The Defend Trade Secrets Act—One Year Later

By: Thomas A. Muccifori, published in the The Legal Intelligencer, May 11, 2017

On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act (DTSA) for the purpose of protecting American businesses from economic espionage. The law is notable for, among other things, providing easier access to federal courts as well as the possibility of double damages, attorney fees and the right to ex parte seizure of misappropriated information.

Since its enactment, federal courts across the United States have agreed that the language in the DTSA—”on or after the date of the enactment of this act (May 11, 2016)”—limits recovery for ­parties wronged. However, limiting recovery means something different depending on the conduct complained of under the DTSA.

Briefly, the DTSA provides wronged parties with three “misappropriation” theories: acquisition, disclosure or use of a trade secret. The statute of limitations is three years after the date on which the ­misappropriation is or should have been discovered, but a continuing misappropriation is a single ­misappropriation—for purposes of the ­statute of limitations section only, 18 U.S.C. 1836(d).

So what happens when “misappropriation” occurred both before and after May 11, 2016, and what does that mean for the possibility of recovery?

It depends.

The analysis of these sections began with Dazzle Software II v. Kinney, No. 16-cv-12191 (E.D. Mich. Aug. 22, 2016). The court dismissed the DTSA count of the plaintiff’s complaint because it alleged only conduct before the effective date, but permitted plaintiff, after discovery, to ­re-plead this count based on conduct after May 11, 2016.

In September 2016, both the Southern District of New York and the Middle District of Florida analyzed such a ­scenario in Syntel Sterling Best Shores Mauritius v. Trizetto Group and Adams Arms v. Unified Weapon Systems, respectively.

In Syntel Sterling, the defendant sought leave to amend and add a counterclaim under the DTSA, It alleged conduct that occurred both before and after May 11, 2016. Specifically, Trizetto alleged that, from September 2014, through February 2015, the plaintiff acquired trade secrets. Trizetto then alleged that the plaintiff used and continued to use the secrets to directly compete for the same clients. The Southern District of New York specifically recognized that the statute defines misappropriation as “disclosure or use,” and granted the motion to amend because the proposed counterclaim alleged continued use after May 11, 2016. So although acquisition and some use occurred before May 11, 2016, continued use after May 11, 2016, was actionable and permitted “partial” recovery under the DTSA.

In Adams Arms, defendant Unified Weapon System, moved to dismiss Adams Arms’ count under the DTSA, arguing that the “continuing misappropriation” language in 18 U.S.C. 1836(d) applied to the ­enactment section of the DTSA as well. That is, the defendant argued that any conduct after May 11, 2016, was part of one continuous misappropriation, even conduct after May 11, 2016, was not actionable. The Middle District of Florida rejected this argument based on the clear legislative intent evident from the language of the statute to make the continuing misappropriation doctrine only apply for purposes of the statute of limitations section.

Instead, the district court made clear that partial recovery is available when conduct occurs before and after May 11, 2016. In this case, the plaintiff alleged the defendant acquired the secrets before May 11, 2016, but that all disclosure occurred after May 11, 2016. Therefore, the court permitted the plaintiff to retain its DTSA claim but limited its potential recovery to that which resulted from the disclosure. Thus, in this case, the entire acquisition of the trade secrets occurred before May 11, 2016 and all the disclosure after May 11, 2016—so there was no “continued” conduct, but, rather, separate ­misappropriation grounds arising before and after the enactment of the DTSA. One misappropriation ground (acquisition, disclosure or use) based upon conduct after its enactment is sufficient for recovery under the DTSA.

Then, the District of New Jersey chimed in—High 5 Games v. Marks, No. 13-7161 (Jan. 24). In granting a motion to amend to include a claim under the DTSA, the district court distinguished Dazzle Software, because the plaintiff in Marks alleged “continuing misappropriation” based upon alleged acquisition and use that began before enactment but continued thereafter. The District Court relied on Adams Arms, but stated that the parties’ briefs were inadequate to deny the motion to amend. At this point, it seems as though the federal courts would permit partial recovery despite continuing misappropriation, so long as some continued misappropriation (defined as acquisition, use or disclosure) occurred after May 11, 2016.

This may not be the case for a party ­alleging a continuing disclosure under the DTSA. The Northern District of California, in Avago Techs U.S. v. NanoPrecision Products, No. 16-cv-03737, clearly set forth the most critical distinction from Adams Arms—the trade secrets at issue were allegedly acquired and disclosed before May 11, 2016, and continually used after May 11, 2016. That is, unlike the other cases, not only did acquisition occur before May 11, 2016, but so did disclosure. The district court stated that it had no authority to sustain a DTSA claim based on continued use where disclosure occurred before May 11, 2016. It further held that “continued disclosure” was insufficient to sustain a DTSA claim. Avago Techs stands for the proposition that the defendants in Adams Arms argued—that a continuing misappropriation, if under a disclosure theory—is not actionable under the DTSA. The reason behind this is once “the information is in the public domain … the trade secret is extinguished.” Therefore, without a continued acquisition or continued use, simply alleging continued disclosure is insufficient for recovery.

The District of New Jersey, in Chubb INA Holdings v. Chang, No. 16-2354, in February 2017, dealt again with acquisition and retention. In that case, all acquisition occurred before May 11, 2016. The court found that the pleadings sufficiently alleged an inference of use based on the retention of confidential information with the intent to disclose or use and the defendants’ ­solicitation of plaintiff’s customers, and subsequent inevitable disclosure.

The Eastern District of Pennsylvania, in Brand Energy & Infrastructure Services V. Irex Contracting Group, No. 16-2499, in March, again analyzed this exact issue—continuing access and use. The court recognized the path being created by Syntel Sterling, Adams Arms and Schein. Interestingly, the court also emphasized that the Pennsylvania Uniform Trade Secrets Act does not apply to continuing misappropriation that occurs after the effective date.

The rule is the same—if there is a continuing access or use that began before the DTSA’s enactment, the DTSA still applies if such misappropriation continued after the date of enactment. However, if the continuing misappropriation is simply disclosure, it appears the courts may not permit recovery under the DTSA.

The point is, even if the misappropriating conduct occurred before May 11, 2016, ­litigants may still be able to avail themselves of this new federal remedy—including the added remedies of double damages, attorney fees and the ex parte seizure of misappropriated information. However, in bringing a DTSA claim, practitioners needs to carefully consider the theory and timing of each alleged misappropriation if any ­conduct predates May 11, 2016.

— Ashley LeBrun and Daniel J. DeFiglio, both associates at Archer & Greiner, ­contributed to this article.•

Thomas A. Muccifori is a partner at Archer & Greiner’s Haddonfield, New Jersey office and chair of the firm’s trade secret protection and noncompete practice Group. He can be reached at ­856-354-3036 or tmuccifori@archerlaw.com.