Defend Trade Secrets Act of 2016 (DTSA) Archives

Misappropriation of Trade Secrets Litigation: A Brief Primer

Posted on March 15, 2021May 2, 2022 by Richard Friedman

Every state has common law or statutory law prohibitions against the theft or disclosure of trade secrets. The federal law is the Defend Trade Secrets Act of 2016 (the “DTSA”) (18 U.S.C. §1836, et seq.). New York relies on common law which creates civil liability for misappropriation of trade secrets.

Trade secrets are only protected under the DTSA if they are related to “a product or service used in, or intended for use in, interstate or foreign commerce.” (18 U.S.C. § 1836(b)).

What is a trade secret?
- The DTSA defines the term “trade secret” to mean “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; and
  - 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)). Some courts have articulated the elements more specifically than the DTSA. ¹
What is misappropriation?
- There are two ways a person or company may be found liable in a civil action for misappropriation of trade secrets under the DTSA:
  - (1) 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
  - (2) disclosure or use of a trade secret of another without express or implied consent. ²
  - When the alleged misappropriation is based on disclosure or use, the person who disclosed the information must have:
    - “(i) used improper means to acquire knowledge of the trade secret;
    - (ii) at the time of the disclosure or use, knew or had reason to know that 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; and
      - (II) knowledge of the trade secret had been acquired by accident or mistake.” 18 U.S.C. § 1839(5).
Preliminary Actions By Employer
- Investigation
  - Conduct a forensic investigation to determine what, if any, information the employee actually misappropriated; and
  - Attempt to determine which information is truly a trade secret;
- Commencing the Action
  - Forum: Unless there is an employment of other agreement between the employee and employer, the employer chooses the forum under the DTSA. Federal courts have pendent jurisdiction over related state law claims.
    - Since DTSA’s enactment, courts generally have analyzed DTSA and parallel state law claims consistently and have looked to DTSA jurisprudence to interpret DTSA definitions. ³
    - The DTSA creates a private cause of action for civil trade secret misappropriation under federal law (18 U.S.C. § 1836(b)). The law supplements but does not preempt or eliminate state law remedies for trade secret misappropriation.
  - Decide whether to add the former employee’s new employer and/or one or more third parties in the action.
  - Pleading stage
    - “At the pleading stage” of a DTSA claim, “a plaintiff need not spell out the details of the trade secret,” but must “describe the subject matter of the trade secret with sufficient particularity to . . . permit the defendant to ascertain at least the boundaries within which the secret lies.” ⁴
    - Employer must allege that it took reasonable steps to guard the secrecy of the allegedly misappropriated information. ⁵
  - Independent Economic Value
    - Failure to allege (and prove) independent economic value from the misappropriated information is fatal to a DTSA claim.
      - The competitive value requirement is not met if the public or a competitor can recreate the information. ⁶
  - Inevitable Disclosure Doctrine: This theory applies where it is allegedly impossible for the former employee to perform his or her new job without relying on the employee’s knowledge of the former employer’s trade secrets, disclosing them to the employee’s new employer, or both. Not every state recognizes this doctrine. ⁷
    - Under the DTSA, courts generally impose a higher burden on plaintiffs seeking relief (must show more than a former employee went to a direct competitor to do the same job, and the former employer fears the former employee will disclose trade secrets in doing that job). ⁸
  - Potential Additional Claims
    - Breach of Contract; Business Torts; Violation of Computer Fraud and Abuse Act.
- Discovery
  - Interrogatories, document requests.
  - Expedited discovery if requesting injunctive relief.
- Remedies/Relief
  - Injunctive relief;
  - Damages;
  - Attorney’s fees and other costs.
Potential Defenses/Counterclaims By Former Employee
- Defenses
  - The information at issue is not a trade secret.
  - The former employer did not take appropriate steps to protect the secrecy of the information.
  - The information was not misappropriated.
- Counterclaims
  - Unpaid wages, discrimination, retaliatory discharge.
- The statute of limitations for DTSA is three years after the earlier of when the misappropriation either: (i) is discovered; or (ii) should have been discovered with reasonable diligence.
Confidentiality during litigation: One challenge for the plaintiff’ is that it must identify and describe the trade secrets it is seeking to protect. However, this issue can generally be resolved via:
- An Order of Confidentiality; and
- Filing certain documents under seal with the Court’s approval.

__________________________________________________

¹ See, e.g., API Americas Inc. v. Miller, 380 F. Supp. 3d 1141, 1148 (D. Kan. 2019); Arctic Ener. Servs., LLC v. Neal, 2018 WL 1010939, at *2 (D. Colo. Feb. 22, 2018).
² Brand Energy & Infrastructure Servs., Inc. v. Irex Contracting Grp., 2017 WL 1105648, at *3 (E.D. Pa. Mar. 24, 2017)).
³ See, e.g., Earthbound Corp. v. MiTek USA, Inc., 2016 WL 4418013, at *10 (W.D. Wash. Aug. 19, 2016).
⁴ Avaya, Inc. v. Cisco Sys., Inc., 2011 WL 4962817, at *3 (D.N.J. Oct. 18, 2011) (Bongiovanni, M.J.); see AlterG, Inc. v. Boost Treadmills LLC, 2019 WL 4221599, at *6 (N.D. Cal. Sept. 5, 2019).
⁵ See Dichard v. Morgan, 2017 WL 5634110, at *2-3 (D.N.H. Nov. 22, 2017) (plaintiff must allege more than an intent to keep information secret); CPI Card Grp., Inc. v. Dwyer, 294 F. Supp. 3d 791, 808 (D. Minn. 2018) (plaintiff must allege what steps it took to protect the specific information at issue, not merely the existence of general confidentiality policies).
⁶ WeRide Corp., 379 F. Supp. 3d at 847.
⁷ PepsiCo, Inc. v. Redmond, 154F3d 1262 (7th Cir. 1995).
⁸ PrimeSource Bldg. Prods., Inc. v. Huttig Bldg. Prods., Inc., 2017 WL 7795125, at *11-12 (N.D. Ill. Dec. 9, 2017.

Richard B. Friedman
Richard Friedman PLLC
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New York, NY 10166
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A Few Tips When Filing (and Opposing) a Preliminary Injunction Motion to Protect Trade Secrets

Posted on September 15, 2017May 2, 2022 by Richard Friedman

The Defend Trade Secrets Act of 2016 (the “DTSA”) is a federal statutory vehicle that companies can use to try to protect their most valuable assets (along with their employees, hopefully) — their trade secrets. Since the DTSA is only slightly more than a year old, there have been relatively few federal court decisions addressing the scope and breadth of the statute. One such case decided this summer in the Northern District of Illinois, Cortz, Inc. v. Doheny Enterprises, Inc., 2017 WL 2958071 (N.D. Ill. 2017), sheds light on the type of information afforded protection under the DTSA. The decision also offers insight as to how a plaintiff can improve its chances of securing a preliminary injunction at a misappropriation hearing under the DTSA as well as under state law and how a company defendant can attempt to defeat that motion.

In Cortz, plaintiff Cortz, Inc., a seller of swimming pool and spa products, initiated a suit against a former employee, Tim Murphy, and his new employer, Doheny Enterprise Inc., and sought a preliminary injunction prohibiting Murphy from continuing to work at Doheny. Among Cortz’s allegations were that Murphy possessed information about the prices that Cortz paid its vendors.

Cortz’s preliminary injunction motion was denied. The case provides us with at least three key takeaways vis-à-vis trade secret preliminary injunction motions.

First: Identify the Alleged Trade Secret with Particularity and Not Just a Body of Information in Which a Secret May Lie.

Cortz alleged in its complaint that “financial information” had been misappropriated. Although the DTSA includes in its definition of trade secret “financial information” and “financial data,” the Illinois District Court held that a mere allegation of misappropriated “financial information” was insufficient under the DTSA. Instead, the Court stated, a plaintiff must allege “‘concrete secrets.’” Cortiz, Inc., quoting Composite Marin Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir. 1993) (per curiam).

During the hearing, Cortz introduced evidence that Murphy had access to pricing as to its 20,000 (!) different products with respect to its approximately 400 vendors and that vendor pricing is relevant for about two to three years. Cortz also introduced evidence that this price list was unique to Cortz even though its competitors purchased similar or identical products from the same vendors since specific retailers often negotiate their own prices with suppliers. Because Cortz had clarified that this was the specific information it was alleging to be a trade secret, the Court stated that it was prepared, for argument’s sake, to assume that Cortz had satisfied the particularity requirement under the DTSA.

The Court reached that conclusion despite stating that the facts that Cortz (i) had required vendors to sign an agreement containing a confidentiality clause and (ii) had entered into non-disclosure agreements with Doheny and Murphy while discussing a potential sale to Doheny (which obviously never went through) was insufficient to prove that it had adequately protected its trade secrets. Specifically, the Court stated, Cortz had failed to show, among other things, “the amount of time, effort, or money that it expended in developing its vendor pricing nor whether it would be difficult to duplicate its effort in doing so.”

As summarized below, Cortz’s failure to present admissible and credible evidence that the defendants had misappropriated its trade secrets was fatal to its preliminary injunction motion.

Second: Since the Rules of Evidence Apply at the Preliminary Injunction Stage, It Is Critical that Evidence of Misappropriation Falls within Applicable Rules.

At the risk of stating the obvious, the rules of evidence apply in preliminary injunction hearings. Thus, plaintiff’s counsel must ensure that the evidence it presents at the hearing is not only persuasive but admissible. During the hearing in Cortz, for example, the Court determined that certain third-party testimony was inadmissible hearsay because it was offered for the truth of the matter asserted and did not fall within a hearsay exception.

Of course, it is not enough for evidence to be admissible. It must also be credible and relevant. In Cortz, the Court found that there was no credible evidence that Murphy physically took any documents from his former employer, much less trade secret information, and that any vendor pricing information he remembered from his prior employment would be stale and irrelevant. Thus, the Court held that Cortz had failed to present admissible, credible, and relevant evidence to support its misappropriation claims.

At the risk of also stating the obvious, plaintiff’s counsel in a trade secrets misappropriation case, as in all cases, must:

• vet witnesses by assessing their credibility;

• ensure that evidence can be introduced for an admissible purpose; and

• determine whether the evidence at hand would further the plaintiff’s cause in court or is likely to be deemed irrelevant to the specific claims at hand.

Third: There Must Be Admissible, Credible Evidence of Actual, Not Merely Hypothetical, Misappropriation.

The Cortz Court pointed out that “it is well-established…that an ‘employer’s fear that its former employee will use the trade secrets in his new position is insufficient to justify application of the inevitable disclosure doctrine.’” Cortz, Inc., quoting Triumph Packaging Grp., 834 F. Supp. 2d 796, 809 (N.D. Ill. 2011). Among other evidentiary deficiencies, Cortz was not able to offer credible evidence that Murphy occupied the same or a similar function at Doheny as he had at Cortz. Further, Cortz’s contention that Murphy would inevitably disclose the supposed trade secrets was rejected because it was unable to demonstrate that he had in fact done so. The Court held that a preliminary injunction would not be granted in reliance on the much maligned so-called inevitable disclosure doctrine. (This doctrine is likely to be the subject of a future article.)

In conclusion, it is important for companies to consult counsel concerning steps that should be taken to try to ensure the protection of information that they consider to be trade secrets long before litigation is commenced. To be most effective, this advice must include an analysis of the particular jurisdiction’s requirements for treatment of information as legally protectable trade secrets in addition to requirements under the DTSA. Similarly, companies defending against misappropriation of trade secret claims under the DTSA should view Cortz as a good starting point for formulating their defenses against such claims at the all important preliminary injunction phase where these cases are often resolved.

Richard B. Friedman

Richard Friedman PLLC
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New York, New York 10022
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Defend Trade Secrets Act of 2016

Posted on October 24, 2016May 2, 2022 by Richard Friedman

In the Digital Information Age, where electronic data containing confidential information is so easily transferable, employers face a dilemma. On the one hand, they generally want to allow employees as much access to information as possible to promote efficient and uninterrupted workflow. On the other hand, there is always the risk that employees with access to highly sensitive information may misplace hard copies and/or flash drives containing such information or purposefully take key information to use on behalf of a competing future employer, for a business they have started or intend to start, or to damage the company because of a personal vendetta.

Defend Trade Secrets Act of 2016

To address this dilemma, the Defend Trade Secrets Act of 2016 (DTSA) was signed into law by President Obama on May 11, 2016, and became effective immediately. It provides for enhanced remedies for misappropriation of information deemed to be trade secrets and creates a number of new remedies for plaintiffs. The Act creates a federal civil cause of action for trade secret misappropriation for the first time and provides for the following remedies: injunctions; damages awards for economic loss arising from the misappropriation; and “in extraordinary circumstances” issuance of “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.” Further, if a court finds that the “trade secret is willfully and maliciously misappropriated,” it may “award exemplary damages” up to twice the amount of the damages awarded.

Employers’ Responsibilities Under the Act

In order to avail themselves of the Act’s remedies, trade secret owners must inform their employees that they will not be held liable for disclosures of information deemed to be trade secrets that “(A) [are] 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) [are] made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.” Once employees are on such notice vis-a-vis a written policy in a company code of conduct or otherwise, employers may seek remedies under the DTSA.

But the DTSA is not intended to blindly empower employers against employees. “If a claim…is made in bad faith, which may be established by circumstantial evidence,” or “a motion to terminate an injunction is made or opposed in bad faith,” a court can award reasonable attorney’s fees to the prevailing party. In addition, if the court finds that the seizure order was “wrongful or excessive,” the defendant “has a cause of action against the applicant for the order under which such seizure was made….”

The foregoing measures were included to protect individuals against wrongful claims. Needless to say, trade secret owners and their counsel must carefully evaluate possible claims under the DTSA before commencing legal action.

Richard B. Friedman

Richard Friedman PLLC
830 Third Avenue, 5th Floor
New York, New York 10022
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