United States: The Federal Defend Trade Secrets Act Vs. The California Uniform Trade Secrets Act

Although some version of the Uniform Trade Secrets Act ("UTSA") has widely been adopted by most states, including California, variations among the versions and related judicial interpretation has led to uncertainty—particularly in today's interstate economy where trade secrets and misappropriation easily may cross multiple states.

On May 11, 2016, President Obama signed the Defend Trade Secrets Act ("DTSA").  The new law, which mostly tracks the UTSA, provides civil remedies in federal district courts for trade secret misappropriation.  18 U.S.C. §§ 1836-39 et. seq.  Notably, the DTSA does not preempt state trade secret laws.  Accordingly, aggrieved trade secret holders now may seek civil remedies for perceived misappropriation under either state or federal law—or both.

A DTSA claim provides a path to federal court where jurisdiction may not otherwise exist.  In federal court, a state-law UTSA claim could be asserted in addition to the DTSA claim.  But, the reverse is not true – a DTSA claim could not be asserted in state court.

Federal court may be perceived as a more desirable forum to some plaintiffs (e.g., a more robust subpoena power exists).  However, federal court may come with some drawbacks (e.g., unlike many state courts, federal courts employ heightened pleading standards that require more precise factual allegations to support the plaintiff's claims.  Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, n. 3 (2007) (The Federal Rules of Civil Procedure "require, a 'showing', rather than a blanket assertion, of entitlement to relief").

There are also reasons that just because a trade secret holder can assert both a DTSA and California UTSA ("CUTSA") claim does not mean it should assert both.

The assertion of a CUTSA claim would preempt common law torts that are "based on the same nucleus of facts as [a] misappropriation of trade secrets claim." See, e.g., K.C. Multimedia, Inc. v. Bank of Am. Tech. & Operations, Inc., 171 Cal. App. 4th 939, 954 (Cal. Ct. App. 2009); Mattel, Inc. v. MGA Ent., Inc., 782 F. Supp. 2d 911, 987 (C.D. Cal. 2011).  That is, a plaintiff asserting a claim under CUTSA cannot also assert state law tort claims (e.g., for unfair competition) that are based on the same allegedly wrongful acts.  It has yet to be decided by the courts whether a plaintiff can avoid CUTSA's preemption effect by asserting a DTSA claim without asserting a CUTSA claim when the allegations would satisfy a CUTSA claim's elements.  There may be times that common law torts would be valuable to the plaintiff.  Accordingly, careful thought should be given as to whether to assert a CUTSA claim.

On the other hand, not all CUTSA claims would also constitute a DTSA claim.  For example, a CUTSA claim may be asserted by a former owner of a trade secret (see Jasmine Networks, Inc. v. Super., Ct., 180 Cal. App. 4th 980, 986 (Cal. Ct. App. 2009)).  The DTSA is silent as to whether a former owner has standing to bring a claim .  18 U.S.C. § 1839(4) (defining owner as "the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed").  Furthermore, DTSA is not retroactive; at least some misappropriation conduct must have occurred after May 11, 2016 for a DTSA claim to be available.  Thus, in circumstances where the plaintiff is a former (as opposed to current) owner of the trade secret, or the entirety of the claim is based on acts that occurred prior to May 11, 2016, relief may not be available under the DTSA.

To help visualize these (and other) differences between CUTSA and DTSA, the following summary chart may be useful:

Law California (UTSA) Federal (DTSA)
Ex Parte Seizure Not mentioned. Ex parte seizure if "necessary to prevent the propagation or dissemination of the trade secret" and only in "extraordinary circumstances."
Whistleblower Immunity Not mentioned. Whistleblowers are immune from civil or criminal action to for disclosing information in confidence to a government official or attorney for the purpose of reporting a suspected violation of law.
Preempts Common Law Tort Claims Based on Same Nucleus of Facts Common law torts "based on the same nucleus of facts as [a] misappropriation of trade secrets claim" are preempted by CUTSA. See, e.g., K.C. Multimedia, Inc. v. Bank of Am. Tech. & Operations, Inc., 171 Cal. App. 4th 939, 954 (Cal. Ct. App. 2009); Mattel, Inc. v. MGA Ent., Inc., 782 F. Supp. 2d 911, 987 (C.D. Cal. 2011). DTSA purports not to preempt state law claims, but it is unclear whether if the allegations satisfy a CUTSA claim, CUTSA's preemption effect would apply to preempt common law torts based on the same nucleus of facts.
Ownership Requirement Current or former owner or licensee may bring an action. DTSA's definition of "owner"  is in the present tense, but the courts have not addressed whether a former owner has standing.
Inevitable Disclosure An injunction that prevents employee mobility is incompatible with California public policy. See Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443 (Cal. Ct. App. 2002); Cal. Bus. & Prof. Code § 16600. 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).

Although on first blush, DTSA and CUTSA claims are comparable, there are fine nuances that should be considered before one or the other or both is asserted.  We, at Sheppard Mullin, stand ready to navigate our clients through those nuances so that they find themselves in the best platform possible for their litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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