The impact of the new Defend Trade Secrets Act, part two

By Evan Rothstein | May 22, 2016

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Last week's column covered the new Defend Trade Secrets Act (DTSA) and how it created, for the first time, a uniform federal intellectual-property regime for trade secrets. I wrote about how this law could affect litigation in federal courts and also detailed changes employers needed to make immediately to any employment contracts containing protections for trade secrets and confidential information. This column discusses two important provisions of the DTSA and how they impact the remedies litigants in court can possibly receive.

Ability to seek ex parte seizures of property

Perhaps the most important difference between the DTSA and the prior state law regimes is the early-seizure remedy. The DTSA contains an unusual provision that permits trade-secret owners to seek, on an ex parte basis (i.e., without first informing the defendants), an order seizing property in defendants' possession that allegedly contains stolen trade secrets. This ex parte seizure provision is new and novel -- nothing like it currently exists in federal or state trade-secret law. As a result, its scope and impact are difficult to predict. The statute appears to allow trade-secret owners to seize not only company property, but property owned by departing employees individually.

The DTSA may further allow an order seizing property that contains both allegedly stolen information and other information such as a former employee's smartphone or thumb drive. Thus, for example, a party could ex parte seek to and seize a hard drive belonging to a departing employee that allegedly contains the trade secrets of the former employer. Given the potential reach of the seizure provision, the risk for competitive abuse is acute. In the above example, a trade-secret owner may seek an order seizing a competitor's key assets (i.e., the hard drive), potentially shutting the competitor down until the order expires if that hard drive was the server upon which the new business is running.

In other words, a judge may order seizure of a hard drive that contains allegedly stolen trade secrets commingled with legitimate data about the competitor's business that is necessary for its ongoing operation -- i.e., payroll. It is unclear what specific damages or other remedies are available to the competitor if it cannot function without the unquestionably legitimate information during the seizure. The DTSA contains numerous safeguards designed to avoid abuse, but it remains to be seen how effective they will be in practice.

Injunctive relief cannot inhibit employee mobility

Most trade-secret cases involve former employees leaving to work for -- or start -- a competing business. One of the major concerns about early versions of the bill was that the DTSA would severely limit employees' mobility. To address this concern, the DTSA provides that any injunctive relief that would "prevent (or place conditions on) a person from entering into an employment relationship" must be "based on evidence of threatened misappropriation and not merely on the information the person knows." In a sense, this federal law confirms that there is no such thing as the "inevitable disclosure doctrine." The requirement of "threatened misappropriation" does not mean that the employee must have expressly threatened misappropriation, but rather should consist of circumstantial evidence of likely misappropriation.

In addition, any injunction issued under the DTSA must not conflict with an applicable law that "prohibit[s] restraints on the practice of a lawful profession, trade, or business." Because state laws governing restraints on employment vary widely, this may result in different outcomes in different states. In particular, in states that tend to place high value on employee mobility such as California (where non-competition agreements are mostly invalid), a trade-secret owner seeking an injunction against a low-level employee may face an argument that state law prohibits or limits the right or scope of an injunction under the DTSA.

Final thoughts

While the urge by IP practitioners may be rushing to judgment that the DTSA is the panacea for trade-secret plaintiffs or holders, we instead suggest a metered approach. We first recommend that employers with heavy trade-secret portfolios or issues incorporate the necessary language into their employment contracts or global policies. We also recommend relying upon the ex parte procedure in cases where a seizure is the best option for stopping an imminent and obvious trade-secret dissemination -- instances where a device or source code is taken.

In most situations where a trade-secrets theft is suspected, though, it is still best to thoughtfully and fully consider where a case is more properly suited -- state court or federal court -- except now we know with certainty that a trade-secret holder has the federal court option available. As the interpretation and implementation of the DTSA evolves, we will all be in a much better place to analyze just how broad and sweeping the new law is and how the guaranteed access to federal court has affected the legal landscape.

Evan Rothstein is an attorney with Brownstein Hyatt Farber Schreck.