United States: Emerging Trends In Defend Trade Secrets Act Litigation

Last Updated: October 2 2017
Article by Tara C. Clancy, April Boyer and Michael R. Creta

Congress created the first statutory private federal cause of action for trade secret misappropriation when it enacted the Defend Trade Secrets Act ("DTSA") on May 11, 2016. Although the DTSA has some material differences from existing state laws (which are predominately variations of the Uniform Trade Secrets Act ("UTSA")),1 the statute generally extends similar protections to those afforded by most states. Nonetheless, the ability to enforce trade secret rights in federal courts and achieve a consistent application of trade secret law across state borders generated a lot of interest amongst employers throughout the United States.

Now, more than a year since its enactment, the DTSA is being shaped and interpreted by various federal court decisions and enforcement trends are emerging. This Alert provides some insight into these new trends in DTSA litigation, including how federal courts have: (1) interpreted DTSA claims premised on theories of continuing misappropriation; (2) required a connection between alleged trade secrets and interstate commerce; and (3) applied the inevitable disclosure doctrine to DTSA claims.

Background

Under the DTSA, an employer may file suit for the misappropriation of trade secrets related to interstate commerce.2 Information is protectable as a trade secret under the DTSA if the owner has "taken reasonable measures to keep such information secret" and "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."3 There are two methods by which plaintiffs may show misappropriation. First, a plaintiff may allege acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means.4 Second, a plaintiff may allege disclosure or use of a trade secret without consent by a person who used improper means to acquire the trade secret or knows or had reason to know that the trade secret was acquired by improper means.5 The DTSA provides wide-ranging remedies for misappropriation, which include civil seizure of property, injunctive relief, monetary damages for actual loss, monetary damages for unjust enrichment, reasonable royalties, exemplary damages, and attorney's fees.6

Continuing Misappropriation

The DTSA provides a cause of action only for acts occurring on or after its May 11, 2016 enactment date.7 Over the last sixteen months, most courts have held that plaintiffs may bring claims based on wrongful acquisition of trade secrets that occurred prior to May 11, 2016, if the defendants continued to use the trade secrets after the enactment date.8 As one federal court recognized, "nothing suggests that the DTSA forecloses a use-based theory simply because the trade secret being used was misappropriated before the DTSA's enactment."9 This "use-based" theory of liability involving acquisition of the alleged trade secrets prior to the enactment date is frequently referred to as "continuing misappropriation."

To explain why the DTSA allows claims based on continuing misappropriation, courts have regularly compared the language of the UTSA with the language of the DTSA. The UTSA states that "with respect to a continuing misappropriation that began prior to the UTSA's effective date, the UTSA does not apply to the continuing misappropriation that occurs after the effective date."10 A number of state trade secret laws contain similar provisions prohibiting continuing misappropriation claims.11 Because the DTSA does not contain any such language, courts have reasoned that continuing misappropriation claims are permissible.12

This trend in allowing claims premised on continuing misappropriation potentially makes it easier for plaintiffs to plead a DTSA cause of action and gain access to the federal courts. However, to successfully bring a DTSA claim, plaintiffs must allege that at least some misappropriation occurred after May 11, 2016. Courts have granted motions to dismiss DTSA claims that fail to allege any specific instances of misappropriation occurring after the DTSA's enactment date.13

The Interstate Commerce Requirement

Unlike state trade secret laws, the DTSA allows a claim only if the alleged trade secrets are "related to a product or service used in, or intended for use in, interstate or foreign commerce."14 Courts have taken this jurisdictional requirement seriously at the pleading stage. If a plaintiff fails to allege a nexus between the alleged trade secrets and interstate or foreign commerce, courts have been willing to grant dismissal.15 Further, even if a defendant does not move for dismissal on these grounds, federal courts have an independent obligation to raise the issue and decide if there is a sufficient nexus between the alleged trade secrets and interstate commerce in order to exercise subject-matter jurisdiction.16

To avoid dismissal, plaintiffs should allege specific facts that demonstrate a clear connection between the alleged trade secrets and interstate commerce. For example, in Grow Fin. Fed. Credit Union v. GTE Fed. Credit Union, the complaint alleged that the plaintiff was a "federally chartered credit union" that was "subject to the Gramm-Leach-Bliley Act of 1999 and the National Credit Union's rules and regulations for privacy and confidentiality."17 The complaint also alleged that the plaintiff "provideed various financial products and services to its members" and used the alleged trade secrets "in connection with the provision of its products and services in interstate U.S. commerce."18 The Middle District of Florida held that, at the pleading stage, these allegations were sufficient to "establish a nexus between the trade secrets that were allegedly misappropriated and interstate commerce."19

The Inevitable Disclosure Doctrine

Prior to discovery, it is often difficult for an employer to show that a former employee disclosed trade secrets to a competitor or that a competitor has used such trade secrets. Some jurisdictions recognize this difficulty and have held that a "plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant's new employment will inevitably lead him to rely on the plaintiff's trade secrets."20 This method of proving trade secret liability is commonly known as the "inevitable disclosure doctrine." In deciding whether there could be an inevitable disclosure of the plaintiff's trade secrets, courts consider three factors: "(1) the level of competition between the former employer and the new employer; (2) whether the employee's position with the new employer is comparable to the position he held with the former employer; and (3) the actions the new employer has taken to prevent the former employee from using or disclosing trade secrets of the former employer."21

When the DTSA was enacted, many academics and commentators believed Congress expressly chose not to recognize the inevitable disclosure doctrine. Specifically, the DTSA authorizes an injunction for a threatened misappropriation, but the injunction cannot "prevent a person from entering into an employment relationship" and "conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows."22 This initially was interpreted to mean that the inevitable disclosure doctrine would not be applicable to claims brought under the DTSA. At least some litigants have attempted to make this argument.23

Some federal courts have disagreed with this interpretation of the DTSA. A trio of recent decisions from the Northern District of Illinois has applied the inevitable disclosure doctrine to DTSA claims.24 In Molon Motor & Coil Corp. v. Nidec Motor Corp., the court denied the plaintiff's motion to dismiss because there was "enough to trigger the circumstantial inference that the trade secrets inevitably would be disclosed by the former employee to the defendant-competitor."25 Similarly, in Mickey's Linen v. Fischer, the court granted the plaintiff's motion for a preliminary injunction after finding that the defendant-former employee would "inevitably use or disclose the plaintiff's trade secrets during his employment with a competitor."26

While plaintiff-employers may be able to take advantage of the inevitable disclosure doctrine to allege DTSA claims, notably all of the decisions on this issue have come from the Northern District of Illinois and have also involved claims under the Illinois Trade Secrets Act. Illinois has been a longstanding supporter of the inevitable disclosure doctrine. Its adoption of the doctrine can be traced back to the seminal Seventh Circuit decision in PepsiCo, Inc. v. Redmond, which involved an Illinois Trade Secrets Act claim.27 But, unlike Illinois, some states have rejected the inevitable disclosure doctrine or at a minimum do not favor it.28 It is unclear if federal courts in these jurisdictions will rely upon the recent Northern District of Illinois case law or instead turn to their respective state law interpretations of the inevitable disclosure doctrine when addressing DTSA claims.

Conclusion

These growing trends provide increased clarity on the scope and requirements of the DTSA. Employers should be aware of the timing of alleged misappropriation, whether alleged trade secrets are related to interstate commerce, and how the inevitable disclosure doctrine could impact current or potential litigation. By being mindful of these trends and continuing to monitor DTSA cases, employers can better protect their intellectual property rights.

Footnotes

1The UTSA was published by the Uniform law Commission in 1979 and amended in 1985. It has been adopted in some form in forty-eight different states.

218 U.S.C. § 1836(b)(1).

3 18 U.S.C. § 1839(2).

4 18 U.S.C. § 1839(5).

5 Id.

6 18 U.S.C. § 1836(b)(2) and (3). For additional background information on the DTSA, please see our alert titled Several Months Into Having Federal Protection for Trade Secrets: What Are We Learning?

7 Defend Trade Secrets Act of 2016, PL 114-153, May 11, 2016, 130 Stat 376.

8 Brand Energy & Infrastructure Servs., Inc. v. Irex Contracting Grp., No. CV 16-2499, 2017 WL 1105648, at *4 (E.D. Pa. Mar. 24, 2017) ("Other district courts have analyzed the applicability of the DTSA to misappropriations that occurred before the DTSA was enacted. These courts have all held that the DTSA applies to misappropriations that began prior to the DTSA's enactment if the misappropriation continues to occur after the enactment date."); Adams Arms, LLC v. Unified Weapon Sys., Inc., No. 8:16-CV-1503-T-33AEP, 2016 WL 5391394, at *6 (M.D. Fla. Sept. 27, 2016) ("The Court finds that the plaintiff may state a plausible claim for relief, if the plaintiff sufficiently alleges a prohibited 'act' occurring after May 11, 2016.").

9 Physician's Surrogacy, Inc. v. German, No. 17CV0718-MMA (WVG), 2017 WL 3622329, at *9 (S.D. Cal. Aug. 23, 2017) (quoting Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-CV-02177-SI, 2017 WL 1436044, at *4 (N.D. Cal. Apr. 24, 2017)).

10 UTSA § 11.

11 E.g., R.I. Gen. Laws § 6-41-11 ("This chapter takes effect on July 1, 1986, and does not apply to misappropriation occurring prior to July 1, 1986. With respect to a continuing misappropriation that began prior to July 1, 1986, the chapter also does not apply to the continuing misappropriation that occurs after July 1, 1986."); Va. Code § 59.1-343 (containing similar language).

12 See Brand Energy, 2017 WL 1105648, at *3–4 (denying motion to dismiss and allowing continuing misappropriation theory after comparing the DTSA to the UTSA); Adams Arms, 2016 WL 5391394, at *5–7 (same).

13 E.g., Physician's Surrogacy, 2017 WL 3622329, at *8–9 (dismissing DTSA claim because it lacked "sufficient detail with regard to any conduct that may have occurred after May 11, 2016"); Cave Consulting, 2017 WL 1436044, at *5 (dismissing DTSA claim because the "plaintiff made no specific allegations that defendant used the alleged trade secrets after the DTSA's May 11, 2016 enactment").

14 18 U.S.C. § 1836(b)(1).

15 Government Employees Insurance Co., et al., v. Scott P. Nealey, et al., No. CV 17-807, 2017 WL 2572519, at *13 (E.D. Pa. June 13, 2017) ("The plaintiffs' complaint does not allege any nexus between interstate or foreign commerce and the alleged trade secrets . . . this deficiency, in itself, warrants dismissal of plaintiffs' DTSA claim."); Hydrogen Master Rights, Ltd. v. Weston, 228 F. Supp. 3d 320, 338 (D. Del. 2017) (dismissing DTSA claims in part because the "complaint failed to allege any nexus between interstate or foreign commerce" and the allegedly misappropriated trade secrets).

16 Government Employees Insurance, 2017 WL 2572519, at *12.

17 No. 8:17-CV-1239-T-30JSS, 2017 WL 3492707, at *3 (M.D. Fla. Aug. 15, 2017).

18 Id.

19 Id.

20 PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).

21  Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16 C 03545, 2017 WL 1954531, at *5 (N.D. Ill. May 11, 2017) (quoting Saban v. Caremark Rx, L.L.C., 780 F. Supp. 2d 700, 734–35 (N.D. Ill. 2011)).

22 18 U.S.C. § 1836(3)(A)(i) (emphasis added).

23 Xoran Holdings LLC v. Luick, No. 16-13703, 2017 WL 4039178, at *6 (E.D. Mich. Sept. 13, 2017) (the defendants cited 18 U.S.C. § 1839(b)(3)(A)(i) and argued that the inevitable disclosure doctrine was "rejected by Congress", but the court did not address this issue).

24 Mickey's Linen v. Fischer, No. 17 C 2154, 2017 WL 3970593, at *12–13 (N.D. Ill. Sept. 8, 2017); Cortz, Inc. v. Doheny Enterprises, Inc., No. 17 C 2187, 2017 WL 2958071, at *11–12 (N.D. Ill. July 11, 2017); Molon Motor, 2017 WL 1954531, at *5–7.

25 Molon Motor, 2017 WL 1954531, at *7. For additional information on the Molon Motor decision and its application of the inevitable disclosure doctrine, please see our alert titled It's Inevitable: Pleading Trade Secret Misappropriation Under the Defend Trade Secrets Act of 2016.

26 Mickey's Linen v. Fischer, No. 17 C 2154, 2017 WL 3970593, at *13 (N.D. Ill. Sept. 8, 2017).

27 54 F.3d at 1267–1272 (affirming district court's grant of preliminary injunction after finding that defendant-former employee would inevitably rely upon trade secrets from plaintiff former-employer in his new position at a competitor of the plaintiff).

28 E.g., Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999) ("The Court holds that California trade-secrets law does not recognize the theory of inevitable disclosure."); LeJeune v. Coin Acceptors, Inc., 849 A.2d 451, 471 (Md. 2004) ("We conclude that the theory of 'inevitable disclosure' cannot serve as a basis for granting a plaintiff injunctive relief under the Maryland Uniform Trade Secrets Act."); Gov't Tech. Servs., Inc. v. IntelliSys Tech. Corp., 1999 WL 1499548, at *1 (Va. Cir. 1999) ("Virginia does not recognize the inevitable disclosure doctrine.").

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
McLane Middleton, Professional Association
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
McLane Middleton, Professional Association
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions