Litigation update regarding DTSA

February 2017 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

The Defend Trade Secrets Act (DTSA) created the long awaited federal jurisdiction for trade secret theft and provided access to the federal courts for trade secret litigants. President Obama signed the DTSA into law in May 2016 after the Senate unanimously, and the House overwhelmingly, passed the act. Upon the president’s signature, the DTSA became immediately effective for all trade secret misappropriation after enactment. The DTSA largely mirrors the law under the Uniform Trade Secrets Act (which had been adopted in 48 states), but does not pre-empt existing state law trade secret claims. While we expect the federal courts to interpret many provisions of the DTSA consistent with existing law in many states, there is still a lot of uncertainty for litigants.

In the months since the DTSA’s enactment, there have been a handful of opinions providing insight into litigation involving the DTSA. We discuss a couple of issues facing trade secret litigants below.

Pleading requirements

While the DTSA omits any requirement that a trade secret plaintiff describe its trade secrets with particularity (something several state laws require), litigators still struggle with how much information is needed to survive a motion to dismiss. Of course, this is a natural struggle based on the nature of the underlying claim – it is supposed to be a trade secret after all. At the end of the day, trade secret litigants must balance the public nature of the pleadings with the sufficient amount of detail to state a DTSA claim and survive a motion to dismiss.

Courts have recently addressed motions to dismiss involving pleading requirements for DTSA claims. In one recent case in the US District Court for the Northern District of Illinois, Mission Measurement Corp. v. Blackbaud, Inc., the federal court addressed the issue of how much detail must be included in a complaint alleging trade secret misappropriation under the DTSA. The court decided that a general explanation of the trade secrets allegedly misappropriated was sufficient to withstand a motion to dismiss.

In Mission Measurement, the plaintiff, Mission Measurement, and one of the defendants, MicroEdge, had worked together where Mission Measurement assisted MicroEdge in developing a method to measure impact of social change programmes. The cooperation included developing software applications based upon Mission Measurement’s proprietary trade secrets and proprietary database information. The parties entered into a non-disclosure agreement and acknowledged the nature of the project, explicitly acknowledging Mission Measurement’s ownership of its proprietary database.

A couple of years later, MicroEdge ceased communications with Mission Measurement because of a pending sale of the company to Blackbaud. After the sale, Blackbaud released a computer application that allegedly utilised the trade secrets that Mission Measurement’s had disclosed to MicroEdge. Mission Measurement filed a complaint alleging that MicroEdge collaborated with Mission Measurement not as a business partner but to steal Mission Measurement’s trade secrets and increase its eventual sale price to Blackbaud.

Blackbaud and MicroEdge moved to dismiss the complaint, arguing that the complaint “failed to specifically identify the exact trade secrets at issue”. The court disagreed with the defendants, reasoning that at the pleading stage, Mission Measurement “need only describe the information and efforts to maintain the confidentiality of the information in general terms”, and that “trade secrets need not be disclosed in detail in a complaint alleging misappropriation for the simple reason that such a requirement would result in the public disclosure of the purported trade secrets”.

The court found that Mission Measurement had sufficiently pleaded the details of its allegations against the defendants. For instance, Mission Measurement listed a number of trade secrets, including “(i) a specialised Outcomes Taxonomy; (ii) a method for collecting standardised data; (iii) a method for calculating grantee impact; (iv) software design specifications; (v) impact reports and analytics; and (vi) business models for selling access to metrics databases”. Pleading these details was sufficient for Mission Measurement to withstand a motion to dismiss.

While there have been a couple recent decisions that have provided guidance regarding this particular issue, pleading trade secret misappropriation is still an imprecise exercise. When drafting the allegations, it is important to describe the misappropriated trade secrets, including the efforts taken to maintain their secrecy. But, as the court noted in Mission Measurement, it is also important to not publicly disclose valuable trade secrets in a public filing. Thankfully, if a plaintiff is careful and does not plead sufficient details, many courts will allow plaintiffs at least one opportunity to re-plead after deciding a motion to dismiss.

Pre-enactment theft

The DTSA states that it applies to theft of a trade secret for which “any act occurs on or after the date of the enactment of this Act”. However, trade secret misappropriation is rarely a single, one-time event but rather it occurs on a rolling basis. In order to avoid the DTSA, defendants would likely argue that this rolling scenario was a single misappropriation which began pre-enactment. Therefore, there was some ambiguity about the use of the DTSA for thefts of trade secrets which began pre-enactment. Some recent decisions explain how a pre-enactment theft can support at least partial recovery if the defendant commits an ‘act’ after 11 May 2016.

In Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group Inc., the court allowed a party to add a DTSA claim that involved the download and use of documents that started in 2014. The court rejected the argument that the 2014 pre-enactment conduct prevented the new DTSA claims because there was an allegation that the alleged misappropriator “continues to use its intellectual property to directly compete with [trade secret owner], the wrongful act continues to occur after the date of the enactment of the DTSA”.

The law related to issues surrounding the DTSA, including pleading requirements and pre-enactment theft, will continue to develop. And with a new federal civil action for trade secret theft, we expect a significant increase in trade secret litigation in federal courts in 2017.

R. David Donoghue and Steven E. Jedlinski are partners and Anthony J. Fuga is an associate at Holland & Knight. Mr Donoghue can be contacted on +1 (312) 578 6553 or by email: david.donoghue@hklaw.com. Mr Jedlinski can be contacted on +1 (312) 715 5818 or by email: steven.jedlinski@hklaw.com. Mr Fuga can be contacted on +1 (312) 715 5771 or by email: anthony.fuga@hklaw.com.

R. David Donoghue, Steven E. Jedlinski and Anthony J. Fuga

Holland & Knight