intellectual_property

The Meaning of Threatened Misappropriation Under the Defend Trade Secrets Act (“DTSA”)

What is the meaning of “threatened” misappropriation or disclosure under the Defend Trade Secrets Act?

The Defend Trade Secrets Act (“DTSA”) provides that the court may enter an injunction to prevent any actual or threatened misappropriation of a trade secret. 18 USC §1836(b)(3)(A)(i). This is the applicable language in the DTSA: “In a civil action brought under this subsection with respect to the misappropriation of a trade secret, a court may grant an injunction to prevent any actual or threatened misappropriation … on such terms as the court deems reasonable, provided the order does 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.” Id.

The question I had was what federal courts say is sufficient to establish a threatened disclosure under the DTSA.

I looked at 161 cases on Westlaw that contained the words “threatened” and “DTSA.” I did not find a single case where a court interpreted the DTSA provision on threatened disclosure any differently it did the threatened disclosure issue under applicable state law, which was usually the Uniform Theft of Trade Secrets Act.

Some courts apply the inevitable disclosure doctrine to claims under the DTSA. Packaging Corp. of Am., Inc. v. Croner, 419 F. Supp. 3d 1059, 1069 n.7 (N.D. Ill. 2020); Inventus Power, Inc. v. Shenzhen Ace Battery Co., Ltd., 20-CV-3375, 2020 WL 3960451, at *11 (N.D. Ill. July 13, 2020); Jazz Pharm., Inc. v. Synchrony Group, LLC, 343 F. Supp. 3d 434, 446 (E.D. Pa. 2018); Freedom Med. Inc. v. Whitman, 343 F. Supp. 3d 509, 521 (E.D. Pa. 2018); Mickey’s Linen v. Fischer, 17 C 2154, 2017 WL 3970593, at *13 (N.D. Ill. Sept. 8, 2017).

Courts examine three factors in an inevitable disclosure analysis: (1) the level of competition between the former and new employer; (2) the similarity between the employee’s former and new positions; and (3) the actions the new employer has taken to prevent the use or disclosure of the former employer’s trade secrets. PepsiCo v. Redmond, No. 94-CV-06838, 1996 WL 3965 at *20 (N.D.Ill.1996) (internal citations omitted). In addition, plaintiffs must allege more than “the mere fact that a person assumed a similar position at a competitor” to state a claim for inevitable disclosure, PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995), which requires “a showing of intent or a high probability” that the employee will use trade secrets. Saban v. Caremark Rx, L.L.C., 780 F. Supp. 2d 700, 734 (N.D. Ill.2011) (internal citations omitted). … Previous plaintiffs that have succeeded in stating claims for inevitable disclosure in this district have alleged that the defendant “could not operate or function” in the new position without relying on the trade secrets. Strata Marketing, Inc. v. Murphy, 317 Ill.App.3d 1054, 251 Ill.Dec. 595, 740 N.E.2d 1166, 1179 (2000); See also Allied Waste Servs. of N. Amer., LLC v. Tibble, 177 F.Supp.3d 1103, 1112 (N.D. Ill. 2016); Complete Bus. Sols., Inc. v. Mauro, No. 01-CV-00363, 2001 WL 290196 (N.D. Ill. Mar. 16, 2001).

Packaging Corp. of Am., Inc. v. Croner, 419 F. Supp. 3d 1059, 1070 (N.D. Ill. 2020). The court in SPBS, Inc. v. Mobley, 4:18-CV-00391, 2018 WL 4185522, at *9 (E.D. Tex. Aug. 31, 2018), applied Texas’ version of the inevitable disclosure doctrine (disclosure of the secrets would benefit the new employer and it was probable the former employee would use them for the benefit of the new employer or the detriment of former employer given the similarities of the market in which the employers operate) in a DTSA case.

Other courts say the inevitable disclosure doctrine somewhat misses the mark, and that the proper inquiry in determining whether to grant an injunction to prevent the threatened disclosure of trade secrets is not whether a defendant inevitably will disclose a trade secret in the absence of injunctive relief, but instead whether there is sufficient likelihood, or substantial threat, of defendant doing so in the future. Mallet & Co. Inc. v. Lacayo, CV 19-1409, 2020 WL 6866386, at *11 (W.D. Pa. Nov. 23, 2020); Power Integrations, Inc. v. De Lara, 20-CV-410-MMA (DEB), 2020 WL 4582675, at *12 (S.D. Cal. Aug. 10, 2020).

Other courts have held it is not enough to allege a competitor hired an employee who possessed trade secrets and that inappropriate use or disclosure is inevitable as a result; the petition must allege specific facts showing the defendant threatened to use or disclose the trade secrets. AWP, Inc. v. Henry, 1:20-CV-01625-SDG, 2020 WL 6876299, at *4 (N.D. Ga. Oct. 28, 2020); Millennium Health, LLC v. Christopher Roberts, 1:19CV2381, 2020 WL 2814440, at *16 (N.D. Ohio Mar. 4, 2020), report and recommendation adopted sub nom. Millennium Health, LLC v. Roberts, 1:19 CV 2381, 2020 WL 2812871 (N.D. Ohio May 29, 2020), appeal dismissed, 20-3653, 2020 WL 7585827 (6th Cir. Nov. 18, 2020); Midwest Sign & Screen Printing Supply Co. v. Dalpe, 386 F. Supp. 3d 1037, 1054 (D. Minn. 2019). This is really no different from the inevitable disclosure doctrine either, because it too requires the showing of more, albeit not much more. There must be evidence of inevitable disclosure, such as similar roles and prior use of trade secrets to solicit customers, compete, manufacture processes, etc. See, e.g., Chartwell Staffing Services Inc. v. Atl. Sols. Group Inc., 819CV00642JLSJDE, 2019 WL 2177262, at *10 (C.D. Cal. May 20, 2019), appeal dismissed, 19-55614, 2020 WL 2791789 (9th Cir. May 19, 2020).

Other courts state the rather obvious, that alleging mere possession of trade secretes is not enough where they were acquired by proper means. Marina Dist. Dev. Co., LLC v. AC Ocean Walk, LLC, 220CV01592GMNBNW, 2020 WL 5502160, at *6 (D. Nev. Sept. 10, 2020); Power Integrations, Inc. v. De Lara, 20-CV-410-MMA (MSB), 2020 WL 1467406, at *19 (S.D. Cal. Mar. 26, 2020); Prime Therapeutics LLC v. Beatty, 354 F. Supp. 3d 957, 970 (D. Minn. 2018).

Threatened misappropriation may occur under several variations: (1) a defendant possesses trade secrets and “actually has misused or disclosed some of those trade secrets in the past”; (2) a defendant possesses trade secrets and “intends to improperly use or disclose some of those trade secrets”; and (3) a defendant possesses trade secrets and “wrongly refuses to return the trade secrets after a demand for their return has been made.”

Power Integrations, Inc. v. De Lara, 20-CV-410-MMA (MSB), 2020 WL 1467406, at *19 (S.D. Cal. Mar. 26, 2020). The Plaintiff should plead facts showing “how improper acquisition, disclosure or use occurred or is threatened.” Power Integrations, Inc. v. De Lara, 20-CV-410-MMA (MSB), 2020 WL 1467406, at *19 (S.D. Cal. Mar. 26, 2020). The threat may be proven by circumstantial evidence, such as when the employee is in possession of trade secrets and has lied about his new role. Integrations, Inc. v. De Lara, 20-CV-410-MMA (MSB), 2020 WL 1467406, at *19 (S.D. Cal. Mar. 26, 2020). Radiant Glob. Logistics, Inc. v. Furstenau, 368 F. Supp. 3d 1112, 1130 (E.D. Mich. 2019), appeal dismissed, 951 F.3d 393 (6th Cir. 2020).

Evidence of illicit intent or a motive to misappropriate will help prove threatened misappropriation. Edward D. Jones & Co., L.P. v. Kerr, 415 F. Supp. 3d 861, 868 n. 4 (S.D. Ind. 2019); Prime Therapeutics LLC v. Beatty, 354 F. Supp. 3d 957, 972 (D. Minn. 2018). Explicitly threatened use or disclosure is the obvious way of proving threatened disclosure. 1-800 Remodel, Inc. v. Bodor, CV 18-472-DMG (EX), 2018 WL 6340759, at *5 (C.D. Cal. Oct. 17, 2018); Indus. Packaging Supplies, Inc. v. Channell, 18 CV 165, 2018 WL 2560993, at *3 (N.D. Ill. June 4, 2018).

At this point, no uniform test for threatened disclosure has developed under the DTSA. Thus, the safest practice is for the Plaintiff to plead and present all of the facts it can on threatened disclosure. Among others, those facts may include: (1) possession of trade secrets, (2) working for competitor, (3) same or similar role at new employer, (4) new employer sells same or similar products, (5) explicit threats to use trade secrets, (6) taking trade secrets by taking computers, storage devices, or documents (7) prior use or disclosure of trade secrets, (8) new employer has not taken steps to prevent their use, (9) it would be advantageous for the new employer to use the trade secrets; and (12) a history of other bad conduct by the employee such as stealing money and breach of fiduciary duties show illicit intent, motive to steal and a pattern and practice of illicit conduct against the Plaintiff.

This article represents one author’s viewpoint and is not a substitute for legal advice.

 

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