TRADE SECRETS AND NON-COMPETES

TRADE SECRETS AND NON-COMPETES Sponsor: Civil Litigation Section CLE Credit: 1.0 Thursday, June 22, 2017 8:30 a.m. - 9:30 a.m. East Ballroom A-B Owensboro Convention Center Owensboro, Kentucky

A NOTE CONCERNING THE PROGRAM MATERIALS The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority. Printed by: Evolution Creative Solutions 7107 Shona Drive Cincinnati, Ohio 45237 Kentucky Bar Association

TABLE OF CONTENTS The Presenter... i Recent Developments in the Law of Trade Secrets and Non-competition Agreements... 1 Attachment 1: Defend Trade Secrets Act of 2019, P.L. 114-153... 17 Attachment 2: Defend Trade Secrets Act, as Codified at 18 U.S.C. 1833 et seq.... 31 Attachment 3: Kentucky Uniform Trade Secrets Act, KRS 365.880 et seq.... 43 Attachment 4: Senate Report on the Defend Trade Secrets Act, Report No. 114-220... 49

THE PRESENTER E. Kenly Ames English, Lucas, Priest & Owsley, LLP 1101 College Street Post Office Box 770 Bowling Green, Kentucky 42101 (270) 781-6500 kames@elpolaw.com E. KENLY AMES is a partner at English, Lucas, Priest & Owsley, LLP in Bowling Green. Her practice focuses on litigation, arbitration and counseling relating to business disputes, with an emphasis on trademark, copyright, trade secret and non-competition matters. Ms. Ames graduated from the University of Pennsylvania and then from Columbia University Law School. She was a member of the Columbia Law Review. After law school, Ms. Ames was a law clerk to the Honorable William C. Conner of the United States District Court for the Southern District of New York. She then joined Choate, Hall & Stewart in Boston, where she was an associate and then a partner in the Litigation Department and the Intellectual Property Litigation Group. She also spent six months as a specially-appointed Assistant District Attorney in Boston. In 2002, she moved to Bowling Green and joined English, Lucas, Priest & Owsley, LLP. i

ii

RECENT DEVELOPMENTS IN THE LAW OF TRADE SECRETS AND NON-COMPETITION AGREEMENTS E. Kenly Ames I. INTRODUCTION This presentation focuses on the new federal legislation creating a federal civil cause of action for misappropriation of trade secrets. It describes the new legislation, compares it to the Kentucky Uniform Trade Secrets Act, provides some information about the extent to which plaintiffs are filing trade secret claims in federal court, and suggests some questions to consider when deciding whether to pursue a trade secret claim in federal or state court. This presentation then touches on recent developments (or more accurately, the lack of recent developments) in the Kentucky law on non-competition agreements. II. BACKGROUND Trade secret theft has been a federal crime since the enactment of the Economic Espionage Act in 1996. However, until last year, there was no federal civil cause of action for trade secret misappropriation. Civil claims for trade secret misappropriation had to be brought under state law and could only be pursued in federal court if the plaintiff could plead diversity jurisdiction or another claim that arose under federal law. Over the last twenty years, there were many calls for creation of a federal civil cause of action for trade secret misappropriation. One of the reasons for the calls was a perceived need for uniformity. The Uniform Trade Secrets Act has existed since 1979. It was amended in 1985. Although forty-eight out of fifty states are listed as having adopted the Uniform Trade Secrets Act, two significant states Massachusetts and New York have not. And among the states that have adopted it, some adopted the first version, while others adopted the amended version. Furthermore, many states modified the statutory language. Commentators generally agree that uniformity has not been achieved. There are significant variations from state to state in statutory language and in the state courts' interpretation and application of the Uniform Trade Secrets Act. After quite a few failed attempts to enact federal trade secret legislation, the effort finally succeeded last year. President Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law on May 11, 2016. The legislation had broad bipartisan support. It passed the Senate by a vote of 87-0. It passed the House by a vote of 410-2. 1 1 A law librarian at the Drexel University law school has collected the legislative history for the DTSA on the law library's web site. It can be found at this link: http://drexellaw.libguides.com/c.php?g=488526&p=3340869&preview=0af5e6621c11dde0c2e5eb 74b1cf8848 1

In many respects, the DTSA will be familiar reading to anyone who has litigated under the Uniform Trade Secrets Act, but there are some notable differences. III. DTSA AND KENTUCKY LAW COMPARED Kentucky adopted the amended version of the Uniform Trade Secrets Act in 1990, without any substantive changes. KRS 365.880 et seq. (KUTSA). Since the KUTSA is familiar territory for many Kentucky practitioners, this presentation reviews the provisions of the DTSA in the context of how they are similar to and different from the KUTSA. A. Cause of Action The DTSA creates a private federal civil cause of action to remedy misappropriation of trade secrets. It provides: "An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce." 18 U.S.C. 1836(b)(1). It also expressly provides that the district courts of the United States have original jurisdiction of civil actions brought under 18 U.S.C. 1836. 18 U.S.C. 1836(c). The KUTSA also provides for a private civil right of action, but it does not present a federal question and can only be asserted in federal court if diversity jurisdiction exists or if it is supplemental to a federal claim. Under the KUTSA, there is no requirement that the trade secret relate to a product or service used in or intended for use in interstate or foreign commerce. B. Definitions The definitions of key terms in the DTSA and KUTSA are similar, but they are not identical. 1. Under the DTSA, only an "owner" of a trade secret may bring a claim. An "owner" is defined as the "person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed." 18 U.S.C. 1839(4). The KUTSA does not use the term "owner." Presumably, however, only a person with an interest in a trade secret would have standing to bring a claim under the KUTSA. 2. A "trade secret" is defined in the DTSA as: 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 2

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). This definition is very similar to the definition of "trade secret" in KRS 365.880(4), although the DTSA's list of examples of information that may constitute a trade secret is longer. The KUTSA defines a "trade secret" as: information, including a formula, pattern, compilation, program, data, device, method, technique, or process, that: (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. KRS 365.880(4). 3. Under the DTSA, "misappropriation" is defined as: (A) 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 (B) disclosure or use of a trade secret of another without express or implied consent by a person who (i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was 3

(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). The definition of "misappropriation" in KRS 365.880(2) is substantively the same. 4. The DTSA provides that the term "improper means:" C. Statute of Limitations (A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and (B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition; 18 U.S.C. 1839(6). The KUTSA defines "improper means" in the same terms as far as what it includes, but it does not expressly exclude reverse engineering, independent derivation or other lawful means of acquisition. KRS 365.880(1). In practice, that should make no difference, since the law is well-established that reverse engineering and independent derivation are proper. Under the DTSA, the statute of limitations is three years from the "date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered." 18 U.S.C. 1836(d). For purposes of the statute of limitations, "a continuing misappropriation constitutes a single claim of 4

misappropriation." Id. The Kentucky statute of limitations is the same. KRS 365.890. D. Immunity for Whistleblowers under DTSA 1. Immunity. The DTSA expressly provides that it does not create a private right of action for trade secret misappropriation against an individual who discloses a trade secret in confidence to a federal, state or local government official or an attorney "solely for the purpose of reporting or investigating a suspected violation of law" or discloses a trade secret in a document filed in a lawsuit or other proceeding, as long as the document is filed under seal. 18 USC 1833(a)(2), 1833(b)(1). The DTSA expressly provides that an individual who discloses a trade secret solely under those circumstances shall not be held "criminally or civilly liable under any Federal or State trade secret law." 18 U.S.C. 1833(b)(1). The DTSA also permits an individual who files a lawsuit against an employer for retaliation for reporting a suspected violation of law to disclose the trade secret to his attorney and to use it in the court proceeding as long as any document containing the trade secret is filed under seal and the employee does not disclose the trade secret except pursuant to court order. 18 U.S.C. 1833(b)(2). It seems likely that the courts will treat this immunity as an affirmative defense that the employee bears the burden of proving. In a case in the District of Massachusetts, an executive with Unum, the disability insurer, was caught on security video on three occasions leaving his office building with all told two boxes, a briefcase, two shopping bags full of documents, and his company laptop. He did not cooperate when Unum investigated. Unum demanded that the employee return the laptop and the documents, but he only returned the laptop. Unum filed suit, alleging claims under the DTSA, the Massachusetts Trade Secrets Act and conversion. The employee moved to dismiss on the grounds that he had turned over the documents to his attorney to report and investigate a suspected violation of law, thereby invoking the immunity provision of the DTSA. The court denied the motion to dismiss. It ruled that the immunity was an affirmative defense and at that stage of the case, the record lacked sufficient facts to support or reject the affirmative defense. Unum Group v. Loftus, 2016 U.S. Dist. LEXIS 168713 (D. Mass. Dec. 6, 2016). 2 2 Unum succeeded in obtaining a preliminary injunction from the court to compel the employee to return the documents. Interestingly, the court based the injunction on Unum's likelihood of success on its conversion claim and did not address the merits of Unum's federal or state trade secret claims. 5

2. Notice requirement. E. Remedies Employers are required to give notice of these immunities in "any contract or agreement with an employee that governs the use of a trade secret or other confidential information." 18 U.S.C. 1833(b)(3)(A). Notice can be expressly provided in the contract or can be provided by cross-reference in the contract to a policy document provided to the employee in which the employer sets out its reporting policy for a suspected violation of law. 18 U.S.C. 1833(b)(3)(B). This notice requirement applies to any contracts and agreements entered into or updated after May 11, 2016. 18 U.S.C. 1833(b)(3)(D). For purposes of these provisions, "employee" includes contractors and consultants for an employer. 18 U.S.C. 1833(b)(4). The KUTSA does not contain any such provisions. The primary remedies available under the DTSA and the KUTSA are essentially the same: injunctive relief, compensatory damages, and exemplary damages and reasonable attorneys' fees for willful and malicious misappropriation. However, there is a trap for the unwary with respect to the availability of exemplary damages and attorneys' fees under the DTSA. 1. Injunctive relief. A court may grant injunctive relief to prevent actual or threatened misappropriation. 18 U.S.C. 1836(b)(3)(A); KRS 365.882. Under both statutes, in appropriate cases the court may require affirmative actions to be taken to protect the trade secret. 18 U.S.C. 1836(b)(3)(A)(ii); KRS 365.882(3). Under both statutes, in cases where an injunction would be inequitable, the court may condition the future use of the trade secret on the payment of a reasonable royalty for no longer than the period of time for which such use could have been prohibited. 18 U.S.C. 1836(b)(3)(A)(iii); KRS 365.882(2). There are two notable differences in the provisions relating to injunctive relief. First, the DTSA simply states that the court may grant an injunction on "such terms as the court deems reasonable," while the KUTSA expressly states that the "injunction shall be terminated when the trade secret has ceased to exist" but may nevertheless be continued "for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from misappropriation." 18 U.S.C. 1836(b)(3)(A)(i); KRS 365.882(1). One wonders if parties will argue that the DTSA's omission of the language authorizing a socalled "head start" injunction indicates that relief is not available 6

under the DTSA. As cases under the DTSA are still in their early stages, I am not aware of any decisions where this issue has been discussed. 3 The other notable difference is that the DTSA expressly requires that the injunction not "prevent a person from entering into an employment relationship," and also requires "that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows." 18 U.S.C. 1836(b)(3)(A)(i)(I). Thus, the DTSA forecloses the "inevitable disclosure" doctrine, under which a court can issue an injunction on the basis that an employee now working for a competitor will inevitably disclose trade secret information. To my knowledge, the Kentucky courts have never recognized or approved the inevitable disclosure doctrine, so this provision is less significant in Kentucky than it might be in other states that do recognize inevitable disclosure. The DTSA also provides that an injunction may not "otherwise conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade or business." 18 U.S.C. 1836(b)(3)(A)(i)(II). There is no similar provision in the KUTSA. 2. Compensatory damages. The damages available to a successful plaintiff under the DTSA and the KUTSA are the same. They include damages for actual loss caused by the misappropriation of the trade secret and damages for unjust enrichment caused by the misappropriation and not taken into account in computing actual loss. 18 U.S.C. 1836(b)(3)(B)(i); KRS 365.884(1). Damages may also include, in lieu of damages measured by any other method, imposition of a reasonable royalty for the misappropriator's unauthorized use or disclosure of the trade secret. 18 U.S.C. 1836(b)(3)(B)(ii); KRS 365.884(1). 3. Exemplary damages. Under both the DTSA and the KUTSA, if a trade secret is willfully and maliciously misappropriated, the court may award exemplary damages not exceeding two times the amount of the compensatory damages awarded. 18 U.S.C. 1836(b)(3)(C); KRS 365.884(2). 3 In a very brief opinion, one district court granted a preliminary injunction under the DTSA and the California Uniform Trade Secrets Act that contained provisions intended to "eliminate any unfair head start Defendants may have gained" by misappropriating trade secrets. Trulite Glass & Aluminum Solutions, LLC v. Smith, 2016 U.S. Dist. LEXIS 142816 at *3 (E.D. Cal. Oct. 5, 2016). 7

4. Reasonable attorney's fees. Under both the DTSA and the KUTSA, the court may award reasonable attorneys' fees to the prevailing party if willful and malicious misappropriation exists. The court may also award fees if a claim of misappropriation is made in bad faith or if a motion to terminate an injunction is made or resisted in bad faith. 18 U.S.C. 1836(b)(3)(D); KRS 365.886. 5. Trap for the unwary. F. Provisional Relief There is one critical limitation on the availability of damages under the DTSA. If an employer fails to give notice of immunities from liability when required (as discussed above), then the employer cannot be awarded exemplary damages or attorneys' fees in any action against an employee to whom notice was not provided. 18 U.S.C. 1833(b)(3)(C). 1. Generally. In appropriate cases under both the DTSA and the KUTSA, parties may and often do seek provisional relief, including temporary restraining orders and preliminary injunctions. They may also seek expedited discovery, leave to file under seal, and protective orders to protect trade secrets from disclosure during the course of the litigation. The KUTSA includes a specific provision (KRS 365.888) on the preservation of secrecy during the pendency of a trade secret action, while the DTSA does not. However, the federal courts have long taken similar steps to preserve secrecy where warranted. Whether a party succeeds in obtaining these types of provisional relief and procedural accommodations turns on the facts of the case, the law of the particular jurisdiction, the procedural rules of the particular court, and the practices of the particular judge. 2. Ex parte seizure orders. However, the DTSA expressly provides for one provisional remedy that is not available under the KUTSA. Under Section 1836(b)(2), "in extraordinary circumstances," the court may issue an ex parte seizure 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." A seizure order may only be issued if the court finds that a temporary restraining order or preliminary injunction would not be adequate relief because the other party would evade or disregard the order. 18 U.S.C. 1836(b)(2)(A)(ii)(I). The legislative history states that the ex parte seizure order is expected to be used in instances where a defendant is planning to flee the country or to immediately 8

G. Preemption disclose the trade secret or can otherwise be expected to disobey a restraining order or injunction. Senate Report 114-220 at 6. The provisions in 18 U.S.C. 1836(b)(2) relating to the ex parte seizure order are long and detailed. In summary, they set out a very high standard that must be met for issuance of a seizure order, set out the elements that must be included in the order (including guidance for the law enforcement personnel who will be executing the order and the security that the party obtaining the order must post to pay any damages for wrongful or excessive seizure), provide for the court to take custody of the seized materials and protect their confidentiality, provide for a prompt post-seizure hearing, prohibit the party obtaining the order from publicizing it, and provide for a cause of action for damages for wrongful or excessive seizure. It will be a very rare case that will warrant a court issuing an ex parte seizure order. Section 2(g) of the DTSA expressly provides that it does not preempt any other laws. 18 U.S.C. 1833 note. Parties are therefore free to plead claims under both the DTSA and the KUTSA, as well as any other state law claims that are not preempted by the KUTSA. The KUTSA preempts any "conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret," but it does not preempt contractual remedies whether or not based on misappropriation of a trade secret or other civil remedies not based on misappropriation of a trade secret. KRS 365.892. It will be interesting to see how the law develops with respect to exactly how the DTSA interacts with existing state law. As one district court has observed, the legislative history makes it clear that Congress intended the DTSA to apply in substantially the same way as the states' trade secrets laws, but with a much broader geographic and jurisdictional reach. Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., 2017 U.S. Dist. LEXIS 43497 at *17 (E.D. Pa. Mar. 23, 2017). H. Applicability of DTSA Section 2(e) of the DTSA provides that the Act applies "to any misappropriation of a trade secret for which any act occurs on or after the date of the enactment of this Act." 18 U.S.C. 1833 note. The DTSA was enacted on May 11, 2016. Until the DTSA has been in place for a while, the courts will be confronted with claims where all or some of the actionable conduct occurred before May 11, 2016. There are already a number of cases where defendants have moved to dismiss DTSA claims on the grounds that the DTSA does not apply to misappropriations before May 11, 2016. A number of the 9

decisions are collected in Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. Mar. 23, 2017). In that case, and in others that it cites, the courts have held that the DTSA applies to misappropriation that begins prior to May 11, 2016, and continues thereafter. The courts point out that the DTSA defines "misappropriation" as "disclosure or use of a trade secret," 18 U.S.C. 1839(5), and find that allegations of continued use of the trade secret after the enactment of the DTSA suffice to state a claim. See, e.g., Brand Energy, 2017 U.S. Dist. LEXIS 43497 at *10. However, if all of the conduct at issue occurred before May 11, 2016, the DTSA does not apply, and any claim brought under it will be dismissed. See, e.g., Avago Techs. United States, Inc. v. NanoPrecision Prods., 2017 U.S. Dist. LEXIS 13484 (N.D. Cal. Jan. 31, 2017) (acquisition and initial disclosure of alleged trade secrets occurred before DTSA enacted; disclosing same trade secret again after DTSA enactment does not constitute basis for claim). IV. DTSA CLAIMS FILING STATISTICS One big question is: are more trade secret cases being filed in federal court now that the DTSA has been enacted? An article published on February 28, 2017, suggests that the answer is "no." The article reports that about 500 cases were filed in the year preceding the DTSA's enactment that included at least one claim for trade secret misappropriation under state law. In the nine months after the DTSA was enacted, there were 227 cases filed in federal court that included a claim under the DTSA and/or state trade secret statutes. The article reports that the largest number of cases have been filed in the Northern and Central Districts of California, Southern District of New York and Northern District of Illinois. 4 With respect to the most novel aspect of the DTSA, which is the ex parte seizure order provisions, the same article indicates that less than a dozen applications for seizure have been filed. One court granted a seizure application in part. Mission Capital Advisors LLC v. Romaka, 1:16-cv-05878 (S.D.N.Y. Jul. 29, 2016) (ordering seizure of a contact list but denying a broader order). Other courts have granted seizure, in effect, under more common forms of pre-trial relief, including expedited discovery and temporary restraining orders. See footnote 4 for a link to the article, which collects the cases. Lexis searches on April 2, 2017 for cases citing 18 U.S.C. 1836 or referring to the DTSA returned about seventy-five results for federal district court case decisions. Not surprisingly, since the DTSA is less than a year old, the searches did not return any results from the Courts of Appeals. 5 4 Lora A. Brzezynkski, Cass W. Christenson, Peter Stockburger & Sophia Gassman, Trends & Insights: The Defend Trade Secrets Act Nine Months Later, Feb. 28, 2017, available on Dentons website at http://www.dentons.com/en/insights/alerts/2017/february/28/trends-insights-thedefend-trade-secrets-act-nine-months-later. 5 These materials were submitted in early April 2017. 10

The same Lexis searches located only two decisions in cases in the Kentucky federal district courts in which claims were asserted under the DTSA. They are Raben Tire Co., LLC v. McFarland, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24. 2017) (Russell, J.), and Procom Heating, Inc. v. GHP Group, Inc., 2016 U.S. Dist. LEXIS 183883 (W.D. Ky. Sept. 9, 2016) (Stivers, J.). In Raben, which is discussed in more detail in the next section, the court granted the defendants' motion to dismiss for failure to state a claim. In Procom, the parties had been embroiled in a long-running lawsuit when new events happened after the DTSA was enacted that caused the plaintiff to move to amend the complaint to add claims under the DTSA and for tortious interference with contract, aiding and abetting breach of fiduciary duty, and breach of a nondisclosure agreement and also to seek a preliminary injunction. The court granted the preliminary injunction without any specific discussion of the DTSA claim, and the case settled shortly thereafter. It remains to be seen whether trade secret filings in federal court will increase as parties become more familiar with the DTSA and as the case law applying it develops. At present it appears that about the same number of trade secret cases are being filed in federal court. The only change is that now most of those cases include claims under the DTSA, as well as claims under the applicable state trade secret misappropriation statutes and other state law claims. V. PLEADING CONCERNS One challenging aspect of litigating trade secret cases is to strike a balance between protecting a trade secret from public disclosure and alleging a claim with enough particularity that it gives the defendant fair notice of the nature of the claim against him. Plead in too much detail, and you risk disclosing the trade secret you are trying to protect. Plead in too little detail, and you risk the case being dismissed on a motion for failure to state a claim. This concern is heightened in federal court. In our state courts, CR 8.01(1) requires only that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." The Kentucky Supreme Court has stated that a motion to dismiss for failure to state a claim should not be granted unless, after taking as true the material facts of the complaint, "it appears the pleading party would not be entitled to relief under any set of facts which could be proved." Fox v. Grayson, 317 S.W.3d 1, 7 (Ky. 2010). In the Kentucky state courts, motions to dismiss are rarely granted. The same is not true in federal court. Under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), a complaint must contain "enough facts to state a claim to relief that is plausible on its face" to survive a motion to dismiss for failure to state a claim. The federal district courts are beginning to wrestle with how much particularity is required to state a claim under the DTSA. In the only Kentucky district court decision available on Lexis that has addressed this issue so far, the court dismissed the DTSA claim on the grounds that the plaintiff had not "plausibly alleged how the information in question qualifies as a 'trade secret' under federal law." Raben Tire, 2017 U.S. Dist. LEXIS 26051 at *1. The court particularly 11

faulted the plaintiff for failing to allege "any steps that it took to protect the information from disclosure." Id. at *3. The court pointed out that there is no allegation that the defendants were restricted from sharing the information by a nondisclosure agreement. Id. at *6. The court found that the absence of any allegations from which to plausibly infer that the plaintiff took any steps to maintain the information's secrecy was fatal to the plaintiff's DTSA claim. Id. at *7. The court dismissed the DTSA claim with prejudice. It then declined to exercise supplemental jurisdiction over the plaintiff's KUTSA and other state law claims, and it dismissed them without prejudice. Id. at *7-*8. Other federal district courts have considered similar motions. In Mission Measurement Corp. v. Blackbaud, Inc., 2016 U.S. Dist. LEXIS 148607 (N.D. Ill. Oct. 27, 2016), the court stated that "trade secrets need not be disclosed in detail in a complaint alleging misappropriation for the simple reason that such a requirement would result in public disclosure of the purported trade secrets." Id. at *13. Instead, "[a]t the pleading stage, plaintiffs need only describe the information and efforts to maintain the confidentiality of the information in general terms." Id. at *14. In that case, the plaintiff listed specifically, albeit in general terms, six types of information that it alleged the defendants misappropriated, alleged that the defendants were subject to a non-disclosure and confidentiality agreement, and alleged the specific occasions on which it disclosed the information to defendants pursuant to the nondisclosure agreement. Id. at *14- *15. That sufficed to defeat the defendants' motion to dismiss under Rule 12(b)(6). See also Aggreko v. Barreto, 2017 U.S. Dist. LEXIS 35573 (D.N.D. Mar. 13, 2017) (denying motion to dismiss; complaint alleged former employee downloaded customer lists, pricing strategy, client history, etc. and provided it to new employer; "All that is required at this stage of the proceedings is an allegation that Barreto misappropriated Aggreko's trade secrets sufficient to put the defense on notice as to the nature of the claim."). It will take time for a sufficient body of law to emerge to give parties guidance on what level of particularity is required to state a claim under the DTSA that meets the federal courts' plausibility pleading standard. VI. PRACTICE CONSIDERATIONS Because the DTSA does not preempt state law, plaintiffs seeking to bring a claim for misappropriation of trade secrets can choose whether to assert a federal claim, a state claim, or both. They can also choose whether to file in federal court or in state court. How does one decide? Given the similarity in the DTSA and the KUTSA, there are a relatively small number of substantive legal issues to consider. However, there are a host of practical concerns. The following is a non-exhaustive list of questions the prospective plaintiff's attorney may want to weigh. A. Substantive Legal Issues 1. How dire is the threat of harm to the plaintiff? Is this a situation where an ex parte seizure order may be needed to prevent an immediate public disclosure of the trade secrets, to keep a defendant from leaving the country, or the like? Or will a 12

temporary restraining order, preliminary injunction and/or expedited discovery suffice? 2. Can you seek double damages and attorneys' fees under the DTSA? That is, if the defendant is an employee and has a contract with the plaintiff that governs the use of trade secrets or other confidential information, was the contract entered into or updated after May 11, 2016? If so, does it contain the required immunity notice? If not, how significant is the possibility of recovering double damages and attorneys' fees to your case? Is the primary focus injunctive relief, or are there significant money damages? What is the likelihood that double damages and attorneys' fee will be collectible? 3. Can the plaintiff allege that the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce? 4. When did the misappropriation occur? Was the trade secret disclosed or used after enactment of the DTSA on May 11, 2016? B. Pleading Issues Can the plaintiff meet the plausibility threshold for pleading in federal court? Or is there a Twombly/Iqbal problem? Give thought to how specific the allegations will need to be about what the trade secrets are, the plaintiff's reasonable measures to keep the information secret, and how and when the misappropriation occurred. C. Procedural and Practical Issues 1. Where are the parties located? Nationwide service of process under Fed. R. Civ. P. 4 is very useful when the parties are out of state. 2. Where are any non-party witnesses located? Are there many non-party witnesses? Nationwide service of subpoenas under Fed. R. Civ. P. 45 is very helpful when the non-party witnesses are numerous and/or far-flung. 3. Does the case involve parties or witnesses outside the United States? The federal courts have developed a body of law and procedures for handling matters involving foreign parties and witnesses. 4. If the plaintiff prevails, will injunctive relief or a money judgment be easier to enforce if you obtain them in federal court? If you have out-of-state defendants, the answer is likely to be yes. 5. Is the case complex in terms of the number of claims and parties or the scope of the discovery that will be required? Although some 13

of our state trial judges are accustomed to handling complex civil cases, many are not. The federal courts may be more comfortable and efficient in handling the issues that arise in complex cases with many parties and extensive discovery. 6. Do the trade secrets in question involve complex technology? Again, although some state trial judges may be comfortable with cases involving complex technology, for many, that kind of case will be a rarity. The federal courts also tend to be quicker to appoint special masters when needed to assist the court with novel or complex technology. 7. Will the case involve a lot of electronic discovery? In much of the state, circuit court judges do not regularly deal with extensive electronic discovery. 8. Will the case benefit from active case management? The involvement of the federal magistrate judges may be a significant benefit to proceeding in federal court in a highly contentious case. 9. Do you want the case to move quickly? Many of our state courts do not use scheduling orders or only enter them once the case has been set for trial. The federal courts always enter a scheduling order tailored to the needs of the case, after input from the parties. 10. Consider the different limitations on discovery under the federal and state court rules. Does one or the other set of limitations work better for you in your case? 11. Are there any differences in the courts' attitudes toward protective orders and filings made under seal? 12. If you are bringing a case for a corporate entity against a departing individual employee, will one court or the other be less likely to sympathize with the employee? 13. Assume the case is going to trial. Do you prefer a one-county jury pool, which you will have in state court, or do you prefer a federal jury pool drawn from a larger area? And does it matter to you that federal juries have to return a unanimous verdict, and in state court only nine out of twelve jurors have to agree? There is a school of thought that it may be more difficult to get a unanimous verdict in a case involving a departing employee. Evaluating all these factors, and others that may be specific to a particular case, falls into the realm of "art, not science" and will be subject to the exercise of judgment (and possibly to second-guessing with hindsight). But it may be that in a particular case, one or more factors will tip the scales clearly in favor of pursuing relief in either federal court or state court. 14

VII. NONCOMPETITION AGREEMENTS During most of 2016, non-competition agreements were a hot topic. In March 2016, the Treasury Department issued a report titled "Non-Compete Contracts: Economic Effects and Policy Considerations" 6 that argued that non-compete agreements are pervasively misused, especially with lower wage earners. In April 2016, President Obama issued an executive order titled "Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy," 7 directing federal agencies to identify actions they can take to promote greater competition. In May 2016, the White House issued a report titled "Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses," 8 which pledged that the administration would identify key issues with non-compete agreements and identify best approaches for reform. Finally, in October 2016, the White House issued a "State Call to Action on Non-Compete Agreements." 9 Since President Trump's election, there have not been any similar policy pronouncements. A number of states have recently enacted legislation restricting non-competes in various ways, including setting one-year or two-year duration limits, prohibiting non-competes for low-wage workers, and prohibiting non-competes for individuals in certain professions. Some state's attorney generals (e.g., Illinois and New York) have brought enforcement actions against employers whose use of non-competes is alleged to violate state law. However, as far as I know, there has been no such activity in Kentucky, nor has any legislation been proposed. Indeed, 2016 was notable for the lack of significant development in the law of non-compete agreements in Kentucky. The last big development was in 2014, when the Kentucky Supreme Court issued its decision in Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345 (Ky. 2014), and held that mere continued employment (without more) was not adequate consideration for a non-competition agreement. When I wrote the description for this program in Fall 2016, it seemed like there might be a lot to talk about regarding non-competition agreements. But in Kentucky, it turns out it has been a quiet year. VIII. ACTION ITEM As a final note, we should revisit one immediate action item for you to take away from this presentation. Many, if not most, trade secret cases are brought against departing employees. In order to take full advantage of the DTSA in such a 6 https://www.treasury.gov/resource-center/economic-policy/documents/ust%20non-competes %20Report.pdf. 7 8 https://obamawhitehouse.archives.gov/sites/default/files/non-competes_report_final2.pdf. 9 https://obamawhitehouse.archives.gov/the-press-office/2016/04/15/executive-order-stepsincrease-competition-and-better-inform-consumers. https://obamawhitehouse.archives.gov/sites/default/files/competition/noncompetes-calltoactionfinal.pdf. 15

case, it is critical that an employer has given notice of the new whistleblower immunity in its contracts with employees, consultants and contractors. Clients need to be advised to review their template agreements (including but not limited to employment, confidentiality, nondisclosure, consulting, contractor engagement, severance, separation, and invention assignment agreements) and their pertinent policies and written procedures and to update them as needed. IX. ATTACHMENTS A. Defend Trade Secrets Act of 2016, P.L. 114-153 B. Defend Trade Secrets Act, as codified at 18 U.S.C. 1833 et seq. C. Kentucky Uniform Trade Secrets Act, KRS 365.880 et seq. D. Senate Report on the Defend Trade Secrets Act, Report No. 114-220 16

ATTACHMENT 1 PUBLIC LAW 114-153-MAY 11, 2016 DEFEND TRADE SECRETS ACT OF 2016 Public Law 114-153 114th Congress An Act May 11, 2016 [S. 1890] Defend Trade Secrets Act of 2016. 18 USC 1 note. To amend chapter 90 of title 18, United States Code, to provide Federal jurisdiction for the theft of trade secrets, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the "Defend Trade Secrets Act of 2016." SEC. 2. FEDERAL JURISDICTION FOR THEFT OF TRADE SECRETS. (a) IN GENERAL. - Section 1836 of title 18, United States Code, is amended by striking subsection (b) and inserting the following: "(b) PRIVATE CIVIL ACTIONS.- "(1) IN GENERAL.- An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. "(2) CIVIL SEIZURE.- "(A) IN GENERAL.- "(i) APPLICATION.- Based on an affidavit or verified complaint satisfying the requirements of this paragraph, the court may, upon ex parte application but only in extraordinary circumstances, issue 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. "(ii) REQUIREMENTS FOR ISSUING ORDER.- The court may not grant an application under clause (i) unless the court finds that it clearly appears from specific facts that- 17

"(I) an order issued pursuant to Rule 65 of the Federal Rules of Civil Procedure or another form of equitable relief would be inadequate to achieve the purpose of this paragraph because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order; "(II) an immediate and irreparable injury will occur if such seizure is not ordered; "(Ill) the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered of granting the application and substantially outweighs the harm to any third parties who may be harmed by such seizure; "(IV) the applicant is likely to succeed in showing that-.. "(aa) the information is a trade secret; and "(bb) the person against whom seizure would be ordered- "(AA) misappropriated the trade secret of the applicant by improper means; or "(BB) conspired to use improper means to misappropriate the trade secret of the applicant; "(V) the person against whom seizure would be ordered has actual possession of- "(aa) the trade secret; and "(bb) any property to be seized; "(VI) the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized; "(VII) the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and 18

"(VIII) the applicant has not publicized the requested seizure. "(B) ELEMENTS OF ORDER. - lf an order is issued under subparagraph (A), it shall- "(i) set forth findings of fact and conclusions of law required for the order; "(ii) provide for the narrowest seizure of property necessary to achieve the purpose of this paragraph and direct that the seizure be conducted in a manner that minimizes any interruption of the business operations of third parties and, to the extent possible, does not interrupt the legitimate business operations of the person accused of misappropriating the trade secret; "(iii) (I) be accompanied by an order protecting the seized property from disclosure by prohibiting access by the applicant or the person against whom the order is directed, and prohibiting any copies, in whole or in part, of the seized property, to prevent undue damage to the party against whom the order has issued or others, until such parties have an opportunity to be heard in court; and "(II) provide that if access is granted by the court to the applicant or the person against whom the order is directed, the access shall be consistent with subparagraph (D); "(iv) provide guidance to the law enforcement officials executing the seizure that clearly delineates the scope of the authority of the officials, including- "(I) the hours during which the seizure may be executed; and "(II) whether force may be used to access locked areas; Deadline. Notification. "(v) set a date for a hearing described in subparagraph (F) at the earliest possible time, and not later than 7 days after the order has issued, unless the party against whom the order is directed and others harmed by the order consent to another date for the hearing, except that a party against whom the order has issued or any person harmed by the order may move the court at any time to dissolve or modify the order after giving notice to the applicant who obtained the order; and "(vi) require the person obtaining the order to provide the security determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure under this paragraph. 19

Courts. "(C) PROTECTION FROM PUBLICITY. - The court shall take appropriate action to protect the person against whom an order under this paragraph is directed from publicity, by or at the behest of the person obtaining the order, about such order and any seizure under such order. "(D) MATERIALS IN CUSTODY OF COURT.- "(i) IN GENERAL. - Any materials seized under this paragraph shall be taken into the custody of the court. The court shall secure the seized material from physical and electronic access during the seizure and while in the custody of the court. "(ii) STORAGE MEDIUM. - If the seized material includes a storage medium, or if the seized material is stored on a storage medium, the court shall prohibit the medium from being connected to a network or the Internet without the consent of both parties, until the hearing required under subparagraph (B)(v) and described in subparagraph (F). "(iii) PROTECTION OF CONFIDENTIALITY. - The court shall take appropriate measures to protect the confidentiality of seized materials that are unrelated to the trade secret information ordered seized pursuant to this paragraph unless the person against whom the order is entered consents to disclosure of the material. "(iv) APPOINTMENT OF SPECIAL MASTER. - The court may appoint a special master to locate and isolate all misappropriated trade secret information and to facilitate the return of unrelated property and data to the person from whom the property was seized. The special master appointed by the court shall agree to be bound by a non-disclosure agreement approved by the court. "(E) SERVICE OF ORDER. - The court shall order that service of a copy of the order under this paragraph, and the submissions of the applicant to obtain the order, shall be made by a Federal law enforcement officer who, upon making service, shall carry out the seizure under the order. The court may allow State or local law enforcement officials to participate, but may not permit the applicant or any agent of the applicant to participate in the seizure. At the request of law enforcement officials, the court may allow a technical expert who is unaffiliated with the applicant and who is bound by a court-approved non-disclosure agreement to participate in the seizure if the court determines that the participation of the expert will aid the efficient execution of and minimize the burden of the seizure. Determination. "(F) SEIZURE HEARING.- "(i) DATE. - A court that issues a seizure order shall hold a hearing on the date set by the court under subparagraph (B)(v). 20

"(ii) BURDEN OF PROOF. - At a hearing held under this subparagraph, the party who obtained the order under subparagraph (A) shall have the burden to prove the facts supporting the findings of fact and conclusions of law necessary to support the order. If the party fails to meet that burden, the seizure order shall be dissolved or modified appropriately. "(iii) DISSOLUTION OR MODIFICATION OF ORDER. - A party against whom the order has been issued or any person harmed by the order may move the court at any time to dissolve or modify the order after giving notice to the party who obtained the order. "(iv) DISCOVERY TIME LIMITS. - The court may make such orders modifying the time limits for discovery under the Federal Rules of Civil Procedure as may be necessary to prevent the frustration of the purposes of a hearing under this subparagraph. "(G) ACTION FOR DAMAGE CAUSED BY WRONGFUL SEIZURE. - A person who suffers damage by reason of a wrongful or excessive seizure under this paragraph has a cause of action against the applicant for the order under which such seizure was made, and shall be entitled to the same relief as is provided under section 34(d)(ll) of the Trademark Act of 1946 (15 U.S.C. 1116(d)(ll)). The security posted with the court under subparagraph (B)(vi) shall not limit the recovery of third parties for damages. "(H) MOTION FOR ENCRYPTION. - A party or a person who claims to have an interest in the subject matter seized may make a motion at any time, which may be heard ex parte, to encrypt any material seized or to be seized under this paragraph that is stored on a storage medium. The motion shall include, when possible, the desired encryption method. "(3) REMEDIES. - In a civil action brought under this sub-section with respect to the misappropriation of a trade secret, a court may- "(A) grant an injunction- "(i) to prevent any actual or threatened misappropriation described in paragraph (1) on such terms as the court deems reasonable, provided the order does not- "(I) prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation, and not merely on the information the person knows; or "(II) otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business; "(ii) if determined appropriate by the court, requiring affirmative actions to be taken to protect the trade secret; and 21