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eLABORate: Federal Court Gives Clues as to When "The Nuclear Option" Will Be Ordered under the Defend Trade Secrets Act

August 23, 2017

In 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), allowing businesses nationwide to file suit in federal court to protect their trade secrets from unscrupulous former employees and dishonest business competitors. The law was applauded by the business community, because prior to the enactment of the DTSA, companies were limited to seeking relief in state courts, where the law can vary from state-to-state, yielding inconsistent results.

In addition to providing for injunctive relief and damages, the most striking provision of DTSA is that upon motion of the victimized company, it allows a federal court to order U.S. Marshals to enter the property of another individual or company to seize property that would allow the stolen trade secrets to be improperly used or disclosed, the so-called “nuclear option.” Such a seizure would be allowed without any advance notice. 

Under the law, a federal judge may order such a seizure only under “extraordinary circumstances” where “immediate and irreparable injury will occur if such seizure is not ordered” and that the harm to the alleged victimized company outweighs the harm to the person against whom seizure would be ordered.[1] However, DTSA does not define exactly what constitutes such “extraordinary circumstances.” Not surprisingly, in the 15 months since it was enacted, federal courts have understandably been very reluctant to “push the button” on this severe legal remedy.

However, in Mission Capital Advisors LLC v. Romaka, a New York District Court provided at least one example where seizure by U.S. Marshals in a civil case would be justified. In Mission Capital, the plaintiff was a company that engaged in commercial real estate finance and loan portfolio evaluation on a national and international level. In its lawsuit, the company alleged that a former employee had copied the company’s entire 65,000 person client list onto his personal computer and that the former Director of Debt and Equity Finance was receiving employment offers from apparent business competitors. In the Court’s Order granting the seizure, it appears the deceptive and dishonest actions of the defendant heavily influenced the District Court’s decision, as well as the threat of imminent trade secret disclosure to Mission Capital’s competitors:

The circumstances indicate that Defendant intends to misuse Plaintiffs’ trade secret information. The verified Complaint avers that Defendant was Plaintiff’s director of debt and equity finance; he downloaded the Contact Lists on to his personal computer without authorization; he did so when he was absent from work for several weeks; Defendant falsely represented that he had deleted the data and permitted a forensic computer investigator to copy and review the data on his computer; the Contact Lists were found on his computer, along with other proprietary information of Plaintiff, but under a different name and a masked file type; Defendant, on information and belief, had concurrently received several offers of employment; although originally cooperative, Defendant now does not respond to Plaintiff’s attempts to contact him and his employment has been terminated.

The Court’s Order also indicated its concern that the defendant “would make the Contact Lists inaccessible to the court, or retain unauthorized copies . . . .”  In essence, the Court did not trust the defendant not to engage in improper conduct. In this particular instance, the District Court ordered U.S. Marshals to go to the defendant’s residence, copy the disguised files off of the defendant’s personal computer and onto a portable storage unit, and to permanently delete the files from defendant’s computer.

A company seeking such a seizure from a federal court must provide for sufficient security or bond to be posted to cover any damages from a wrongful or excessive seizure. However, a company which inappropriately elects to seek such relief potentially could pay the price. DTSA provides that victims of “wrongful or excessive seizure” may state a cause of action against the party seeking seizure for actual damages and attorney fees.[2] Any property seized remains in the custody of the court and a hearing must be held no later than seven (7) days after the hearing where the party seeking the seizure must prove that the order was necessary to protect against disclosure or use of the trade secrets in question.[3]

A company that potentially may need to utilize DTSA in future trade secret litigation is required to take preemptive measures to take full advantage of the protections and remedies provided by the law. DTSA places an affirmative duty on employers to provide employees notice of DTSA’s immunity or “whistleblower” provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Failure to provide this notice will prevent a company from being able to recover exemplary damages and attorneys’ fees in any lawsuit brought under DTSA. 

If employers anticipate they may want or need to exercise rights under DTSA, they should consider integrating such language into company documents such as, but not limited to, employment agreements, independent contractor agreements, employee handbooks, offer letters, non-compete/non-solicitation agreements, non-disclosure/confidentiality agreements, invention and assignment agreements, and return of property agreements.

[1] 18 U.S.C. § 1836(b)(2)(A)(i);18 U.S.C. § 1836(b)(2)(A)(ii)(II & III).

[2] 18 U.S.C. § 1836(b)(2)(G).

[3] 18 U.S.C. § 1836(b)(2)(B)(v) & 18 U.S.C. § 1836(b)(2)(D).