Tuesday, April 19, 2016

Why (Some) Companies Won't Sue Under the Defend Trade Secrets Act

The Senate's unanimous passage of the Defend Trade Secrets Act has resulted in a flood of legal blog posts that have, for the most part, extolled the virtues of having a federal regime covering this fourth branch of intellectual property.

However, there are at least three reasons why the Act, which still must pass the House of Representatives, may not result in an immediate wave of federal litigation.

1. The "Inevitable Disclosure" Doctrine's Inevitable Demise

One of the most prominent - and sensible - features of the DTSA is its implicit rejection of the inevitable disclosure theory of misappropriation. That topic has generated a wave of posts on this blog alone. To be sure, it is highly controversial and enables parties to bring suit without evidence of actual or even threatened misappropriation of trade secrets. In practice, it can amount to an implied non-compete without any objective parameters.

Fortunately, few states (Illinois, Iowa, New Jersey are a few) have adopted this theory and many have expressly rejected it (California and Georgia, for example). But in many states, it's just not clear whether inevitable disclosure is a viable theory on which to proceed. Since the Uniform Trade Secrets Act is the basis for most states' law, this uncertainty is a real head-scratcher.

The DTSA now provides that a federal court may grant a plaintiff an injunction as long as it doesn't "prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows."

Since the DTSA is intended to work in tandem with state law, a company that relies on the inevitable disclosure theory of misappropriation has no factual basis to invoke federal law and must proceed in state court.

2. Protecting the Whistleblower

During the amendment process, the Senate added protections in the DTSA which will protect a whistleblower who must disclose trade-secret information as part of reporting wrongdoing by an ex-employer. As part of these protections, an employer will have certain obligations that require it to notify an employee in a contract or policy statement of the DTSA's immunity provisions. If the employer does not provide notice of whistleblower immunity, it "may not be awarded exemplary damages or attorneys fees...in an action against an employee to whom notice was not provided."

It is somewhat unclear whether this provision applies in all trade-secret cases or only those that concern some whistleblowing activity. From the plain language of the DTSA's notice provision, I have to assume that it applies across the board. This is a somewhat obscure and late addition to the DTSA and it's not clear what the House will end up doing with the proposed legislation. But it's reasonable to assume that many smaller employees with less-sophisticated compliance operations will not have fully compliant agreements or policy statements. In that case, employers that feel they have a strong claim for punitive damages and attorneys' fees may have to resort to state law.

3. Fee-Shifting in Federal Court

The last reason that federal suits may not be as prevalent is related to the inherent weaknesses in many trade-secrets cases. This area of the law produces a large volume of silly, frivolous, and anti-competitive litigation. These weak cases often arise in employment-based trade-secrets suits, rather than those that are driven by intellectual property protection. For plaintiffs who seek to deter competition and invoke trade-secrets law in doing so, the federal system may end up helping defendants because of courts' willingness to sanction discovery abuse, bad-faith conduct by counsel, and spurious claims that lack evidentiary support.

The DTSA adopts the familiar bad-faith fee-shifting language now endorsed by most states. So simply as a textual matter, the opportunity for defendants to recover fees shouldn't be all that enhanced. However, practically speaking, federal courts have the know-how and political cover to award sanctions for frivolous cases.