Friday, May 26, 2017

The Defend Trade Secrets Act Giveth…But Very Little

If you jump to PatentlyO, you’ll read a great column by Dr. Maxwell Goss – a business litigator like me. He offers his thoughts on the scope of “inevitable disclosure” injunctions under the Defend Trade Secrets Act of 2016 (DTSA) and argues that the theory “lives on under the DTSA, albeit in a diminished form.”

This is a pretty hot topic in the area of trade secrets law. Congress passed the DTSA last year and limited the circumstances in which courts could enjoin activity that impacts one’s ability to enter into or maintain an employment relationship.

Dr. Goss outlines this limitation in his discussion, so I won’t repeat it. The upshot is this: under the DTSA, a court can enjoin an employee’s work conduct, or even her ability to work for a competitor at all, if she has engaged in actual or threatened trade secret misappropriation. But it cannot impose limitations on that person’s job merely because she may know of, or have been exposed to, particularly sensitive information.

With the DTSA having recently celebrated its one-year anniversary, we have seen just a trickle of cases to this point. None are all that earth-shattering. Dr. Goss discusses one of the more significant ones—if only because our pool of candidates is so shallow—and it’s the first to discuss the inevitable disclosure theory of misappropriation in some depth.

The case, Molon Motor and Coil Corp. v. Nidec Motor Corp., comes from the Northern District of Illinois (the leading jurisdiction for DTSA filings). Judge Edmond Chang allowed a DTSA claim to proceed based, at least in part, on the plaintiff’s contention that a corporate defendant would inevitably disclose Molon Motor’s trade secrets. Factually, the case follows a painfully familiar paradigm in trade secrets litigation: suspicious pre-termination activity by an ex-employee in accessing and copying sensitive data off a computer system. The complaint offered nothing more. Molon Motor alleged quite simply that, through its hiring of the ex-employee, “Nidec Motor’s use of the trade secrets can be inferred under the ‘inevitable disclosure doctrine.’” (Dkt. Entry 64, at ¶ 67).

In discussing the availability of injunctive relief under the DTSA, Dr. Goss states that “an injunction that does not impact employment may still be based on inevitable disclosure.” This may refer to central fact in the Molon Motor case and which it’s not going to upend anything in the DTSA’s textual limits: the employee isn’t a defendant. Molon Motor only sued its direct competitor.

True, it seeks injunctive relief, but not in a way that would limit the employee’s work with Nidec Motor or even in a manner that would impose stringent conditions on that work. Therefore, the DTSA’s limitations on injunctive relief do not apply at all given the relief Molon Motor seeks. Those limitations speak only of a court’s ability to either (a) “prevent a person from entering into an employment relationship,” or (b) limit the “conditions placed on such employment.”

Another way to look at it: the claim in Molon Motor is not really based on inevitable disclosure by the person with original access to the trade secrets, but rather inevitable use by those to whom he allegedly distributed them. Therein lies the problem with the inevitable disclosure theory under the DTSA: if there was disclosure, then the conduct amounts to actual misappropriation. The concept of “inevitability” then disappears from the equation when actual use is proven.

So what are we using inevitable disclosure for? A gateway to discovery? Apparently, yes. A suit based on suspicion. Troubling.

After one year, where do we stand with the DTSA? Inevitable disclosure injunctions are nominally available in one of three factual circumstances:

  1. Where the plaintiff seeks to enjoin use of trade secrets in a way that does not independently restrain its former employee’s work activity;
  2. Where an ex-employee is not joining another company but instead starts her own business, such that the relief would not prevent her from entering into an employment relationship;
  3. Where the plaintiff claims inevitable use of trade secrets following a failed business transaction in which the putative acquirer learned of those secrets during due diligence.
At least as of now, plaintiffs can gain federal question jurisdiction under the DTSA and seek broader injunctive relief under a State-law UTSA claim (at least in venues like Illinois, which currently recognize inevitable disclosure injunctions). But in those States (like California or Maryland) that reject the inevitable disclosure doctrine, the DTSA offers no gateway to broader injunctive relief.

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