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The Defend Trade Secrets Act – 2018 Update

Client Advisory

January 16, 2019

With the third anniversary of the Defend Trade Secrets Act of 2016 (“DTSA” or “Act”)[1] fast approaching, we reflect on some of the recent trends in DTSA litigation. While the available body of law continues to evolve, there are several observations worth noting.

Utilization of the DTSA Since Enactment

Since its enactment on May 11, 2016, litigants have wasted no time using the federal private right of action the DTSA provides for trade secret misappropriation. Indeed, one report shows that trade secrets cases have increased by more than 30% since 2016, a trend that is likely to continue.[2] In the first half of 2018 alone there were approximately 385 cases filed with DTSA claims.[3] The sharp increase in trade secrets cases highlights the significance of the DTSA for intellectual property holders.

Plaintiffs continue to rely on a mix of DTSA and state law claims when seeking relief, availing themselves of the benefits of both the DTSA and its state law counterparts. This approach is likely based on the fact that, while the DTSA closely resembles the Uniform Trade Secrets Act adopted by 49 states, there may be instances where a claimant succeeds on one but not the other.[4] This is similar to other instances where federal law provides a parallel cause of action to state law (such as the Lanham Act).

Issues at the Pleading Stage

The existence of a trade secret remains the cornerstone of a claim under the DTSA, and courts have not hesitated to dismiss DTSA claims where the claimant fails to allege a trade secret in sufficient detail.[5] To establish a claim under the DTSA, a party must plead a protectable trade secret by alleging that it possesses (1) secret information, (2) that is reasonably protected, and (3) that derives value from its secrecy. Where a litigant fails to adequately plead any of these elements, misappropriation claims will fail.[6] Ongoing dismissals at this early stage reveal the perils of failing to properly plead each element of a trade secret.

A recurring issue at the pleading stage involves allegations of misappropriation that begin before the DTSA’s effective date, May 11, 2016. As discussed in our previous advisory, misappropriation that occurred before May 11, 2016 does not give rise to liability under the DTSA.[7] Where appropriate, litigants can rely on a theory of “continuing misappropriation” to assert a claim under the DTSA. For example, a claim is proper under the DTSA if a defendant improperly acquires trade secrets before the enactment of the DTSA and uses those trade secrets after the enactment of the DTSA. Parties relying on a continuing misappropriation theory, however, risk dismissal if they do not clearly set forth specific acts of post-enactment misappropriation.[8]

Seizures & Injunctive Relief

Many commentaries have focused on the DTSA’s ex parte seizure provision, which allows for the immediate seizure of property – without notice to the property holder – to prevent misappropriation.[9] Despite the wealth of attention, the remedy has been reserved for only extraordinary circumstances.[10] Indeed, to obtain an ex parte seizure, movants must demonstrate that any other form of equitable relief would be inadequate, and that immediate and irreparable injury would result absent a seizure.[11] Given the severity of the measure, which directs law enforcement officers to seize the property in question, we expect its use to remain uncommon.

Various other forms of injunctive relief have predominated over ex parte seizures.[12] Undoubtedly aware of the high bar for enforcing ex parte seizures, litigants have continued to rely on traditional forms of equitable relief, including temporary restraining orders and preliminary injunctions, which generally require a showing of (1) a likelihood of success on the merits, (2) irreparable harm absent relief, (3) a balance of the equities, and (4) no harm to the public interest. Although not as drastic, temporary restraining orders and preliminary injunctions offer claimants powerful mechanisms for enforcing their rights under the DTSA and are likely to remain prevalent.

Damages

Courts are just beginning to consider damages under the DTSA.[13] The DTSA provides for three different measures of damages: (1) “for actual loss caused by the misappropriation,” and (2) “for any unjust enrichment caused by the misappropriation,” or (3) “in lieu of damages measured by any other methods . . . a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.”[14] Where misappropriation was willful or malicious, exemplary damages are also available.[15] Because the DTSA allows for “multiple types of damages that are based on different calculations, computing damages in a trade secrets case is not cut and dry.”[16] As more cases are adjudicated, we expect further guidance from courts with respect to damages.

One important development on damages calculations recently emerged from the New York Court of Appeals. New York’s highest court determined that, under New York law, “damages in trade secret actions must be measured by the losses incurred by the plaintiff,” and not by an infringer’s avoided costs.[17] As the name suggests, avoided costs are the costs the defendant avoided as a result of the misappropriating activity. Although the New York Court of Appeals did not consider damages under the DTSA, the decision could serve as a springboard for future attacks on damages calculations that include avoided costs.[18] On the other hand, at least one court has suggested that avoided costs are appropriately considered under the DTSA.[19] This potential distinction in the damages available under New York and federal law highlights the importance of asserting trade secret misappropriation claims under both the DTSA and state law.

Appellate Cases and Future Outlook

Appellate courts are now hearing appeals involving DTSA claims. Early appellate decisions have focused on threshold issues under the Act, including grants and denials of injunctive relief. Most recently, on December 28, 2018, the Tenth Circuit affirmed a district court’s denial of a preliminary injunction where a movant did not show, among other things, that the defendants retained access to the movant’s trade secrets.[20] In another ruling, the Tenth Circuit reversed the grant of a preliminary injunction after the district court found that irreparable harm “presumptively exists” where “a defendant is or will soon be engaged in acts or practices” prohibited by the DTSA.[21] The Tenth Circuit held that a showing of irreparable harm is not presumed under the DTSA.[22] In a similar vein, the Third Circuit remanded the grant of a preliminary injunction to the district court after the district court failed to discuss the movant’s likelihood of success, the balance of the equities, and the public interest.[23]

In November 2018, the Fifth Circuit ruled that the DTSA’s fee shifting provision does not apply where claims are voluntarily dismissed without prejudice.[24] The DTSA provides that where “a claim of [] misappropriation is made in bad faith,” the court may “award reasonable attorney’s fees to the prevailing party.”[25] As interpreted by the Fifth Circuit, attorney’s fees are not available where claims are dismissed without prejudice because “no one has prevailed; the litigation is just postponed with the possibility of the winner being decided at a later time in a new arena.”[26]

Given the limited binding precedent concerning the DTSA, we expect differences on open issues to grow between courts as more cases are litigated. Although the proliferation of cases will provide more clarity within jurisdictions, disagreements across jurisdictions are likely to emerge, requiring careful consideration of the controlling law applicable to particular trade secret disputes.

  


For more information concerning the matters discussed in this publication, please contact the authors Jeffrey S. Boxer (212-238-8626, boxer@clm.com), Jack Griem (212-238-8659, griem@clm.com), Alexander G. Malyshev (212-238-8618, malyshev@clm.com), or Dylan Ruffi (212-238-8854, ruffi@clm.com), another member of Carter Ledyard’s Litigation and Disputes practice group, or your regular Carter Ledyard attorney.


      

[1] Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 130 Stat. 376.

[2] Press Release, Lex Machina Releases New Trade Secret Litigation Report, PRNEWSWIRE (July 18, 2018, 6:00 A.M.), https://www.prnewswire.com/news-releases/lex-machina-releases-new-trade-secret-litigation-report-300682712.html (last visited Jan. 15, 2019) (comparing 2017 to 2016).

[3] LEX MACHINA, TRADE SECRET LITIGATION REPORT 2018 at 3 (2018).

[4] See, e.g., Blue Star Land Servs., LLC v. Coleman, No. CIV-17-931-R, 2017 U.S. Dist. LEXIS 202396, at *18 (W.D. Okla. Dec. 8, 2017) (“Oklahoma’s UTSA establishes a greater burden to plead a trade secrets misappropriation claim. . . . Although the state ‘trade secrets’ and ‘misappropriation’ definitions are nearly identical to the DTSA, Plaintiff must additionally show ‘use’ and ‘detriment.’”).

[5] See, e.g., Indira v. W. Side GI, LLC, No. 1:18-cv-01005 (AT) (SDA), 2018 U.S. Dist. LEXIS 192728, at *23 (S.D.N.Y. Nov. 9, 2018) (recommending dismissal where plaintiff failed to provide “sufficient information about the nature, value and measures taken to safeguard” the alleged trade secret); Elsevier Inc. v. Doctor Evidence, LLC, No. 17-cv-5540 (KBF), 2018 U.S. Dist. LEXIS 10730, at *17 (S.D.N.Y. Jan. 23, 2018) (dismissing claims where party “fail[ed] to include allegations supporting the various factors that define the ‘contours’ of a trade secret”); Universal Processing LLC v. Zhuang, No. 17 CV 10210-LTS, 2018 U.S. Dist. LEXIS 168730, at *10 (S.D.N.Y. Sept. 28, 2018) (dismissing claims where plaintiff did “not sufficiently allege[] the existence of a trade secret protectable by the Act”); Segerdahl Corp. v. Ferruzza, No. 17 cv 3015, 2018 U.S. Dist. LEXIS 22007, at *10 (N.D. Ill. Feb. 10, 2018) (allegations insufficient where plaintiff merely identified broad areas of technology); Vendavo, Inc. v. Price f(x) AG, No. 17-cv-06930-RS, 2018 U.S. Dist. LEXIS 48637, at *10 (N.D. Cal. Mar. 23, 2018) (“the Complaint’s conclusory and generalized allegations are insufficient”).

[6] See, e.g., Elsevier, 2018 U.S. Dist. LEXIS 10730, at *15-17 (plaintiff alleged only broad categories of confidential information); Indira, 2018 U.S. Dist. LEXIS 192728, at *23 (plaintiff did “not allege any facts regarding her efforts to maintain the secrecy of her [trade secret]”); Universal Processing, 2018 U.S. Dist. LEXIS 168730, at *9-10 (plaintiff did not proffer facts concerning the value and competitive advantage of the alleged trade secret).

[7] Camick v. Holladay, Nos. 18-3065, 18-3074, 2018 U.S. App. LEXIS 35410, at *9 (10th Cir. Dec. 18, 2018) (“The DTSA only applies to ‘any misappropriation of a trade secret, (as defined in [the DTSA]) for which any act occurs on or after the date of the enactment of [the] Act’ on May 11, 2016.” (citing DTSA, 130 Stat. at 381-82)).

[8] See, e.g., id. at *5, 8-10 (dismissing claims where plaintiff relied on pre-enactment acquisition but failed to allege any post-enactment misappropriation, apart from conclusory allegations of “‘past and present’ misappropriation”); Attia v. Google LLC, No. 17-cv-06037-BLF, 2018 U.S. Dist. LEXIS 99400, at *31-39 (N.D. Cal. June 13, 2018) (dismissing claims where pleading failed to differentiate between valid trade secrets and trade secrets eliminated via pre-enactment disclosure and similarly failed to allege “continued use of trade secrets beyond May 11, 2016 by each Defendant”); see also PDC Machs. Inc. v. Nel Hydrogen A/S, No. 17-5399, 2018 U.S. Dist. LEXIS 100506, at *9 (E.D. Pa. June 15, 2018) (“Although the statute does not reach misappropriation occurring entirely before the May 11, 2016, enactment date, it has been widely interpreted to reach a defendant’s continued use of trade secrets after the enactment date, even if the secrets were acquired earlier.” (citing cases)).

[9] 18 U.S.C. § 1836(b)(2).

[10] See, e.g., Thoroughbred Ventures, LLC v. Disman, No. 4:18-cv-00318-ALM, ECF No. 6 at ¶ 15 (E.D. Tex. May 1, 2018) (ordering ex parte seizure where court found an “extreme likelihood” that defendant would copy the contents of his former employer’s laptop, provide its contents to a co-conspirator, or destroy the data entirely); Axis Steel Detailing, Inc. v. Prilex Detailing LLC, No. 2:17-cv-00428-JNP, 2017 U.S. Dist. LEXIS 221339, at *4 (D. Utah June 29, 2017) (ordering ex parte seizure where, among other things, defendants showed “a willingness to provide false and misleading information” and had previously attempted to delete emails and computer data).

[11] 18 U.S.C. § 1836(b)(2)(A)(ii)(I)-(II).

[12] See, e.g., Cochrane USA, Inc. v. Filiba, No. 18-341 (EGS), 2018 U.S. Dist. LEXIS 185726 (D.D.C. Mar. 9, 2018) (denying ex parte seizure but granting TRO); Sun Distrib. Co., LLC v. Corbett, No. 18-cv-2231-BAS-BGS, 2018 U.S. Dist. LEXIS 176224, at *20 (S.D. Cal. Oct. 12, 2018) (granting TRO); Par Pharm., Inc. v. QuVa Pharma, Inc., No. 17-6115-BRM-DEA, 2018 U.S. Dist. LEXIS 43612, at *30 (D.N.J. Mar. 16, 2018) (granting preliminary injunction); SPBS, Inc. v. John D. Mobley & Intermed Grp. Servs., Inc., No. 4:18-CV-00391, 2018 U.S. Dist. LEXIS 148881, at *43 (E.D. Tex. Aug. 31, 2018) (same).

[13] See, e.g., Steves & Sons, Inc. v. Jeld-Wen, Inc., No. 3:16-cv-545, 2018 U.S. Dist. LEXIS 203593 (E.D. Va. Nov. 30, 2018) (discussing whether a permanent injunction and reasonable royalty damages would amount to double recovery); Steves & Sons, Inc. v. Jeld-Wen, Inc., No. 3:16-cv-545, 2018 U.S. Dist. LEXIS 80306 (E.D. Va. May 10, 2018) (discussing damages in the context of a motion for summary judgment).

[14] 18 U.S.C. § 1836(b)(3)(B).

[15] Id. § 1836(b)(3)(C).

[16] Steves, 2018 U.S. Dist. LEXIS 80306, at *8 (alteration and quotation omitted).

[17] E.J. Brooks Co. v. Cambridge Sec. Seals, 31 N.Y.3d 441, 454 (2018) (leaving open whether avoided costs may be used to calculate a plaintiff’s losses in certain instances).

[18] See, e.g., Capstone Logistics Holdings, Inc. v. Navarrete, No. 17-CV-4819 (GBD) (BCM), 2018 U.S. Dist. LEXIS 217876, at *14 (S.D.N.Y. Dec. 13, 2018) (citing E.J. Brooks favorably at the discovery stage).

[19] Steves, 2018 U.S. Dist. LEXIS 80306, at *21 (“avoided costs are appropriately considered as part of [counterclaimant’s] unjust enrichment damages”).

[20] DTC Energy Grp., Inc. v. Hirschfeld, No. 18-1113, 2018 U.S. App. LEXIS 36656, at *14-15 (10th Cir. Dec. 28, 2018).

[21] First W. Capital Mgmt. Co. v. Malamed, 874 F.3d 1136, 1139-40 (10th Cir. 2017) (quoting the record).

[22] Id. at 1143.

[23] Fres-co Sys. USA v. Hawkins, 690 F. App’x 72, 73 (3d Cir. 2017).

[24] Dunster Live, LLC v. Lonestar Logos Mgmt. Co., LLC, 908 F.3d 948, 950 (5th Cir. 2018).

[25] 18 U.S.C. § 1836(b)(3)(D).

[26] Dunster, 908 F.3d at 951.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2019 Carter Ledyard & Milburn LLP.
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