limitations provision, which provides that:
A civil action under [18 U.S.C. § 1836(b)] may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.
18 U.S.C. § 1836(d) (emphasis added). The defendants argued that because some of the alleged conduct at issue occurred before the effective date of DTSA, there was a single continuing misappropriation and therefore, none of the conduct was actionable. The Florida court was not persuaded, noting that the sub-section addresses only when a claim accrues for statute of limitations purposes, but does not address the critical question: whether an owner may recover under DTSA when the misappropriation occurs both before and after the effective date, assuming the entire misappropriation is within the 3-year limitations period. The court looked to Section 2(e) of DTSA, which applies to “any misappropriation . . . for which any act occurs” after the effective date. Pub. L. No. 114-153, § 2(e). According to the court, this language suggests that when an “act” occurs after the effective date, a partial recovery is available on a misappropriation claim. Based on that reading of Section 2(e) of the DTSA, the court found that a plaintiff may state a plausible claim for relief so long as it sufficiently alleges a prohibited “act” that occurred after May 11, 2016. Because Adams Arms’ complaint alleged that Unified Weapons disclosed Adams Arms’ trade secrets to the Peruvian military in or about late May or early June of 2016, the court held that Adams Arms articulated a viable misappropriation claim premised on a disclosure theory. However, the court held that the complaint failed to state a viable claim based on an acquisition theory after the effective date of DTSA because the alleged facts indicated that Unified Weapons acquired all of Adams Arms’ trade secret information well prior to May 2016. Accordingly, the court denied Unified Weapons’ motion to dismiss the DTSA claim, but limited the DTSA claim to a disclosure theory and held that Adams Arms could not proceed under an acquisition theory.
The second case comes from the Northern District of California and was decided on January 31, 2017: Avago Techs. United States Inc. v. NanoPrecision Products, No. 16-cv-03737, 2017 U.S. Dist. LEXIS 13484 (N.D. Cal. Jan. 31, 2017). In this decision, the California court considered Avago’s motion to dismiss a DTSA counterclaim asserted by nanoPrecision Products, Inc. (“nPP”) contending that Avago had misappropriated its trade secrets by acquiring its confidential business information and disclosing it in three U.S. patent applications and subsequent prosecution of those applications. Avago argued that the counterclaim should be dismissed because all of the actionable conduct occurred before the DTSA came into effect. The court agreed.
nPP did not dispute that the original wrongful acquisition of its confidential information (i.e., Avago’s receipt of nPP’s confidential information in the course of the parties’ business discussions that ended in 2012) occurred before the DTSA came into effect. But nPP nevertheless argued that Avago’s continued use of its confidential information in the prosecution of the three patent applications allowed it to seek a partial recovery for misappropriation from the date the DTSA came into effect. nPP specifically did not suggest that any new information was disclosed in the course of the patent prosecutions that had not been disclosed prior to DTSA’s effective date.
Significantly, nPP relied on the Adams Arms decision in support of its position, but to no avail. Noting that the Adam Arms court had found that DTSA’s statute of limitations provision applies only to determinations of the timeliness of a DTSA claim and does not preclude a DTSA claim based on acts that occurred after the effective date of the statute, the California court distinguished Adams Arms, stating that the situation in Avago was “entirely different.” Whereas in Adams Arms there were allegations that specific information had been disclosed after DTSA’s effective date, the confidential information at issue in Avago was disclosed when the three patent applications were published before the DTSA came into effect. The court therefore held that nPP’s DTSA counterclaim failed on the pleadings because nPP had failed to allege any facts showing acts of misappropriation that occurred after DTSA came into effect.
From these two decisions emerges a temporal limitation on the reach of the DTSA. While this issue is still open for further judicial interpretation, Adams Arms and Avago Techs. indicate that a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016. Defendants facing such DTSA claims should carefully analyze the alleged facts and consider raising this as a defense.