The Impact of the New Federal Trade Secrets Act on Trade Secret Litigation

Traditionally, trade secret litigation has been based on state law, principally the various state versions of the Uniform Trade Secrets Act (UTSA) which nearly all states have adopted. The landscape changed on May 11, 2016, when Congress enacted the first federal trade secret misappropriation law: the Defend Trade Secrets Act (DTSA).¹ Since its enactment, there has been a significant increase in trade secrets actions filed in federal court. In 2017, the number of trade secrets actions jumped to 1,134 from an average of around 900 per year from 2009-2016.² Here are some of the ways the enactment of the DTSA impacted trade secret litigation.

Increased Access to Federal Courts

The DTSA provides federal jurisdiction for most trade secrets cases so that, if a DTSA claim is included in the complaint, the case can be filed in (or removed to) federal court. Previously, federal jurisdiction was only available to diverse parties, or if the plaintiff asserted a federal claim in addition to the state law trade secret claim. The DTSA requires that the alleged trade secrets be "related to a product or service used in, or intended for use in, interstate or foreign commerce." This requirement is easily met in most cases, but courts have dismissed DTSA claims if a plaintiff fails to allege a nexus between the alleged trade secrets and interstate or foreign commerce.³

Access to the federal courts provides a forum that may sometimes be preferred over state courts for resolving the issues that arise in trade secret cases. Federal courts are accustomed to handling sophisticated civil litigation. They are experienced in dealing with complex discovery issues, including protective orders, and issues regarding expert witness testimony. Alongside this, federal courts readily grant meritorious motions for summary judgment. Further, as Congress noted when it enacted the DTSA, trade secret theft today is often not confined to a single state and trade secret cases often require swift action by courts across state lines to preserve evidence. Federal courts can be better equipped to provide such relief.

The DTSA Does Not Displace State Trade Secret Law

The DTSA explicitly provides that it does not preempt or displace any other remedies provided by state law for the misappropriation of a trade secret.⁴ Consequently, it appears that plaintiffs now are asserting claims under both the DTSA and the applicable state version of the UTSA so that they can claim the benefits of both provisions to the extent there is a difference between them.

Liability under the DTSA

The DTSA was modeled upon the UTSA. Its definition of a trade secret is very similar to the UTSA. Likewise, it defines "misappropriation" in the same way as the UTSA, to include (1) acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means or (2) 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 does not apply to acts of misappropriation that occurred before its enactment in May 2016. But it does apply to misappropriations that began prior to the DTSA's enactment if the misappropriation continued to occur (through wrongful use or disclosure) after that date.⁶ Thus, the DTSA covers cases of "continuing misappropriation." This contrasts with the UTSA, which does not apply to continuing misappropriation that occurs after the effective date of the relevant state statute.

Pleading a DTSA Claim

Pleading a claim under the DTSA is essentially the same as pleading a claim under the UTSA but there are at least two potential differences. First, as discussed above, a claim under the DTSA must allege a nexus between the alleged trade secrets and interstate or foreign commerce. Second, it may not be necessary to plead damages to state a claim under the DTSA.⁷

Remedies Available under the DTSA

The DTSA provides for both equitable and monetary relief. Like the UTSA, it authorizes an injunction to prevent actual or threatened misappropriation of trade secrets. But, as discussed above, an injunction may not prevent a person from entering into an employment relationship, and any conditions placed on the new employment must be based on evidence of threatened misappropriation and not merely on the information the person knows. In this respect, relief under the DTSA is potentially narrower than under the UTSA.

As yet, there is little case law analyzing damages under the DTSA although one recent decision does provide an extended and thoughtful discussion of damages under the DTSA and UTSA.⁸ It appears unlikely that the DTSA will change the landscape with respect to damages for trade secret misappropriation because its provisions essentially replicate the UTSA.⁹

There are three categories of damages that the court may award:

1. Actual losses: the plaintiff's lost profits from the misappropriation.
2. Unjust enrichment: a plaintiff may also recover the amount of unjust enrichment received by the defendant, but only to the extent it is not duplicative of its actual losses.
3. Reasonable royalty: as an alternative to damages based on actual losses or unjust enrichment, the plaintiff may be awarded a reasonable royalty for the unauthorized disclosure or use of the trade secret.¹⁰ The legislative history makes clear that this is not the preferred remedy: "the Committee prefers other remedies that, first halt the misappropriator's use and dissemination of the misappropriated trade secret and, second, make available appropriate damages."¹¹

Both the DTSA and the UTSA permit the recovery of two times exemplary or punitive damages provided that the misappropriation of the trade secret is willful and malicious. Both also provide for an award of attorneys' fees for the prevailing party in circumstances of bad faith or willful and malicious misappropriation. In order to obtain those enhanced damages and attorneys' fees against an employee or former employee under the DTSA; however, an employer must include certain immunity language in its confidentiality agreements or policies acknowledged by employees that address whistleblower immunity.¹²

Notes:

¹ 18 U.S.C. § 1831 et seq.

² https://www.law360.com/articles/1063760/trade-secret-suits-rise-sharply-in-wake-of-landmark-ip-law.

³ E.g., Government Employees Insurance Co. v. Scott P. Nealey, No. CV 17-807, 2017 WL 2572519, at *13 (E.D. Pa. June 13, 2017).

⁴ 18 U.S.C. § 1838.

⁵ 18 U.S.C. § 1839; see AUA Private Equity Partners, LLC v. Soto, No. 1:17-cv-8035, 2018 WL 1684339, at *4 (S.D.N.Y. April 5, 2018).

⁶ Brand Energy & Infrastructure Servs., Inc. v. Irex Contracting Grp., No. CV 16-2499, 2017 WL 1105648, at *4 (E.D. Pa. Mar. 24, 2017).

⁷ See Blue Star Land Services, LLC v. Coleman, No. CIV-17-931, 2017 WL 6210901, at *4 and n. 2 (W.D. Okla. Dec. 8, 2017).

⁸ Steves and Sons, Inc. v. JELD–WEN, Inc., No. 3:16–cv–545, 2018 WL 2172502 (E.D. Va. May 10, 2018).

⁹ See Lightning Box Games Pty, Limited v. Plaor, Inc., No. 17-cv-03764, 2017 WL 7310782, at *11 (N.D. Cal. Dec. 29, 2017).

¹⁰ 18 U.S.C. § 1836(b)(3)(B).

¹¹ H.R. Rep. No. 114-529 at 13 (2016); see also S. Rep. No. 114-220 at 9 (2016).

¹² 18 U.S. Code § 1833