The Executive Suite: Trade Secrets (Part 2): The Defend Trade Secrets Act of 2016

Introduction

Signed into law on May 11, 2016, the Defend Trade Secrets Act of 2016 ("DTSA") creates a new federal private right of civil action for trade secrets misappropriation. Section 2 of the DTSA states unequivocally that "[a]n owner of a trade secret that is misappropriated may bring a civil action." One of the most significant provisions of the DTSA is the ex parte seizure provision. The ex parte seizure provision gives trade secret owners the right, in extraordinary circumstances, to request the court to order the seizure of property if necessary to prevent the propagation or dissemination of the trade secret that is the subject of an action. Are attorneys requesting ex parte seizure orders and are courts granting such requests? The questions are important because oftentimes there is an urgent need for a company to stop a departing employee or a former business partner from taking or disclosing proprietary information. In an explosive new lawsuit filed in January 2018, Faraday Futures alleges that a former executive, Bill Strickland, "copied and took potentially thousands of FF's most sensitive electronic documents from his FF computer and FF's servers." Tan Liu, a former employee of Rockwell Automation, Inc., was charged (since acquitted) with 12 counts of stealing trade secrets from Rockwell. Just before he left Rockwell, Liu allegedly downloaded 2,500 files containing Rockwell's proprietary software and source code.

Ex Parte Seizure Order Under the DTSA
Under the DTSA, a court may issue an ex parte seizure order "only in extraordinary circumstances." Courts appear to be reluctant to grant ex parte seizure orders and are granting it only in truly extraordinary circumstances. In Mission Capital Advisors LLC v. Romaka, the court awarded the first, and possibly the only, DTSA seizure order in the U.S. to date. In this case, Plaintiff Mission Capital Advisors LLC ("Mission") accused an employee, Romaka, of downloading confidential company files including contact lists. Forensic examination of Romaka's personal desktop had revealed that he had indeed downloaded a multitude of company files. Plaintiff requested a seizure order. When the defendant failed to acknowledge service or to show up for hearing, the court ordered the United States Marshals Service ("U.S. Marshal") to copy onto a storage medium and delete specific files (the Contact Lists of Plaintiff Mission Capital Advisors LLC.) on the Defendant's computer.

A request for an ex parte seizure order was denied in Balearia Caribbean Ltd., Corp., v. Calvo. Plaintiff Balearia Caribbean Ltd., Corp. (''BCL'') alleged that its former Chief Executive Officer, Hernan Calvo, misappropriated its trade secrets. Just before he left BCL, Calvo had his personal laptop computer reconfigured to access Balearia's electronic information systems and secretly inserted an electronic command into his BCL email addresses to ensure that all email communications he received would be surreptitiously forwarded in their entirety to his private G-mail account. Nevertheless, the court denied BCL's request to seize Calvo's personal computer concluding that the applicant failed to demonstrate the "extraordinary circumstances contemplated by the DTSA."

In OOO Brunswick Rail Management v. Sultanov, plaintiffs OOO Brunswick Rail Management and Brunswick Rail Group Limited ("Brunswick") alleged that defendants, former employees, Richard Sultanov and Paul Ostling, misappropriated Brunswick's confidential information. Plaintiff filed an ex parte application for inter alia a seizure order under the DTSA, a seizure and preservation order under Rule 65, and expedited discovery. The court granted the request for a seizure and preservation order under Rule 65 but denied the request for a seizure order pursuant to the DTSA concluding that seizure under the DTSA was unnecessary because an order under Rule 65 was adequate.

Attorneys appear to be using the DTSA's ex parte seizure process sparingly and are instead opting for temporary restraining orders (TROs) and orders for expedited discovery. In Henry Schein, Inc. v. Cook, Henry Schein, Inc. (HSI) alleged that defendant and former employee Jennifer Cook looted confidential data, failed to return her laptop for two weeks after she stopped working for HSI, unlawfully accessed HSI's computer system after her resignation and attempted to erase the e-mails that she sent from her HSI computer. Granting the plaintiff's request for a TRO, the court ordered the defendant to "immediately preserve all documents, data, tangible things, and other materials relating to th[e] case." The defendant was also enjoined "from altering, destroying, or disposing of any evidence or other materials, in any form, relating to th[e] action," and "from directly or indirectly accessing, using, disclosing, or making available to any person or entity other than Plaintiff, any of HSI's confidential, proprietary, or trade secret documents, data or information."

So what can we learn from the handful of cases that have addressed the DTSA's ex parte seizure provisions?

First, courts are reluctant to issue ex parte seizure orders. The only ex parte seizure order under the Act to date is that issued in Mission Capital Advisors LLC v. Romaka.

Second, courts appear to be more willing to allow more common forms of pre-trial relief, such as expedited discovery and TROs. In Dazzle Software II v. Kinney, the court denied plaintiff's request for civil seizure of computers and computer storage devices pursuant to the DTSA but granted in part a motion for expedited discovery that permitted the plaintiff to take the depositions of several key witnesses.

Third, a lot can be achieved with an "ordinary" TRO under Rule 65. In Earthbound Corporation v. MiTek USA, Inc., the TRO required the defendant to inter alia "immediately deliver to a neutral third-party expert ... all flash drives, SD cards, cell phones, and other external drives ... that are in Defendants' possession, custody, or control," for forensic imaging at defendants' expense. In Panera, LLC v. Nettles, the court ordered the defendant to provide his personal laptop and any other materials that may have housed plaintiff's information for review and inspection.

Fourth, even if a plaintiff is successful in getting an ex parte seizure order, such an order is likely to be limited. The DTSA stipulates that ex parte seizure orders shall "provide for the narrowest seizure of property necessary to achieve the purpose of [the statute]." Not surprising, in Mission Capital Advisors LLC v. Romaka, the court only allowed the seizure of a single document, a contact list.

Conclusions

The legal and regulatory landscape for trade secret protection is changing in the United States and around the world. The usefulness of some of the recent laws are beginning to be tested in courts. Although an important piece of legislation, reliance the DTSA's ex parte seizure provision is still limited but is likely to grow. When it comes to using trade secret to protect innovations, extreme vigilance backed-up by appropriate contractual, technological and physical security measures remains the word. However, where an invention is patentable, the risk of disclosure is high, and reverse engineering is highly possible, a company would be well advised to consider patents over trade secrets.