Is the DTSA Toothless?
Early DTSA cases and ex parte seizure
By: Drew Schmidt
Congress passed the Defend Trade Secrets Act (or “DTSA”) on April 27th, 2016, and the President signed it into law on May 11th, 2016. The bill experienced remarkable bipartisan support; the House passed it 410-2[1], while the Senate passed it 87-0.[2] Senator Orrin Hatch of Utah spearheaded the effort to federalize trade secret protection just two years after the Uniform Trade Secrets Act (or “UTSA”) had been adopted by 47 state legislatures.[3] The DTSA does not differ significantly from the UTSA in terms of its language, but there are three critical differences.[4]
First, the DTSA provides for a federal civil cause of action, allowing trade secret claims to be brought in federal court on their own as long as the secret is related to a “product or service used in…interstate or foreign commerce.”[5] By virtue of supplemental jurisdiction, the DTSA makes federal courts the forum of choice for state law claims of trade secret theft.[6] The UTSA, by contrast, is merely a model law drafted by the Uniform Law Commission and adopted (often piecemeal) by state legislatures throughout the United States.[7] Without diversity jurisdiction, or supplemental jurisdiction due to the relatedness of the claim, a trade secret case will not be heard in federal court under state-created UTSA regimes.[8]
Second, the Act gives whistleblowers “immunity from liability” if they report illegal activity to the government.[9] The District of Massachusetts encountered the DTSA’s first major whistleblower claim in Unum Group v. Loftus, holding that the defendant’s immunity defense could not “adjudicated at the motion-to-dismiss” stage.[10] The UTSA had no such whistleblower provision.[11]
Third, the Act permits plaintiffs to apply for an ex parte seizure of property that, if not seized, could cause “the propagation or dissemination of the trade secret.”[12] The DTSA only allows an ex parte seizure “in extraordinary circumstances” and when injunctive relief under Federal Rule of Civil Procedure (or “FRCP”) 65 would be “inadequate.”[13] Courts issuing the order must approve the “narrowest seizure of property necessary” to prevent dissemination of the secret.[14] Moreover, the federal law enforcement officials conducting the seizure must “not interrupt the [defendant’s] legitimate business operations.”[15]
A seizure authorized under 1836(b)(2) sends a federal law enforcement official to take the property into the custody of the court: a marked contrast from temporary restraining orders (or “TROs”) under Rule 65 which would require the plaintiff to deliver the property personally.[16] From a doctrinal point of view, however, the ex parte seizure provision under 1836(b)(2) differs little from a temporary restraining order, issued under F.R.C.P. 65(b), designed to regain property containing or constituting the trade secret.[17] Both motions must demonstrate that “immediate and irreparable” harm will occur without seizure and that both are susceptible to motions to dissolve.[18] Plaintiffs seeking either a TRO or an ex parte seizure under the DTSA must post a bond in case the seizure is wrongful.[19]
Despite its similarity to Rule 65, the seizure provision faced the most opposition and criticism among members of the legal public. Forty-two law professors signed a letter opposing the DTSA, the main argument of which was that the seizure provision was “fraught with potential abuse,” especially with regard to “small business, startups, and other innovators.”[20] Some of these academics predicted a coming era of “trade secret trolls” akin to the patent non-practicing entities of the last few years.[21] Industry professionals expressed similar apprehension after the DTSA passed; many speculated that the ex parte seizure provision could act as leverage for unscrupulous litigants deterring competition or seeking settlement.[22]
Only ten months have passed since the DTSA became law. How have courts used the ex parte seizure provision?
To my knowledge, there have been no ex parte seizures ordered under § 1836(b)(2) thus far.[23] In fact, there have only been three ex parte applications at all.[24] Out of those three, only one application has produced a public ruling on the merits on the motion.[25] In that decision, the judge denied the plaintiff’s application for ex parte seizure because a temporary restraining order requiring the preservation and delivery of sensitive property was adequate to protect the plaintiff’s interests.[26] This case illustrates the general approach that courts have taken to trade secrets after the DTSA. Out of the thirty-three cases which have made it past the preliminary injunction / temporary restraining order stage, seventeen had plaintiffs who sought preliminary injunctions or TROs requiring the return of property which could be used to disseminate the trade secret.[27] Plaintiffs seem to be utilizing—and courts appear to be more receptive to—the traditional tools provided by FRCP 65 rather than the DTSA’s seizure provisions.[28]
Why might this be? Plaintiffs are still subject to post a security in order to obtain a TRO, and many have been ordered to do so as a result of judges granting their motions in early DTSA cases.[29] While FRCP 65 allows for recovery from the security posted by the plaintiff when the defendant is “wrongfully” enjoined, the DTSA allows it when property is “wrongfully or excessively” seized.[30] Though there is a lack of jurisprudence as to whether Rule 65(c)’s “wrongfully” differs from 1836(b)(2)(B)(vi)’s “wrongful or excessive,” this may be deterring plaintiffs from applying for an ex parte seizure when a TRO will do the job. As industry commentators have pointed out, the risk of an excessive seizure is much greater in the trade secret context than in the copyright or trademark context under the Lanham Act.[31] Rather than seizing a shipment of products bearing a copyrighted work or registered mark, the seizure of a personal laptop containing sensitive information is necessarily overinclusive[32] Plaintiffs scared off by the likelihood of losing their security due to an excessive seizure may be opting for a TRO to save the trouble.
Were the doomsayers in legal academia wrong about the seizure provision? It is obviously too early to say, but the dangers of an excessive seizure seem too great to risk when courts appear receptive so far to preliminary injunctions and TROs. Hopefully a landmark case will come up soon between a US corporation and a foreign national where time really is of the essence, and an ex parte seizure will be used for its intended purpose. In the meantime, anxiety about ex parte seizures being used to hammer the competition seems misplaced. The bar is high and the consequences of rash acting are great.
The seizure provision may still prove to be significant in everyday litigation through its collateral effects. Early questions of application have arisen about whether the seizure remedy displaces Rule 65 motions and whether amending a complaint to include a DTSA claim prejudicial because of the seizure remedy.[33] We can expect to see similar procedural issues as courts adapt to the DTSA over time.
[1] 18 U.S.C. § 1836; “Defend Trade Secrets Act of 2016: Roll Vote No. 172.” Congressional Record 162:65 (April 27, 2016) p. H2028. http://clerk.house.gov/evs/2016/roll172.xml
[2] 18 U.S.C. § 1836;”Defend Trade Secrets Act of 2016: Roll Vote No. 39.” Congressional Record 162: 65 (April 4, 2016) p. S1890. https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=114&session=2&vote=00039
[3] “Legislative Fact Sheet – Trade Secrets Act.” Accessed March 9, 2017. http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Trade%20Secrets%20Act.
[4] Compare 18 U.S.C. § 1836 with U.T.S.A. (Unif. Law Comm’n amended 1985).
[5] 18 U.S.C. § 1836(b)(1).
[6] See 18 U.S.C. § 1331 (giving federal courts original jurisdiction of claims “arising under” the laws of the United States.); 18 U.S.C. § 1367 (permitting federal courts to exercise jurisdiction over claims related enough to those claims over which the court has original jurisdiction so as to form the “same case or controversy”); see also United Mine Workers of America v. Gibbs, 383 U.S. 715, 725 (1966) (holding that “same case or controversy” is satisfied by a “common nucleus of operative fact.”).
[7] Staff, L. I. I. “What Are Uniform Laws?” LII / Legal Information Institute, January 27, 2014. https://www.law.cornell.edu/uniform/uniform. (explaining the Uniform Law process).
[8] See supra note 23.
[9] 18 U.S.C. § 1833(b).
[10] Unum Grp. v. Loftus, No. 4:16-CV-40154-TSH, 2016 WL 7115967, at *2 (D. Mass. Dec. 6, 2016).
[11] U.T.S.A. (Unif. Law Comm’n amended 1985).
[12] 18 U.S.C. § 1836(b)(2)(A)(i).
[13] Id. § 1836(b)(2)(A)(i)-(ii)(I).
[14] Id. § 1836(b)(2)(B)(ii).
[15] Id.
[16] Staff, L. I. I. “Temporary Restraining Order.” LII / Legal Information Institute, August 6, 2007. https://www.law.cornell.edu/wex/temporary_restraining_order.
[17] Compare 18 U.S.C. § 1836(b)(2), with Fed. R. Civ. P. 65(b).
[18] Compare 18 U.S.C. § 1836(b)(2), with Fed. R. Civ. P. 65(b).
[19] Compare 18 U.S.C. § 1836(b)(2)(B)(vi)., with Fed. R. Civ. P. 65(c).
[20] David S. Levine & Sharon K. Sandeen, Professors’ Letter in Opposition to the “Defend Trade Secrets Act of 2014” (S. 2267) and the “Trade Secrets Protection Act of 2014” (H.R. 5233) 4-5 (Aug. 26, 2014), available at https://tinyurl.com/kt4r6xp
[21] See David S. Levine & Sharon K. Sandeen, Here Come the Trade Secret Trolls, 71 Wash. & Lee L. Rev. Online 230 (2015).
[22] Dowd, James. “Federalizing Trade Secret Protection: A Close Look at the Ex Parte Seizure Provision | WilmerHale.” May 23rd, 2017. https://www.wilmerhale.com/uploadedFiles/Shared_Content/Editorial/Publications/Documents/2016-05-31-Federalizing-Trade-Secret-Protection-A-Close-Look-at-the-Ex-Parte-Seizure-Provision.pdf. (arguing that employers could use an ex parte seizure to stymy competition). Dhanani, Ali. “The New Defend Trade Secrets Act: Finally, A Federal Tool to Protect Your Trade Secrets | Ideas | Ideas.” Baker Botts LLP. Accessed February 27, 2017. http://www.bakerbotts.com/ideas/publications/2016/07/ip-report-a-dhanani. (speculating that ex parte seizures could be used abusively).
[23] See DTSA Seizure Spreadsheet.
[24] See e.g. OOO Brunswick Rail Mgmt. v. Sultanov, No. 5:17-CV-00017-EJD, 2017 WL 67119 (N.D. Cal. Jan. 6, 2017); ICE Consulting, INC. v. Jensen, 2016 WL 6781012 (N.D. Cal.); Dazzle Software II, LLC v. Kinney, No. 16-CV-12191, 2016 WL 6248906 (E.D. Mich. Aug. 22, 2016).
[25] See OOO Brunswick Rail Mgmt., No. 5:17-CV-00017-EJD, 2017 WL 67119.
[26] Id. at *2.In the other two cases, the application was dealt with on procedural grounds. In ICE Consulting, Inc. v. Jensen, the plaintiffs voluntarily withdrew their ex parte application, while in Dazzle Software v. Kinney, the plaintiff’s DTSA claim was dismissed before ruling on the merits of the application. See supra note 23.
[27] See DTSA Seizure Spreadsheet.
[28] Twelve out of the seventeen preliminary injunction / TRO motions were granted. See DTSA Seizure Spreadsheet.
[29] See e.g. Engility Corp. v. Daniels, No. 16-CV-2473-WJM-MEH, 2016 WL 7034976 (D. Colo. Dec. 2, 2016); First W. Capital Mgmt. Co. v. Malamed, No. 16-CV-1961-WJM-MJW, 2016 WL 8358549 (D. Colo. Sept. 30, 2016); ProCom Heating, Inc. v. GHP Grp., Inc., No. 113CV00163GNSHBB, 2016 WL 8201960 (W.D. Ky. Sept. 9, 2016).
[30] Compare Rule 65(c) with 1836(b)(2)(B)(vi).
[31] Beral, Arash. “The Flaw In DTSA’S Civil Seizure Provision – Law360.” Accessed March 9, 2017. https://www.law360.com/articles/808112/the-flaw-in-dtsa-s-civil-seizure-provision.
[32] Id.
[33] The answers are no and no; the seizure provision does not displace Rule 65 motions and is not prejudicial when amending a complaint. See Magnesita Refractories Co. v. Mishra, No. 2:16-CV-524-PPS-JEM, 2017 WL 655860 (N.D. Ind. Feb. 17, 2017); VIA Techs., Inc. v. ASUS Computer Int’l, No. 14-CV-03586-BLF, 2017 WL 491172 (N.D. Cal. Feb. 7, 2017).
