Defend Trade Secrets Act Developments in 2017

In 2017, there were several cases worth noting under the federal Defend Trade Secrets Act (“DTSA”). These cases addressed (i) time periods covered by the DTSA, (ii) pleading requirements under the DTSA, and (iii) standards for obtaining ex parte seizure orders under the DTSA. We will discuss these three issues in turn.

Timing

The DTSA became effective May 11, 2016, which raised the questions of if, when, and how it might apply to pre-May 11, 2016, conduct. Simply stated, defendants may have a “timing defense” when the alleged misappropriation occurred before the DTSA’s enactment (May 11, 2016). See Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017). As the Cave Consulting court noted,

[W]ithout facts about when post-enactment use occurred and whether the information disclosed was new or somehow different from the prior misappropriation, plaintiff has failed to state a claim under the DTSA.[1]

The court, however, gave the plaintiff the opportunity to amend, while pointing out that “[t]he Act’s text contemplates three theories of liability: (1) acquisition, (2) disclosure, or (3) use . . .” and that “[n]othing suggests that the DTSA forecloses a use-based theory simply because the trade secret being used was misappropriated before DTSA’s enactment.”[2] Thus, there is no “timing” defense when the plaintiff can show that misappropriation has continued to (or likely will) occur on a date after the statute’s May 11, 2016, effective date. Brand Energy & Infrastructure Sev. v. Irex Contracting Grp., 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. March 23, 2017) (a plaintiff is allowed to pursue a DTSA claim because the amended complaint alleged multiple uses of trade secrets that occurred after the DTSA was enacted). Courts’ focusing on the timing of alleged misappropriations continues into 2018. Indeed, in Ultradent Prods. v. Spectrum Sols., LLC, 2018 U.S. Dist. LEXIS 3858 (D.Utah Jan. 8, 2018), the court dismissed the complaint precisely because “[n]one of the allegations against Spectrum indicate[d] when the alleged misappropriation occurred,” leaving one to speculate as to whether the misappropriations were alleged to have occurred after the effective date of the statute.

Pleading

Under the now well-known Twombly/Iqbal standard, applicable on motions to dismiss under Federal Rules of Civil Procedure 12(b)(6), DTSA plaintiffs must adequately allege, among other requirements, that they took reasonable steps to maintain the secrecy of protected information. In Aggreko, LLC v. Barreto, 2017 U.S. Dist. LEXIS 35573 (D. N. Dak. Mar. 13, 2017), the plaintiff alleged that it required employees to sign a confidentiality agreement and that information was not disseminated outside the workplace. That was deemed sufficient to withstand a motion to dismiss under Rule 12(b)(6). But in Raben Tire Co. v. Dennis McFarland, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24, 2017), the plaintiff failed to allege that employees were required to sign confidentiality agreements or to allege any other indicia of reasonable steps to maintain secrecy. This led to a dismissal with prejudice.

Likewise, to avoid dismissal, a plaintiff must adequately allege improper acquisition and/or improper disclosure or use and must do so through more than conclusory allegations or labels. See Prominence Advisors, Inc. v. Dalton, 2017 U.S. Dist. LEXIS 207617 (N.D. Ill. Dec. 18, 2017) (dismissing the DTSA count).

Ex Parte Seizures

Finally, and perhaps most importantly, courts have limited the applicability of the DTSA seizure mechanism. That puts a damper on some of the initial enthusiasm that trade secret holders held for the possibility of expanded enforcement rights under the DTSA. For example, courts in California and Indiana each held that statutory seizure orders are only available in extreme circumstances and only when traditional injunctions or temporary restraining orders (“TROs”) sought under Rule 65 of the Federal Rules of Civil Procedure would be inadequate. See OOO Brunswick Rail Mgmt. V. Sultanov, 2017 U.S. Dist. LEXIS 2343 (N.D. Cal. Jan. 6, 2017) (“A court may issue a seizure order only if, among other requirements, an order under Fed. R. Civ. P. 65 or another form of equitable relief would be inadequate.”), and Magnesita Refractories Co. v. Mishra, 2017 U.S. Dist. LEXIS 10204 (N.D. Ind. Jan. 25, 2017) (traditional Rule 65 TROs are still the preferred means of ordering a seizure of property in DTSA cases; “[o]bviously, in this case, Rule 65 did the trick.”). Rather than making seizures easier and more likely, these cases suggest that the standards for a DTSA seizure order are more strenuous than those under Rule 65.

A version of this article originally appeared in the Take 5 newsletter “Keeping Pace in the Fast-Moving World of Trade Secrets and Employee Mobility.”