March 30, 2017 Litigation Webinar Series Trade Secret Protection and the Defend Trade Secrets Act: What s New, What s Different? Olga May Principal San Diego, CA Martina Hufnal Principal Wilmington, DE
Overview Litigation Series Upcoming webinars Housekeeping CLE Contact: Jane Lundberg lundberg@fr.com Questions INSIGHTS Litigation Webinar Series Materials: http://www.fr.com/webinars #fishwebinar Upcoming Webinars: Cybersecurity Update May 18, 2017 1:00 2:00 PM ET Biosimilars Litigation Update May 23, 2017 1:00 2:00 PM ET 2
Overview of Available Private Remedies State Law Versions of Uniform Trade Secret Act ( UTSA ) adopted by each state except New York New York uses common law Federal Law ITC Defend Trade Secrets Act of 2016 ( DTSA ) Arbitration DTSA amended the Economic Espionage Act of 1996 ( EEA ) to provide for civil remedies for trade secret misappropriation 3
DTSA vs. UTSA: Overall Comparison DTSA does not affect state law Can assert claims under both simultaneously Similar definitions of trade secret and misappropriation DTSA does not delay discovery DTSA does not preempt tort claims DTSA offers additional remedy of ex parte seizure DTSA adds explicit limitations on injunctions, rejecting inevitable disclosure and noncompetes DTSA includes whistleblower immunity and related notice obligations 4
Choice of Venue Federal One district judge handles all substantive issues, one magistrate judge handles discovery Courts often more familiar with IP issues More published and more predictable law Smaller caseloads Often more user-friendly But the case may be transferred to another district on Defendant s motion 5
Choice of Venue State Case may bounce around a number of judges Less published and less predictable law Courts may be unfamiliar with IP issues But more difficult for Defendant to transfer to a different venue, unless the case is removable 6
Scope of Coverage DTSA Limitations DTSA applies only to trade secrets related to a product or service used in, or intended for use in, interstate or foreign commerce Broad definition DTSA requires standing: action by an owner of a trade secret Owner = person/entity with rightful legal or equitable title to, or license in, trade secret UTSA does not have these limitations 7
Scope of Coverage Preemption DTSA does not preempt tort remedies Can assert alternative claims, e.g., conversion UTSA (e.g., CA) may preempt tort (but not contractual) remedies based upon the same facts as misappropriation of a trade secret Regardless of whether UTSA is pleaded 8
DTSA Definition of Trade Secret All forms and types of financial, business, scientific, technical, economic, or engineering information Whether tangible or intangible Whether or how stored AS LONG AS: 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 another person who can obtain economic value from the disclosure or use of the information 9
UTSA Definition of Trade Secret Information, including a formula, pattern, compilation, program device, method, technique, or process, that: i. Derives independent economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use, and ii. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Similar to and possibly slightly broader than DTSA UTSA does not limit information to enumerated types UTSA does not require that the owner take secrecy measures 10
Definitions of Misappropriation Identical in substance: i. Acquisition of a trade secret of another by improper means; or ii. Disclosure or use of a trade secret of another without express or implied consent DTSA specifically provides that the term improper means does not include reverse engineering, independent derivation, or any other lawful means of acquisition 11
Differences in Discovery Open Issue Some UTSA statutes (e.g., CA) prevent Plaintiff from conducting discovery until the Plaintiff identifies the trade secrets with reasonable particularity California Code of Civil Procedure Section 2019.210 Has been applied in federal court as consistent with FRCP 26 DTSA does not have this requirement But federal caselaw precedent exists 12
Whistleblower Immunity California s version of UTSA acknowledges that UTSA is not intended to prevent whistleblowing activities DTSA enacted explicit whistleblower immunity 13
Whistleblower Immunity Employees may disclose trade secrets: In confidence to a government official or attorney, solely for the purpose of reporting or investigating a suspected violation of law ; OR In a court (or other proceeding) filing, if made under seal Plaintiffs in a retaliation suit may: Disclose the trade secret to an attorney AND Use the information in a court proceeding, if filed under seal and not otherwise disclosed except pursuant to court order Employee includes contractors and consultants Once trade secrets are disclosed, the employer has to rely on federal protections Freedom of Information Act 14
Whistleblower Immunity Appears intended as immunity from suit Unum Grp. v. Loftus, 2016 WL 7115967 (D. Mass. Dec. 6, 2016): Denied motion to dismiss based on immunity The NY/NJ CLE Code is 223 15
Notice of Whistleblower Immunity Employer shall provide notice of immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information Applies to agreements that are entered into or updated after the date of enactment of DTSA (May 11, 2016) DTSA is not retroactive Update agreements to include: Notice of DTSA whistleblower immunity OR Cross-reference to a policy document with employer s reporting policy for violations of law 16
Whistleblower Immunity If fail to provide notice: Will not bar claims Will bar exemplary damages and attorneys fees 17
Inevitable Disclosure and Non-Compete Can enjoin a former employee from job that would inevitably result in the use of the employer s trade secrets A de facto non-compete Unavailable in many states DTSA and some states UTSA affirm rejection of the doctrine 18
Inevitable Disclosure and Non-Compete UTSA (e.g., CA): allows injunction against threatened misappropriation Former employee has threatened, manifested by words or conduct, an imminent misuse of the trade secret DTSA goes a bit further: Cannot enjoin employment based merely on what employee knows Can put conditions on employment based on evidence of threatened misappropriation Injunctions cannot conflict with state law prohibiting restraints on the practice of a lawful profession, trade, or business But DTSA does not preempt state law and inevitable disclosure and/or non-compete agreements may be available under state law 19
Remedies Damages Punitive Injunction Fees UTSA DTSA Damages Punitive Injunction Fees Ex parte seizure 20
Damages Identical under UTSA and DTSA: Actual losses: Plaintiff s lost profits Unjust enrichment (to the extent it is not duplicative of Plaintiff s actual losses) Reasonable royalty: For past damages In exceptional circumstances that render an injunction inequitable, the court may grant an injunction that institutes an ongoing reasonable royalty Exemplary damages Fees Only recoverable if notice of whistle blower immunity is provided! 21
Injunction Under both UTSA and DTSA, issues to prevent actual misappropriation DTSA adds a number of express limitations for threatened misappropriation May not prevent a person from entering into an employment relationship May only place such conditions on employment as based on evidence of threatened misappropriation and not on the information the person knows May not otherwise conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade or business 22
Seizure Ex Parte Application Requirement of Extraordinary Circumstances Ex parte application affidavit or verified complaint Must clearly appear to the court from the specific facts: Rule 65/normal equitable relief inadequate The party would evade, avoid or otherwise not comply with the order Immediate and irreparable injury Harm to applicant of denying outweighs harm to legitimate interests of seizure target Substantially outweighs harm to any third party Likelihood of succeeding on the merits Target would destroy, move, hide or otherwise make such matter inaccessible to the court if notice were given 23
Seizure Order and Hearing Seizure Order: Provides for the narrowest seizure of property necessary to achieve the purpose Prohibits access by the applicant and target Sets date for a hearing as early as possible, no later than 7 days after the order has issued Requires the applicant to provide the security in case of wrongful or excessive seizure Seizure Hearing Must prove support for the Order Order may be dissolved CAUTION: Cause of action for wrongful or excessive seizure 24
The DTSA in Action - Pleadings Most DTSA cases allege both federal (DTSA) and state law (UTSA) claims No real downside (so far) Other claims pled: Unfair competition Breach of contract o Confidentiality agreements o Non-solicitation agreements Patent infringement 25
The DTSA in Action - Defendants The majority of DTSA cases were brought against former employees The majority of those cases also named former employee s new employer as a defendant Other main category of defendants were contractors and licensors Access to TS under contract then breach the contract Failing to return/destroy TS per contract terms Misuse Disclosure 26
The DTSA in Action Preliminary Injunctions Federal district courts have been amenable to granting preliminary injunctive relief Out of 24 identified cases with published opinions: The majority of plaintiffs sought preliminary injunctive relief (TRO/PI) Of those, the majority were successful, at least in part 27
The DTSA in Action Ex Parte Seizure In <10 identified cases, trade secret owners requested seizure, 2 were successful (sort of): What persuaded the Court? 1) Rule 65 not adequate defendant repeatedly lied about stealing files 2) Likelihood of success on the merits: a) Information was trade secret new product development, target markets, formulation process; multiple employment and nondisclosure agreements; password protected databases b) Defendant actually possessed trade secret forensically located on his computer and USB drive c) Defendant intended to misuse trade secret defendant logged into adjacent colleague s computer on a Sunday; repeatedly lied when confronted in investigation AVX Corp. v. JunHee Kim, No. 17-CV-00524 (D.S.C. March 8, 2017) 28
The DTSA in Action Ex Parte Seizure What persuaded the Court? 1) Rule 65 not adequate defendant had evaded service and was no-show at post-tro hearing 2) Likelihood of success on the merits: a) Information was trade secret significant investment of $$ and time to compile, comprised non-public information, password-protected, confidentiality provisions in handbook and employment contract b) Defendant actually possessed trade secret forensically located on his computer c) Defendant intended to misuse trade secret defendant s departure was suspicious, his download was unauthorized, he falsely stated that he had deleted, and he tried to hide the trade secret during forensic search 3) Trade secret owner was proceeding on notice Mission Capital Advisors LLC v. Romaka, No. 16-CV-5878 (S.D.N.Y. July 29, 2016) 29
The DTSA in Action Ex Parte Seizure OOO Brunswick Rail Mgt. v. Sultanov, No. 5:17-cv-00017 (N.D. Cal. Jan. 6, 2017) Trade secret owner alleged former employees sent confidential documents to their personal email accounts, and communicated with one of Brunswick s creditors Court determined seizure unnecessary because Third-party email providers ordered to preserve data Defendants were ordered to deliver devices to Court at hearing Magnesita Refractories Co. v. Mishra, No. 2:16-CV-524-PPS-JEM, 2017 WL 655860 (N.D. Ind. Feb. 27, 2017) Trade secret owner alleged defendant was rogue employee seeking to set up competitive venture in violation of employment contract Threatened (not actual) misappropriation of trade secrets Court granted the plaintiff s request for an ex parte TRO but not seizure by federal marshals Ordered that defendant turn in laptop to trade secret owner s counsel 30
Where To Enforce Your Trade Secrets 1. State Courts 2. Federal District Courts 3. International Trade Commission 4. Arbitration 31
State Courts (State Law Trade Secret Misappropriation) Pros If no interstate (or int l) commerce component, then may be only option Statute of limitations can be longer Availability of inevitable disclosure More options re: enforcing restrictive covenants Cons Definition of trade secret could be narrower Exemplary damages less dramatic in some cases May need to describe trade secret before discovery commences Super home court advantage 32
Federal Courts (DTSA) Requires: Product or service is involved in interstate or foreign commerce Act of misappropriation must occur on or after May 11, 2016 (Section 2(e) of the DTSA) PROS Supplemental jurisdiction No preemption of state law Definition of trade secret v. broad No need to describe trade secret with particularity pre-discovery Up to treble damages Broad injunctive relief CONS Length of time to resolution, depending on caseload Murky personal jurisdiction for foreign actors Ex parte seizure unlikely 33
Enforcing Trade Secret Rights in the ITC Requires: Importation, sale for importation, or sale after importation of articles Injury to domestic industry Domestic industry need not employ/practice the trade secret Nexus needed between misappropriation and alleged injury PROS In rem jurisdiction over imported articles no personal jurisdiction headaches ITC s jurisdiction reaches extraterritorial conduct Relatively short time to resolution Powerful injunctive relief: exclusion and/or cease-and-desist orders CONS Fact pleading and strong evidentiary support required to convince Commission to institute investigation No monetary recovery Commission order subject to Presidential review 34
Arbitration Requires: An arbitration clause with the appropriate scope PROS Default confidentiality Lower costs (maybe) More limited discovery CONS Immediate injunctive relief not available Opportunities for delay and gamesmanship more limited discovery may not be sufficient to effectively prosecute case Still need to go to court to enforce award 35
Strategic Considerations Depending on the state, DTSA provides stronger remedies and may subsume UTSA Assert DTSA unless: Your product/service cannot be used in interstate commerce You are not the owner of the trade secret You want to stay in state court Know your state s version of UTSA: Check for preemption of tort claims Check for delay of discovery pending identification of trade secrets Assert DTSA without UTSA to help avoid these limitations Comply with the whistleblower immunity notice provisions to preserve the right to punitive damages and fees under DTSA 36
Thank you! Olga May 858-678-4745 omay@fr.com Martina Hufnal 302-778-8471 hufnal@fr.com Please send your NY CLE forms or questions about the webinar to marketing at lundberg@fr.com. A replay of the webinar will be available for viewing at http://www.fr.com/webinars. 37