The Defend Trade Secrets Act: An Overview and Key Developments
Article By: Ben Natter1 and Xincheng Ma2
Four years have passed since Congress enacted the Defend Trade Secrets Act (“DTSA”) in 2016, and federal courts have developed a new body of law based on this relatively young statute. The DTSA provides a private civil cause of action for victims of trade secret espionage or theft where a trade secret has been misappropriated, and requires that the misappropriated trade secret is related to a product or service used in, or intended for use in, interstate commerce.3 Since the passage of the DTSA, trade secret claims have become increasingly attractive to plaintiffs, including in high-profile cases such as the dispute between Waymo and Uber that was litigated in 2018.4 Although the DTSA was only passed four years ago, the impact the statute has had on trade secret law has been significant and has provided an avenue for civil relief for trade secret owners whose trade secrets are stolen or misappropriated.
Prima Facie Element of the DTSA: Defining “Trade Secret”
In passing the DTSA, Congress intended to create a unified definition of what constitutes a trade secret and a separate federal cause of action for misappropriation of trade secrets. Under subsection 1839, a trade secret is defined 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 physically, electronically, graphically, photographically, or in writing.”3 The majority of courts have implied or even expressly held that the definition of a trade secret is the same under the DTSA and state trade secret law. Many of these courts still rely on pre-DTSA state law cases in analyzing DTSA claims. However, at least one court has held that the DTSA defines trade secrets more broadly than state laws.6
Additionally, section 1839 further requires that trade secret owners must take certain measures in order for the information at issue to maintain protection as a trade secret under the DTSA:
Accused parties frequently argue that protection of the information at issue as a trade secret was destroyed because owners did not take “reasonable measures to keep their information secret.” Whether measures taken by trade secret owners are “reasonable” highly depends on the specific facts of each case, including the technology used, the industry, and how sophisticated the parties are.6 For example, in Weride Corporation v. Huang, the District Court for the Northern District of California held that restricting access to a source code by logging-in, encrypting the source code, and requiring employees to sign a proprietary information and inventions assignment agreement was sufficient to meet the reasonable measurement standard.9 By contrast, the District Court for the Southern District of Florida in Temurian v. Piccolo held that giving other parties access to the information without requiring the other parties to sign any confidentiality agreement was insufficient to constitute reasonable measures to protect the alleged trade secret, and hence protection of the trade secret was waived.10
In terms of the “readily ascertainable” requirement, case law is still developing as to the proper test for different types of trade secrets. For example, it is still an open question how to determine whether a customer list qualifies as a trade secret. Some courts considered the amount of labor and time needed for compiling such a list in determining whether it is “readily ascertainable.”11 Other courts have held such difficulty irrelevant,12 and concluded that to be a trade secret, the customer list must contain some additional customer information, such as purchasing preferences and order histories.13
Finally, plaintiffs always face a dilemma in trade secret litigation. To survive the pleading stage, a plaintiff needs to identify the trade secret at issue.14 At the same time, a plaintiff has many reasons to avoid disclosing too much of their trade secret so as to amount to a de facto forfeiture of the trade secret, especially when the presiding judge has expressed an inclination that a motion to seal will not be granted. For example, in AlterG Inc. v. Boost Treadmills LLC, a judge from the Northern District of California recognized such a dilemma faced by trade secret owners and held that the identification of commercial trade secrets needs less specificity than a technical and complex trade secret.15
Prima Facie Element: Nexus to Interstate Commerce
Section 1836 requires a trade secret to be “related to a product or service used in, or intended for use in, interstate or foreign commerce” in order to constitute an actionable claim under the DTSA.16 The majority of courts set a very low standard to meet this requirement at the pleading stage.17 One court even suggested that no allegation of such a relationship is necessary to adequately plead a DTSA claim.18 Excluding this outlier, it is prudent for trade secret owners to allege sufficient nexus between the trade secret at issue and interstate or foreign commerce. Otherwise, the DTSA claims will risk being dismissed for “fail[ing] to allege any nexus between interstate or foreign commerce and the alleged trade secrets.”19
Time of Misappropriation
Because the DTSA covers “any misappropriation of a trade secret for which any act occurs on or after the date of the enactment of [the statute],”20 plaintiffs need to allege in their pleading when the accused misappropriation happened, and to be covered under the DTSA, the date must apply to an act or acts occurring after the enactment of the DTSA in May 2016. Defendants often challenge a DTSA claim by raising this timing defense. This issue most frequently arises when the acquisition of a trade secret occurred before the DTSA’s enactment in May 2016. In the last four years, courts have continuously issued opinions shaping the law in this regard. For example, the District Court for the District of Utah in Ultradent Products., Inc. v. Spectrum Solutions LLC granted the defendant’s motion to dismiss because the plaintiffs’ employee joined the defendant before the enactment of the DTSA.21 Although the plaintiffs argued that the defendant was currently “using or threatening to use the [plaintiffs’] trade secrets,” the court rejected such argument and explained that “this conclusory allegation [was] wholly devoid of any well-plead facts” and was “insufficient to state a claim under the federal DTSA.”22 In contrast, in AllCells, LLC v. Zhai, a judge from the District Court for Northern District of California held otherwise and explained: “even if [defendants] copied and thus acquired the alleged trade secrets before May 11, 2016, [the plaintiff] has sufficiently alleged that there was at least use of the trade secrets after that date. Hence, the Act applies.”23 These cases teach that to survive a timing defense, trade secret owners should allege in their complaint and lay some evidentiary support that the misappropriated trade secret had been used or will inevitably be used after the enactment date of the DTSA, hence constituting “continuing” misappropriation that falls under the DTSA. If a trade secret owner is not confident in its timing argument, it should consider filing a state law claim that does not have this timing issue.
Courts have also consistently insisted that plaintiffs should establish the causal relationship between the trade secrets misappropriated and the damages pled. For example, in Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., the Federal Circuit reversed the district court’s determination of the damages award because the plaintiff’s expert did not apportion damages by trade secret, but instead attributed “all profits to the misappropriation of all trade secrets.”24 As a result, the Federal Circuit held that there was an insufficient link between the misappropriated trade secrets and the damages award. Similarly, the Fourth Circuit affirmed a lower court’s summary judgment against the plaintiff for lack of support for a finding of proximate causation.25 The same problem might also underlie why the final settlement amount in the famous case between Waymo and Uber was much lower than the initial damage demanded by Waymo, observing that at least those docket entries not filed under seal provided little evidence that Uber had used any of the information taken from Waymo.26
Unique Remedy: Ex parte seizure
The ex parte seizure remedy is one of the most potent weapons the DTSA affords to trade secret holders. It empowers a court to issue an order to allow law enforcement to seize stolen trade secrets without hearing the opposing party’s argument. Because Congress was concerned that this weapon would be too powerful in interfering with the accused parties’ normal business operations, the statute requires courts to issue such an order only in “extraordinary circumstances,” such as a situation where the accused party will not comply with a normal injunctive order and no other remedies are applicable.27 Therefore, courts generally favor less extreme alternatives, such as Temporary Restraining Orders, which request defendants to not obstruct or modify the property containing trade secrets, or in more serious situations request defendants to temporarily turn the property over to the court or to plaintiff’s counsel directly.28
The DTSA also includes an “immunity” provision, which exempts whistleblowers from liability for any trade secret disclosure made “solely for the purpose of reporting or investigating a suspected violation of law” to attorneys or government officials.29 Recent case law on this provision suggests that if an accused party raises this affirmative defense, the court will check whether there are facts in the record indicating that the accused party is truly using the information for such purpose.30 If so, the burden will shift to the trade secret owner to prove that the accused party intends to use or disclose the alleged trade secrets for another unprotected purpose.31 Furthermore, the “immunity” provision requires employers to provide notices to their employees about the availability of this “immunity.”32 Failing to do so will result in employers losing certain remedies under the DTSA, such as attorney fees and exemplary damages.33 In contrast, most state trade secret laws do not have such a provision.
The DTSA has been heavily litigated in the past four years, but case law around this statute is still far from definitive. Companies should actively monitor the newest developments in this area of law, but more importantly, companies should establish their internal trade secret management and clearance mechanisms to avoid disputes as much as possible and establish necessary protection for their trade secrets. For example, as explained above, the “reasonable measurement” requirement can be a prerequisite for trade secret protection. On the other hand, if a company unintentionally obtains trade secrets from new hires, companies can take proper measures to mitigate damages and avoid a trade secret dispute. Trade secret litigation can be costly, and companies do not want negative publicity regarding trade secrets. Understanding recent developments and what is required to maintain protection for a company’s trade secrets is critical, and the DTSA provides powerful tools for trade secret holders to seek damages in the event of theft of their trade secrets.