Litigating Under the Defend Trade Secrets Act of 2016

Defend Trade Secrets Act of 2016
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The enactment of the Defend Trade Secrets Act of 2016 (DTSA) reflects the changing nature of trade secret theft, which has led to more interstate and international trade secret cases than ever before. The DTSA, best known for its creation of a federal civil cause of action for trade secret misappropriation, provides a single, consistent framework to resolve trade secret cases between parties from states with potentially conflicting laws.

In May 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). In addition to granting the federal courts jurisdiction over civil trade secret claims, the act grants whistleblowers immunity from trade secret lawsuits, permits the assertion of companion claims with a trade secret claim, and sets forth requirements for the government to publish reports on trade secret theft.

In 1996, Congress passed the Economic Espionage Act (EEA), its first piece of trade secret legislation, which criminalized the misappropriation of trade secrets. Until the adoption of the DTSA, however, civil trade secret lawsuits were governed strictly by state law. Most states, including Minnesota, have adopted some form of the Uniform Trade Secrets Act (UTSA), which was drafted in 1979 by the Uniform Law Commission to create unity and consistency in United States trade secret law.

The framework for a federal civil cause of action originated in the Senate in 2012 as a bill called the Protecting American Trade Secrets and Innovations Act. That bill and several similar bills died in Congress before the legislation that would ultimately become the DTSA was introduced in July 2015. The DTSA passed unanimously in the Senate and by a 410-2 vote in the House. It was signed into law by President Obama on May 11, 2016.

One of the primary reasons Congress felt the need to enact the DTSA is the changing nature of trade secret theft, including the growing use of cloud technology, which has allowed increased cyber-theft, leading to more interstate and international trade secret cases than ever before. The DTSA provides a single, consistent framework to resolve trade secret cases between parties from states with potentially conflicting laws. The DTSA also may provide for a more powerful defense of U.S. companies’ secrets from international entities.

How is the DTSA different from the UTSA?

Congress drafted the DTSA to closely mirror the UTSA. Therefore, most of the DTSA’s provisions closely resemble most states’ current law. There are, however, several significant differences.

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Federal jurisdiction

The most obvious difference between the DTSA and UTSA is that the DTSA allows for federal jurisdiction for civil trade secret lawsuits when the trade secret in question affects either interstate or foreign commerce.[1] Because of the DTSA, a plaintiff may now bring a trade secret lawsuit in federal court without needing diversity jurisdiction or some other federal claim. Likewise, a defendant now will be able to remove to federal court a lawsuit brought in state court that alleges a claim under the DTSA.

Generally, there are two ways to protect intellectual property, either through trade secret law or through patent law. In the case of patent law, the patent discloses an invention to the world in exchange for monopolistic protection; under trade secrecy protection, the secrecy provides the protection. A complex federal civil system already is in place to grant patent protection. Recent Supreme Court cases, however, have narrowed the scope of innovations that are eligible for patents.[2] Since the Alice decision, patents have been invalidated by the courts at a very high rate.[3] This development, along with the enactment of the DTSA, likely will lead to an increased reliance on trade secret law for protection of intellectual property.

Ex parte seizure

Another prominent difference between the DTSA and the UTSA is a provision in the DTSA that allows for ex parte seizure orders.[4] Under this provision, a party may request, on an ex parte basis, that a court order the seizure of property if necessary to prevent the propagation or dissemination of the trade secret. For a case in which such an order was granted, see Axis Steel Detailing, Inc. v. Prilex Detailing LLC.[5]

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A seizure order is an extreme remedy, however, and will likely be used rarely. Indeed, the DTSA expressly provides that seizure is only to be ordered in extraordinary circumstances. Further, many trade secrets are intangible or informational in nature and are misappropriated simply by someone having or acquiring knowledge that a company wishes to remain secret. In such cases, an injunction to prevent dissemination, not a seizure order, is appropriate. The DTSA also only allows ex parte seizure from the party that is accused of misappropriation.[6] In some cases, stolen trade secrets are digitally stored in “the cloud,” meaning that they are stored on a remote hard drive owned and operated by a third party. This may prevent the application of the ex parte seizure because the owner of the property to be seized (the hard drive) is not the party accused of stealing the trade secret.[7]

Before issuing a seizure order, the DTSA requires that a court clearly find, based on specific facts, that:

  • other forms of relief are inadequate (preliminary injunctions and TROs, for example) because the party against whom seizure would be ordered would evade, avoid, or not comply with any such order;
  • immediate and irreparable injury will occur if seizure is not ordered;
  • potential harm to the applicant of denying the application outweighs the harm to the person against whom seizure would be ordered and substantially outweighs the harm to any third parties;
  • the applicant is likely to succeed in showing that the information is a trade secret and that the person against whom seizure is sought misappropriated the trade secret through improper means or conspired to use improper means to misappropriate the trade secret;
  • the person against whom seizure would be ordered has possession of the trade secret and property to be seized;
  • the applicant describes with reasonable particularity the matter to be seized and where the matter is located to be seized;
  • the person against whom the order is sought would destroy, move, hide or make the matter inaccessible if the applicant were to proceed with notice to such person; and
  • the applicant did not publicize the requested seizure.[8]

While ex parte seizure only will be used in extraordinary circumstances, the fact that it is an available remedy under the DTSA is a significant development and provides plaintiffs a potential remedy that may not be available under state trade secret law.

Non-exclusivity of DTSA

The UTSA contains a provision that displaces other laws providing civil remedies for trade secret misappropriation.[9] This means that UTSA plaintiffs cannot bring other related civil claims, except for contractual claims, based on the same facts as the misappropriation. This greatly limits the relief available for plaintiffs under the UTSA. However, the DTSA contains no such preemption provision. In fact, 18 U.S.C. §1838 specifically states that except for immunity for whistleblowers under the DTSA, the DTSA shall not “preempt or displace any other remedies”[10] This difference allows plaintiffs who bring DTSA claims to pursue relief through other related claims, such as unfair competition or unjust enrichment.

No inevitable disclosure

In some states, plaintiffs can be granted injunctions that prevent a defendant (usually a former employee) from entering into a new employment relationship because of proprietary knowledge that he or she possesses that will inevitably be used or disclosed in his or her new position. While states may differ on their acceptance and application of the doctrine, the DTSA plainly states that courts may not use the DTSA to grant an injunction preventing a person from entering into an employment relationship.[11]

Protection for whistleblowers

The DTSA provides two separate protections for individuals who disclose trade secrets for the purpose of exposing suspected violations of the law.[12] To receive the benefit of these protections, such whistleblowers must comply with certain requirements under the DTSA. Significantly, the immunity protections protect employees as well as contractors and consultants.[13]

First, the DTSA provides that an individual cannot be held criminally or civilly liable under any federal or state trade secret law if the individual confidentially discloses a trade secret to the government or an attorney solely for the purpose of reporting or investigating a suspected legal violation.[14] Similarly, such an individual cannot be held liable if he or she discloses a trade secret in a court filing that is made under seal.[15]

Second, if an individual sues an employer for retaliation for reporting a suspected violation of law, the individual may disclose the trade secret to his/her attorney and use it in court proceedings, provided that any document containing the trade secret is filed under seal and the individual does not disclose the trade secret (except pursuant to a court order).[16]

Some states’ whistleblower statutes, including Minnesota’s, do not allow employees to reveal confidential information when reporting suspected violations committed by their employers.[17] To the extent the DTSA contradicts such laws, the DTSA is controlling. While the DTSA generally does not displace other laws, the DTSA whistleblower protections expressly preempt conflicting law.[18]

Employer notice requirements

Under the DTSA, employers are required to provide notice of the whistleblower protections discussed above in any contract or agreement with an employee, including a contractor/consultant, that governs the use of a trade secret or other confidential information.[19] In accordance with 18 U.S.C. §1833(b), such protections are:

(1) Immunity. An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that

(A) is 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) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

(2) Use of trade secret information in anti-retaliation lawsuit. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual

(A) files any document containing the trade secret under seal; and

(B) does not disclose the trade secret, except pursuant to court order.

The DTSA provides that an employer who fails to provide such notice may not be awarded exemplary damages or attorneys’ fees in an action for misappropriation of trade secrets that is brought against an employee to whom notice was not provided.[20]

Which claims should be brought, and where?

Because each case and client is different, there are several issues to consider when deciding whether to bring a claim under the DTSA or a state trade secret law, as well as where to file a case.

Speed and types of relief

If a party believes an ex parte seizure order is warranted, the DTSA is the clearest option, because state laws under the UTSA may not allow for this type of relief. If a party needs a restraining order to prevent dissemination of a trade secret, then it is important to evaluate whether the DTSA or applicable state law would be more responsive to the party’s needs. If the inevitable disclosure doctrine is at issue and an employer believes that an order preventing a former employee from entering into a new employment relationship is appropriate, then a claim needs to be brought under state law (subject, of course, to the state recognizing the inevitable disclosure doctrine).

Companion claims

Under the UTSA, plaintiffs cannot bring companion claims arising from the same facts as the trade secret misappropriation.[21] If a client would like to bring companion claims, such as unjust enrichment or unfair competition, then a lawsuit should be commenced under the DTSA, which does not preempt other remedies arising out of the same incident.[22]

Preference for state or federal court

As the DTSA’s legislative history indicates, a party may prefer federal courts for trade secret cases out of a belief that they are better equipped to handle such lawsuits.[23] However, this history is not based on actual evidence or analysis that federal courts reach better outcomes than state courts in trade secret cases. Anecdotally, Cherne Industrial, Inc. v. Grounds & Assocs., Inc., a Minnesota Supreme Court case tried and argued by one of the authors, has been cited over 1,000 times by courts and legal authorities.[24] This underscores the fact that a state court can render an influential and well-respected decision in a trade secret case.

How much does a trade secret lawsuit cost?

The cost of a trade secret lawsuit seems to depend upon how much money is at stake. According to the American Intellectual Property Law Association’s 2015 Report of the Economic Survey, a trade secret lawsuit with less than $1 million at stake costs about $500,000 per side. For cases with $10 – $25 million at stake, the average cost increases to an estimated $1.5 million per side.[25] These costs show in hard dollars how much time, effort, and expense the federal courts can expect to invest in hearing more trade secret cases.

Government reporting on trade secret theft

The DTSA requires the U.S. attorney general, in conjunction with the heads of other appropriate agencies, to submit a report to Congress about the theft of U.S. trade secrets from abroad.[26] The report must contain information about:

  • the scope and breadth of international trade secret theft;
  • the ability of trade secret owners to prevent theft;
  • the protections afforded U.S. companies by foreign countries;
  • instances of the U.S. government working with foreign countries to enforce trade secret law abroad; and
  • recommendations of government actions that can be undertaken to help U.S. companies avoid or reduce the risk of trade secret theft.

This reporting requirement helps illustrate Congress’ motivation for the DTSA. One of the goals was to reduce international theft of American trade secrets. This report will give the U.S. government a greater understanding of how much theft is occurring, where it is taking place, and how it can be prevented in the future.

By arming the government with this knowledge, this report will hopefully enable U.S. trade secret holders to better protect their intellectual property, and encourage greater cooperation between countries to prevent trade secret misappropriation across borders. If so, then the DTSA will serve our economy and encourage ethical business behavior.

The DTSA had wide bipartisan support. Time will tell whether it leads to an influx of trade secret cases in federal court, but two things are clear: Plaintiffs who believe their trade secrets have been misappropriated now have an additional remedy at their disposal, and whistleblowers now have an added layer of protection. Gerald T. Laurie

The authors gratefully acknowledge the assistance of Stephen Couillard, a 2018 graduate of the University of Minnesota Law School, in the writing of this article.


[1] 18 U.S.C. § 1836(c) and 18 U.S.C. § 1836(b)(1).

[2] Alice v. CLS Bank, 134 S. Ct. 2347 (2014); Bilski v. Kappos, 561 U.S. 593 (2010)

[3] http://www.law360.com/articles/604235/a-survey-of-patent-invalidations-since-alice

[4] 18 U.S.C. § 1836(b)(2)

[5] Axis Steel Detailing, Inc. v. Prilex Detailing LLC, 2017 U.S. Dist. LEXIS 221339 (D. Utah 2017).

[6] 18 U.S.C. § 1836(b)(2)(A)(ii)(IV)(bb)

[7] 18 U.S.C. § 1836(b)(2)(A)(ii)(IV)(bb)

[8] 18 U.S.C. § 1836(b)(2)(A)(ii)

[9] See, e.g., Minn. Stat. § 325C.07(a)

[10] 18 U.S.C. § 1838

[11] 18 U.S.C. § 1836(b)(3)(A)(i)(I)

[12] 18 U.S.C. § 1833(b)

[13] 18 U.S.C. § 1833(b)(4)

[14] 18 U.S.C. § 1833(b)(1)

[15] 18 U.S.C. § 1833(b)(2)

[16] 18 U.S.C. § 1833(2)

[17] Minn. Stat. § 181.932 subd. 5

[18] 18 U.S.C. § 1838

[19] 18 U.S.C. § 1833 (b)(3)

[20] 18 U.S.C. § 1833 (b)(3)(C)

[21] Minn. Stat. § 325.07C(a)

[22] 18 U.S.C. § 1838

[23] H. Rep. No. 114-529

[24] Cherne Industrial, Inc. v. Grounds & Assocs., Inc., 278 N.W.2d 81 (Minn. 1979).

[25] 2015 Report of the Economic Survey, American Intellectual Property Law Association.

[26] 18 U.S.C. § 1832 note (b).

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