Misappropriation of Trade Secrets: Make a Federal Case Out of It (Under the Defend Trade Secrets Act)

 

Last month, President Obama signed the Defend Trade Secrets Act (“DTSA”) into law, which permits plaintiffs to bring civil claims for misappropriation of trade secrets in federal court.  While trade secret theft has been a federal crime since 1996, civil claims for such theft were, until now, generally available only through the state courts.  That state-level relief is provided though the Uniform Trade Secrets Act, which was adopted, modified and interpreted differently by California and 47 other states—resulting in varying levels of protection among the different jurisdictions.  The DTSA brings true uniformity to trade secret lawsuits to the extent that complaints are brought at the federal level.  At the same time, the new law adds a layer of complexity for companies seeking to protect trade secrets: since the DTSA does not preempt state law, trade secrets issues are now governed by federal and state law.

Significant aspects of the new law include:

Whistleblower Immunity

The DTSA provides civil and criminal immunity for employees, contractors and consultants who disclose trade secrets to a government official or an attorney “solely for the purpose of reporting or investigating a suspected violation of law” or in a court filing made under seal.  In addition, employers must give notice of this immunity in any confidentiality or trade secret agreement entered into with an employee or contractor after May 11, 2016.   Employers who fail to do so will not be able to recover exemplary damages or attorneys’ fees provided for in the DTSA.

Employee Mobility

Under an “inevitable disclosure doctrine” in effect in many states, employers are able to enjoin employees from accepting employment elsewhere by showing that the employment would inevitably lead to a disclosure of the employer’s trade secrets.  California courts have rejected this doctrine as an unlawful restraint on employee mobility.  The DTSA also rejects the doctrine by specifying that federal courts may not use the doctrine to enjoin individuals from entering into employment relationships.  However, the Act permits courts to impose conditions on a new employment relationship where there is evidence of threatened misappropriation—a higher bar than an injunction premised on “inevitable disclosure,” i.e., merely on the basis of an employee’s knowledge.

Ex Parte Seizure

The DTSA provides employers with a new powerful tool to protect trade secrets that is currently not available under California state law: ex parte orders for the seizure of property necessary to prevent propagation or dissemination of a trade secret.   However, the usefulness of this tool is limited by the requirements for the issuance of such an order.  To issue a seizure order, a court must find that:

  • another form of equitable relief would be inadequate because the party to be enjoined would evade, avoid, or otherwise not comply;
  • an immediate and irreparable injury will occur if such seizure is not ordered;
  • the harm to the applicant outweighs the legitimate interests of the person against who seizure would be ordered and substantially outweighs the potential harm to third parties;
  • the applicant is likely to succeed on the merits;
  • the person against whom seizure would be ordered has actual possession of the trade secret;
  • the application describes with reasonable particularity the matter to be seized;
  • the person against whom seizure would be ordered would destroy, move, hide, or otherwise make such matter inaccessible to the court; and
  • the applicant has not publicized the requested seizure.

Additionally, the order itself must detail these findings of fact and meet various other requirements.  In short, an ex parte seizure order will be permitted only in “extraordinary circumstances,” and a plaintiff hoping to use the seizure process should complete a full factual investigation before seeking this relief.

The DTSA applies to any claims for alleged trade secret misappropriation crossing state and national borders that occurred on or after May 11, 2016.  Going forward, employers will need to carefully consider the benefits of proceeding with trade secret theft claims in federal court.  More immediately, employers should, with the aid of counsel, review their employment and confidentiality agreements to ensure that the agreements contain either the required DTSA immunity notice or a cross-reference to the employer’s policy document for reporting a suspected violation of law.

-Jacob Swiss

California Employees Lose An Important “First To File” Case Involving Non-Compete Agreements

Because of California’s employee-friendly laws on agreements containing restrictive covenants, whenever possible, employers include foreign state choice of law and forum selection provisions.  This frequently leads to a proverbial “race to the courthouse” with the first filing party arguing that its case should be heard and the later filed case stayed or dismissed.  This artifice – sometimes the difference in hours or minutes — has left the enforceability of such agreements uncertain. 

Enter the recent decision of the Appellate Division of the Supreme Court of New York County (the state’s intermediate appellate court) in the matter of Aon Risk Services v. Cusack.   In that case, New York court affirmed the grant of a preliminary injunction to Aon, an insurance company, enjoining a former sales employee who had worked for the company in California for 15 years from violating a non-compete agreement that had a New York forum selection clause.  The former employee unsuccessfully argued that the action should be stayed or dismissed because he had filed a declaratory judgment action in California about the enforceability of the same agreement a few days earlier.  But, the New York court was not buying the argument.  It attached no significance to the fact that the former employee had lived in California for 15 years and instead enforced the forum selection clause.

The long term effect of this important decision remains to be seen.  On the one hand, California courts will enforce forum selection clauses but they do place significant weight on forum non conveniens arguments – namely that an individual defendant does not have the resources to litigate in a foreign jurisdiction.  And, California courts have been very assertive in enforcing the State’s public policy disfavoring non-compete agreements as an unlawful  “restraint on trade.”  These often conflicting public policies have left an uncertain legal landscape for California employers.

Will courts outside of California follow this lead and take a dim view of California public policy positions?  Will California courts continue to favor forum non conveniens arguments advanced by employees in these cases?  Will the California courts stand down when other state courts enforce forum selection clauses.  We will keep you informed over the next several months of any changes and strategies moving forward.  In the interim, employers would be well advised to include foreign forum selection clauses, particularly if there is a nexus to New York, in restrictive covenants wherever possible. 

- Greg Glazer (Los Angeles)