The UTSA and the DTSA: Making a Federal Case out of Trade Secrets

Eric Lindberg | January 11, 2018

Traditionally, trade secret litigation has been based on state common law and the various state versions of the Uniform Trade Secrets Act (“UTSA”). In fact, 48 out of 50 states have passed some version of the UTSA (New York and Massachusetts are the outliers), although each version may have minor definitional differences or state-specific provisions. But the passage of the Defense of Trade Secrets Act of 2016 (“DTSA”)[1] marks a major shift in trade secret litigation. While the DTSA does not replace state trade secret law claims, there are important distinctions and differences between the DTSA and state law.

Trade secret litigation had previously been a matter of state law. Federal jurisdiction was only available to diverse parties, or when another claim provided the parties with federal jurisdiction to file or remove the case. For example, in recent years many litigators have increasing asserted Computer Fraud and Abuse Act (“CFAA”) claims against ex-employees in order to plead a federal claim in federal court. These allegations almost never involved hacking or sophisticated computer crimes, but rather employees emailing company information to themselves (or others) or downloading information to a flash drive or to Dropbox.

Still, trade secret litigation is complicated and expensive. According to the AIPLA Report of the Economic Survey 2015, the median cost for a trade secret lawsuit with between $1M and $10M at risk was $925,000.

On May 11, 2016, President Obama signed the DTSA into law. According to Congress, the DTSA is intended to provide a “single, national standard for trade secret misappropriation with clear rules and predictability for everyone involved.”[2] Forbes magazine remarked: “While creating a new federal trade secret claim to complement existing state law may sound more procedural than substantive, the DTSA actually has major consequences for intellectual property law and for our economy.[3] The DTSA permits individual plaintiffs to file lawsuits to assert federal trade secret claims.[4] Plaintiffs will no longer need diversity or CFAA claims in order to litigate in federal court. But the DTSA does not replace state law. Congress explicitly stated that, in most cases, the DTSA does not preempt state trade secret law.[5]

Congress explicitly modeled the DTSA on the UTSA. Many of the provisions are similar. For example:

  • The elements of a DTSA misappropriation claim are similar to the elements under state law.[6]
  • Congress used established definitions that track state law.[7]
  • Remedies under the DTSA generally track remedies available under state law, including the possibility of injunctive relief (but see below for a description of a new remedy: ex parte seizure).[8]

Congress did deviate from state law, however, in several important provisions. For example, Congress provides a federal definition of “trade secrets” in the DTSA.[9] Although the definition of trade secret is narrower in scope than in some states, a federal definition may help to increase uniformity.

Congress also created a new remedy: ex parte seizure. The DTSA authorizes such civil seizures “to prevent the propagation or dissemination of the trade secret that is the subject of the action,” but “only in extraordinary circumstances.”[10] The ex parte seizure provision involves a complicated procedure with many hurdles and limitations.

Congress also added a provision protecting whistleblowers. The DTSA provides protection for people who disclose trade secrets to the government or to their attorney in order to expose or investigate potentially illegal activity.[11]

Congress also restricted injunctive relief that prevents an “employment relationship” or that conflicts with state competition or non-compete laws that prohibits restraints on employment.[12] Likewise, the DTSA instructs courts not to grant an injunction based merely on what someone knows, but rather based on evidence of a threatened misappropriation.[13]

Of course, to bring a DTSA claim in federal court, the federal pleading rules apply: you must allege a plausible nexus to interstate commerce;[14] you must establish personal jurisdiction over each defendant;[15] and you must have standing to sue. Take care with that last requirement: standing is limited to current owners under the DTSA, whereas in some states former trade secret owners had standing.[16]

Overall, the DTSA does not replace state trade secret law, but rather offers an additional enforcement venue that may offer parties more consistency in approach and in discovery practice.

 


 

[1] Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 130 Stat. 376.

[2] Adams Arms, 2016 WL 5391394, at *5.

[3] Eric Goldman, The New ‘Defend Trade Secrets Act’ Is The Biggest IP Development In Years, Forbes, April 28, 2016, available at https://www.forbes.com/sites/ericgoldman/2016/04/28/the-new-defend-trade-secrets-act-is-the-biggest-ip-development-in-years/#720c7e584261.

[4] 18 U.S.C. § 1836(b)(1).

[5] 18 U.S.C. § 1838. Congress expressly indicated that “[n]othing in the amendments made by this section shall be construed . . . to preempt any other provision of law.”

[6] Compare 18 U.S.C. § 1839(3)–(6), with RCW 19.108.010(2).

[7] “The Committee intentionally used this established definition to make clear that this Act is not intended to alter the balance of current trade secret law or alter specific court decisions.” H Rep No. 114-529 (Apr. 26, 2016), at 14.

[8] 18 U.S.C. § 1836(b)(3).

[9] 18 U.S.C. § 1839(3).

[10] 18 U.S.C. § 1836(b)(2)(A)(i).

[11] 18 U.S.C. § 1833.

[12] 18 U.S.C. § 1839(3)(A)(i)(1)(I).

[13] 18 U.S.C. § 1836(b)(3).

[14] Hydrogen Master Rights, Ltd. v. Weston, No. 16-474-RGA, 2017 WL 78582 (D. Del. Jan. 9, 2017) (dismissing claim without prejudice for failing to allege interstate commerce nexus).

[15] Gold Medal Prod. Co. v. Bell Flavors & Fragrances, Inc., No. 1:16-CV-00365, 2017 WL 1365798 (S.D. Ohio Apr. 14, 2017).

[16] 18 U.S.C. § 1836(b)(1).

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