Tuesday, December 6, 2016

Colorado Court Interprets Key Remedies Section of Defend Trade Secrets Act

With only a life span of a few months, the new Defend Trade Secrets Act has produced very little in the way of interesting case law. That's hardly a surprise at this point.

For the most part, the DTSA does not change substantive state law concerning trade secrets and how one may "misappropriate" a trade secret. The statutory differences, by and large, concern the scope of available remedies. And of course, the muscle that federal courts provide is the principal value that the new statute offers. (For more discussion on litigating in federal versus state court, see my post immediately preceding this one.)

This past week, a federal district court in Colorado offered perhaps the most in-depth look yet into the DTSA. And not surprisingly, the core aspect of the opinion concerns statutory remedies, particularly those relating to injunctions.


Injunctive relief is a default remedy for actual or threatened misappropriation. But injunctions that prohibit merely using or exploiting trade secrets are only so helpful. For one, monitoring that type of order is almost impossible. And just as problematically, trying to define what exactly is prohibited from "use" is an exercise sure to drive lawyers and judges nuts.

To be certain, injunction clauses under the DTSA and state statutory law are not so confining for aggrieved trade-secret owners. State laws don't set precise boundaries on how far injunctions can go. So a late addition to the DTSA drew quite a bit of attention when it appeared to do just that. Section 1836(b)(3)(A) of the DTSA contains two provisions that seem to limit broader conduct-based injunctions - that is, injunctions that extend beyond prohibitions on using trade secrets.

First Exception. The first expressly states that an injunction order may not "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." That provision is a clear, direct shot at states that endorse injunctions under the theory of "inevitable" disclosure - something broadly akin to a non-compete agreement.

Second Exception. The second DTSA provision says an injunction cannot "otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business." This simply means that plaintiffs cannot invoke the DTSA to secure more expansive injunctive relief than some employee-friendly states would allow when enforcing non-compete agreements.


Engility Corp. v. Daniels (a copy of which is embedded below) brought these two exceptions into play. The case was a fairly typical employment-related trade secret dispute, which arose when two employees of Engility - a former division of L-3 Communications - left to form their own business. The relevant market is somewhat technical in that it concerned the sale of military communications equipment and a related network. The facts giving rise to claims of trade secret theft arose largely from one employee's retention of data pertaining to this market and his shifting story about what he did with that data for a few weeks after termination.

Engility sought more than a use-based injunction. Although it had no non-compete agreement with the employee, Engility wanted the court to prevent the ex-employees and their new firm from working with a particular military customer. The court's challenge was to apply the DTSA, and its limiting language concerning injunctions, to this particular request.


The court found that the first remedial limitation did not apply, principally because the ex-employees formed a new business. In the court's words, the DTSA gives "no indication that 'employment relationship' encompasses the role of an outside contractor," which the new entity would be to the military customer that was the focal point of the injunction request. It might have been easier, however, if the court simply stated that the exception did not apply because the employer did demonstrate a likelihood of actual or threatened trade-secret misappropriation.

The court then turned to the second exception and found that Colorado state law independently did not bar the customer-based restraint. The question was significant, because Colorado state law is much more restrictive of non-compete use than many other states. Here, however, the court relied upon state statutory law that allows non-compete agreements to be enforced "for the protection of trade secrets." Applying this provision, the court was able to issue a broader conduct-based injunction under the DTSA since Colorado law allowed it to the extent necessary to protect trade secrets.


The Engility decision is instructive for how the new remedies provision of the DTSA may apply in practice. Its applicability, however, may be somewhat narrow for difficult future cases. The facts of Engility established a firm basis for the court to conclude that the employee engaged in actual or threatened trade secret misappropriation - at least at the preliminary injunction phase. With those facts determined, the court didn't really have a tough call in applying the two DTSA injunction exceptions.

The much harder cases will come when employers are unable to present facts that look like theft or misuse of confidential information. The DTSA statutory exceptions should be sufficient to weed out these weak speculative claims, based largely on a theory that an employee inevitably will use something secret. That is why those exceptions are there. Broad conduct-based restrictions under the DTSA won't survive unless employers show facts in the mold of those described in Engility.

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