Recourse for Trade Secret Misappropriation under the Federal Defend Trade Secrets Act

April 19, 2018 (21 min read)

By: Bret Cohen, Nelson Mullins and Amanda Carozza, Mintz Levin, P.C.

THE DEFEND TRADE SECRETS ACT OF 2016 (DTSA), 130 STAT. 376, allows U.S. employers to protect against and remedy misappropriation of trade secret information in federal court. Before the enactment of the DTSA, in the absence of diversity jurisdiction, employers seeking redress had no choice but to sue in state court. While most states have adopted and codified some version of the Uniform Trade Secrets Act (UTSA), which provides uniform definitions and remedies for trade secret misappropriation, these laws nevertheless tend to differ from state to state both in the text of the laws themselves and in their application. Bringing suit under the DTSA allows a party to avail itself of the federal courts, which can be advantageous since federal courts often are more adept at addressing highly complex technical issues arising in trade secret cases. Bringing a claim under the DTSA can be a double-edged sword, however, as it can make a case that an employer wishes to keep in state court (for any number of strategic reasons, including taking advantage of more employer-friendly laws or procedures) removable to federal court by the defendant. As a result, employers should think strategically before including a claim under the DTSA, particularly where the employer may prefer to remain in state court.

The DTSA Does Not Preempt Existing State Trade Secret Law

While the DTSA provides trade secret owners with a new federal cause of action, it does not preempt existing state trade secret law regimes. As a practical matter, this means that a trade secret owner can bring parallel state and federal claims for trade secret misappropriation in federal court.¹ Because state trade secret laws may provide slightly different relief than the DTSA, it is important to consider bringing concurrent state and federal trade secret claims to avail the employer of all potential causes of action. When considering filing dual claims under the DTSA and state trade secret law, be cognizant that the definition of trade secret in the DTSA and state trade secret laws may differ.

Statutory Definitions: DTSA vs. UTSA

Before bringing a claim pursuant to the DTSA (or state or common law), it is important to understand the definitions of key terms to ensure the employer has a viable claim.

Definition of Trade Secret

A trade secret is generally any commercially valuable information that is not publicly known where reasonable effort is taken to preserve its confidentiality. The DTSA’s definition of trade secret is broad, allowing a wide range of proprietary information to fall under its protection.

Trade secret is defined as:

All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if:
- (A) The owner thereof has taken reasonable measures to keep such information secret.
- (B) The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

18 U.S.C. § 1839(3).

This definition is not significantly different from the definition for trade secret in the UTSA and contains the familiar requirements of the UTSA that the trade secret “derives independent economic value, actual or potential, from not being generally known,” and that the trade secret owner has undertaken reasonable efforts to keep the information secret.

The UTSA definition of trade secret, which is the basis for the definition of trade secret in most state trade secret statutes, is set forth below:

Trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
- (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use
- (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

Unif. Trade Secrets Act § 1(4).

Although minor, the differences in the definition of “trade secret” between the DTSA and UTSA are not necessarily insignificant, and litigants have already attempted to exploit these differences. For example, in RF Micro Devices, Inc. v. Xiang, 2016 U.S. Dist. LEXIS 91284, at *10-13 (M.D.N.C. July 14, 2016), the defendant successfully argued that a guilty plea to a criminal charge of misappropriation could not establish liability under a state civil trade secret statute with a different definition of trade secret.² Thus, be sure to argue that the trade secrets at issue meet the definition of trade secret under all applicable statutes.

Definition of Misappropriation

The definition of misappropriation under the DTSA does not differ from the definition for this term under the UTSA, and is as follows:

Misappropriation is defined in detail as follows:

(A) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means –or–

(B) Disclosure or use of a trade secret of another without express or implied consent by a person who:

(i) Used improper means to acquire knowledge of the trade secret
(ii) At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was
- (I) Derived from or through a person who had used improper means to acquire the trade secret
- (II) Acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret –or–
- (III) Derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret –or–
(iii) Before a material change of the position of the person, knew or had reason to know that
- (I) The trade secret was a trade secret.
- (II) Knowledge of the trade secret had been acquired by accident or mistake.

18 U.S.C. § 1839(5); Unif. Trade Secrets Act § 1(2)

Drafting a DTSA Complaint

When filing suit under the DTSA, it is very important to explain in the complaint why the allegedly misappropriated information qualifies for trade secret protection. It is not enough to simply call something a trade secret in a complaint under the DTSA. Rather, a plaintiff must plausibly allege—at least in general terms—how the information qualifies as a trade secret. Where a plaintiff fails to do so, the complaint is susceptible to dismissal with prejudice.³

It is, however, necessary to be guarded about how much information about the allegedly misappropriated trade secret the employer discloses during court proceedings. Thus, it is important to balance two important considerations. On the one hand, put a sufficient amount of detail into the complaint to (1) state a claim, (2) show that the allegedly misappropriated information qualifies as a trade secret, and (3) survive a motion to dismiss. On the other hand, limit the amount of detail regarding the employer’s trade secret in the pleadings, as public disclosure of a trade secret may cause the information to lose its protected trade secret status. This is an integral yet often difficult balance to strike.

The DTSA makes finding this balance easier by allowing employers to maintain the secrecy of allegedly misappropriated trade secrets during court proceedings. Specifically, the DTSA states:

[A] court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential.

18 U.S.C. § 1835(b).

Under this provision, the DTSA gives trade secret owners an opportunity to identify what information is subject to trade secret protection and why that information should be shielded from public disclosure. Thus, if trade secret owners make a proper submission, they then have a tool at their disposal to protect trade secret information from disclosure during court proceedings.

DTSA Statute of Limitations

There is a three-year statute of limitations for claims under the DTSA. This period begins when “the misappropriation . . . is discovered or by the exercise of reasonable diligence should have been discovered.” 18 U.S.C. § 1836(d). The DTSA generally applies to trade secret misappropriation that occurred on or after the date of the enactment of the Act (May 11, 2016) or began before the Act’s enactment and continued after the Act took effect.⁴

DTSA Civil Seizure

The DTSA provides for an ex parte civil seizure mechanism. Civil seizure is a preventative tool employed prior to a finding of misappropriation by which a court may “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”⁵ Using this tool, an employer aware of a potential misappropriation of its trade secrets may quickly prevent further dissemination of that information during the pendency of a formal DTSA case. Following issuance of a seizure order, the court must hold a seizure hearing where the party who obtained the seizure order has the burden to prove the facts underlying the order.

Civil seizure may be ordered only in “extraordinary circumstances” and requires a showing that:

An order pursuant to Fed. R. Civ. P. 65 or other equitable relief would be inadequate because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order.
An immediate and irreparable injury will occur if seizure is not ordered.
Harm to the applicant from denial of a seizure order (1) outweighs the harm to the person against whom seizure is ordered and (2) substantially outweighs the harm to any third parties harmed by such seizure.
The applicant is likely to succeed in showing that the information is a trade secret and that the person against whom the order is issued (1) misappropriated the trade secret by improper means or (2) conspired to use improper means to misappropriate the trade secret.
The person against whom the order will be issued has possession of the trade secret and any property to be seized.
The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the matter’s location.
The person against whom seizure is ordered would destroy, move, hide, or otherwise make such matter inaccessible to the court if on notice.
The applicant has not publicized the requested seizure.

18 U.S.C. § 1836(b)(2)(A)(ii).

Only a handful of such requests have been made under the DTSA. As of this writing, we have not identified any request for civil seizure that a court has granted.⁶ Cases where an employee used external digital storage devices and/or cloud storage services to store misappropriated trade secrets may be candidates for use of the civil seizure mechanism, especially if it is clear that the employee may not fully comply with a temporary restraining order (TRO) or preliminary injunction. Regardless of the form of the misappropriated trade secret, to make civil seizure effective, be prepared to quickly explain to the court what information was stolen, who stole it, and where it is being kept. A well-developed trade secret asset management plan—in which an employer takes proactive steps to identify, value, secure, and protect its trade secrets—will greatly assist in this process.

Seizures under Fed. R. Civ. P. 65

Where the extraordinary circumstances required for a DTSA civil seizure order are not present, litigants seeking redress for trade secret misappropriation have another option in Fed. R. Civ. P. 65. Under Rule 65, a judge may grant a seizure request as part of a TRO or preliminary injunction related to allegations of trade secret theft under the DTSA and thus potentially avoid the extraordinary circumstances requirement of the DTSA civil seizure provision.⁷

Other Remedies under the DTSA

The DTSA also provides for several remedies other than seizure upon a finding that a party misappropriated a trade secret. For instance, a court may grant an injunction to prevent any actual or threatened misappropriation, provided that the injunction does not “prevent a person from entering into an employment relationship,” and that any conditions placed on employment are based on “evidence of threatened misappropriation and not merely on the information the person knows.”⁸ Where appropriate, an injunction under the DTSA may require affirmative actions to protect the trade secret.⁹ Further, in “exceptional circumstances that render an injunction inequitable,” the court may condition future use of the trade secret on the payment of a reasonable royalty.¹⁰

Following a finding of misappropriation, a court may also award damages.¹¹ Where the trade secret is willfully and maliciously misappropriated, a court may award exemplary damages of up to double the damage amount already awarded.¹² A court may also award attorney’s fees where the misappropriation or claim of misappropriation was in bad faith or where a party makes or opposes a motion to terminate an injunction in bad faith.¹³

Inevitable Disclosure Doctrine Unavailable

By requiring actual evidence of threatened misappropriation, the DTSA explicitly rejects the inevitable disclosure doctrine under federal trade secret law

Inevitable disclosure is a common law doctrine by which a court can prevent a former employee from working for a competitor of his or her former employer where doing so would require the employee to depend upon his or her former employer’s trade secret information.¹⁴

Notwithstanding that the DTSA proscribes application of the inevitable disclosure doctrine in a federal claim for trade secret misappropriation, trade secret plaintiffs can still allege misappropriation under the inevitable disclosure doctrine pursuant to a state law cause of action where the state common law allows application of the doctrine. Thus, because some states have adopted (or at least not rejected) the inevitable disclosure doctrine and some have not, the choice of jurisdiction is very important for trade secret plaintiffs alleging misappropriation under the DTSA with a pendent state trade secret claim under a theory of inevitable disclosure.¹⁵

Whistleblower Provision and Notice Provision

As discussed above, the remedies for employers suing former employees for trade secret misappropriation under the DTSA include punitive damages and attorney’s fees. To take advantage of these remedies, however, an employer must advise its employees of the existence of the whistleblower immunity in any contract or other employment agreement entered into after the enactment of the DTSA.¹⁶ As such, employers should strongly consider updating their employment policies and agreements going forward to include either the required notice or a cross-reference to a policy document that includes a statement about the DTSA’s whistleblower immunity.

The DTSA also includes a safe harbor for whistleblower employees that provides for immunity from criminal or civil liability under any federal or state trade secret law for disclosure of a trade secret in confidence to an attorney or governmental official “solely for the purpose of reporting or investigating a suspected violation of law,” or in a filing in a lawsuit made under seal.¹⁷ Employers should be acutely aware of the notice provision within the whistleblower immunity section of the statute because compliance with this notice provision may affect whether an employer can seek certain remedies under the statute.

Sample Notice Language

Below is sample notice language that employers may consider including in employment agreements entered into after enactment of the DTSA:

Defend Trade Secret Act Trade Secret Disclosure Notice
NOTICE is hereby given that this agreement does not affect any immunity under 18 U.S.C. § 1833(b)(1) or (2). For the purposes of these subsections only, which are reproduced below, individuals performing work as contractors or consultants are considered to be employees.
(1) An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
(2) An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.

Overseas Application

The terms of the Economic Espionage Act (EEA), which the DTSA modified, allow employers to use the DTSA to address trade secret misappropriation where the theft occurred outside of the United States. Specifically, the EEA includes a provision indicating that the law applies to conduct occurring outside of the United States if:

The offender is a citizen or permanent resident of the United States.
The offender is a United States corporation.
An act in furtherance of the offense was committed in the United States.

18 U.S.C. § 1837.

The option to apply the DTSA to overseas conduct will be immensely valuable because overseas trade secret theft continues to proliferate. The increased threat of trade secret theft overseas is a result of the lack of strong intellectual property protection in many foreign countries. Overseas application will be especially useful to address economic and corporate espionage originating in China.¹⁸ Compounding this threat is the reality that significant structural and institutional impediments undermine effective IPR enforcement in China, including a lack of coordination among government agencies, insufficient resources for enforcement, local protectionism, and a lack of judicial independence.¹⁹

The DTSA’s ability to address trade secret misappropriation overseas is valuable whether the theft occurs in China or another country with weak IP protections.

The DTSA at the International Trade Commission

The DTSA may also become the trade secret statute of choice to remedy trade secret misappropriation through a Section 337 investigation before the International Trade Commission (ITC). The ITC is a quasi-judicial administrative agency with the authority to address unfair trade practices related to imports, including the authority to exclude articles from importation into the United States. A complaint in a Section 337 investigation related to trade secret misappropriation generally must show:

(1) Importation of an article into the United States related to an unfair method of competition or unfair act, the threat or effect of which is to
- (a) Destroy or substantially injure an industry in the United States
- (b) Prevent the establishment of such an industry
- (c) Restrain or monopolize trade and commerce in the United States

19 U.S.C. § 1337(a)(1)(A).

Notably, in a Section 337 investigation, there is no requirement that the alleged trade secret theft take place in the United States.²⁰ Additionally, Section 337 investigations move very quickly, and the ITC typically reaches a final adjudication within 16 months of initiating the investigation. Thus, where an employer has been the victim of trade secret misappropriation overseas and the theft relates to articles being imported into the United States, strongly consider bringing a DTSA action before the ITC.

Bret Cohen is a partner in Nelson Mullins Riley & Scarborough LLP’s Boston office where he co-chairs the Labor and Employment Practice. His practice covers a range of industries in the drafting and enforcement of non-compete, confidentiality, and other employment-related agreements throughout the United States. He has also represented individual employees, typically high level executives, in such matters on behalf of the companies who seek to hire them. Mr. Cohen’s practice has also regularly involved advising public company executives on terminations and employment issues and providing advice on a range of matters involving employment agreements, termination of high level executives, worker classification, deal diligence, and hiring oversight and best practices. His practice covers both the negotiation and drafting of relevant agreements and the regular enforcement in litigation of the claims of employers seeking to enforce those agreements. Amanda Carozza is Of Counsel at Mintz Levin, P.C. Her practice encompasses a variety of employment litigation matters, including disputes involving misappropriation of trade secrets and confidential information, wage and hour violations, discrimination and wrongful termination, breach of fiduciary duties and litigation surrounding the enforcement and defense of non-competition and non-solicitation restrictive covenants. She has experience representing managementside clients before state, federal, and local administrative agencies as well as before state and federal courts throughout the country and in arbitration and mediation forums. Jennifer Roma is an associate in Nelson Mullins’ Boston office who represents clients in antitrust, distribution, intellectual property, and general corporate matters

To find this article in Lexis Practice Advisor, follow this research path:

RESEARCH PATH: Labor & Employment > Non-competes and Trade Secret Protection > Protecting Trade Secrets > Articles

Latest Blogs

The New York LLC Transparency Act

Protecting Attorney-Client Privilege and Work Product in a GenAI...

New Publications Added to Lexis+® and Lexis®

“World We Want” Podcast Features Efforts to Leverage Technology...

Employee or Independent Contractor? The Department of Labor’s...