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What The Defend Trade Secrets Act May Mean For California

Private civil actions for trade secret misappropriation are currently governed by state statutory or common law. The Uniform Trade Secrets Act, published by the Uniform Law Commission in 1979 and amended in 1985, was promulgated to provide a legal framework to create uniformity among state trade secret laws, codifying "the basic principles of common law trade secret protection." Unif. Trade Secrets Act with 1985 Amendments, Prefatory Note 1 (Unif. Law Comm'n 1985). All but two states have adopted some variation of UTSA, and California was the ninth state to do so. The California Uniform Trade Secrets Act, which became effective on Jan. 1, 1985 (see Cal. Civ. Code §§ 3426-3426.11), codified California trade secret law and created unique procedures for litigating trade secret misappropriation claims.

In July 2015, bipartisan sponsors in both houses of Congress introduced the Defend Trade Secrets Act, which would create a federal civil cause of action for trade secret misappropriation. See H.R. 3326, S. 1890, 114th Cong. (2015). Supporters anticipate that DTSA would provide the uniformity currently lacking under the varying legal standards adopted by states and allow for better protection of trade secrets in federal court. See, e.g., Protecting Trade Secrets: the Impact of Trade Secret Theft on American Competitiveness and Potential Solutions to Remedy This Harm: Hearing on S. 1890 before the S. Comm. on the Judiciary, 114th Cong. 5 (2015).

But, as proposed, the language of DTSA would not seek to preempt current state trade secret law and would place limitations on jurisdiction. Indeed, critics complain that DTSA will not further its stated objectives of providing uniformity, and may actually increase litigation costs and have anticompetitive effects. See, e.g., id.

Congress previously tried to enact similar legislation, but has so far been unsuccessful. However, given the growing concerns over cybersecurity threats and theft of electronic data, DTSA stands a greater chance of success than prior similar legislation. On Dec. 2, 2015, the Senate Judiciary Committee held hearings on the bill. Thus, it is a good time to discuss the implications this proposed federal legislation could have on trade secret disputes, specifically in California. Although many of DTSA's provisions mirror those of UTSA, there are several key differences between DTSA and California trade secret law under CUTSA:

  • Ownership Status. DTSA provides that an "owner of a trade secret may bring a civil action" for trade secret misappropriation. DTSA (S. 1890, 114th Cong.) § 2(b)(1) (2015). In contrast, CUTSA is silent on the ownership requirement and California courts have found that CUTSA does not require a plaintiff to be a current owner of a trade secret. See Jasmine Networks, Inc. v. Super. Ct. 180 Cal. App. 4th 980, 986 (Cal. Ct. App. 2009) ("[W]e find no support for [a current-ownership] rule in the text of the CUTSA, cases applying it, or legislative history…"). Instead, the California civil jury instructions for trade secret misappropriation require only that the plaintiff owned and/or was a licensee of the claimed trade secret. Judicial Council of California Jury Instructions No. 4401.
  • "Aggrieved" Requirement. Under DTSA, an owner of a trade secret may bring an action "if the person is aggrieved by a misappropriation of a trade secret…." DTSA § 2 (b)(1). It is unclear what "aggrieved" means, and how this standard would be met. CUTSA does not contain the "aggrieved" language but California law instead requires that a plaintiff prove that he/she/it "was harmed or the defendant was unjustly enriched" by the misappropriation. CACI No. 4401.
  • Jurisdiction. DTSA grants U.S. district courts "original jurisdiction" for an action "for misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce." DTSA § 2 (c). This is sure to invite challenges as to what exactly is "related" to a product or service involving interstate commerce. Absent the interstate commerce hook, a plaintiff would conceivably still be able to bring a CUTSA claim in federal court if there were diversity or supplemental jurisdiction. Issues involving preemption and the Erie doctrine are bound to arise if the application of DTSA is disputed.
  • Statute of Limitations. DTSA proposes a relatively long five-year statute of limitations, running from the date on which the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. Id. § 2 (d). This is materially longer than the three-year statute of limitations under CUTSA. Cal. Civ. Code § 3426.6.
  • Inevitable Disclosure. DTSA provides that a court may grant an injunction "to prevent any actual or threatened misappropriation ... provided the order does not prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation." DTSA § 2 (b)(3)(A)(i). Some argue that this language could be interpreted as an endorsement of the criticized inevitable disclosure doctrine, under which a claim of trade secret misappropriation can be established by showing that a defendant's new employment will inevitably lead him or her to rely on the plaintiff's trade secrets. Such an interpretation conflicts with California law, which has rejected the inevitable disclosure doctrine as being incompatible with California's public policy against restraints on employee mobility and trade. See Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443 (Cal. Ct. App. 2002); Cal. Bus. & Prof. Code § 16600.
  • Civil Seizure. DTSA contains a "Civil Seizure" provision that would allow a plaintiff to request, through an ex parte application, seizure of any property "necessary to prevent the propagation or dissemination of the trade secret that is subject to the action." CUTSA does not contain a similar provision; whether this will be applied narrowly as appears to be intended or, as feared by some of the bill's opponents, potentially cause anti-competitive harm, particularly against small businesses, bears watching.
  • Alleging Trade Secret with Sufficient Particularity. California Code of Civil Procedure section 2019.210 requires that a party alleging misappropriation identify the trade secret with reasonable particularity before commencing discovery relating to the misappropriation claim. Although section 2019.210 is a procedural statute, federal courts adjudicating trade secret misappropriation claims under CUTSA have sometimes applied it. DTSA, like most statutory schemes under UTSA, is silent on this requirement and, therefore, may take a potent weapon away from a defendant in California.
  • Preemption of Tort Claims. Under California jurisprudence, tort claims which are "based on the same nucleus of facts as [a] misappropriation of trade secrets claim" are preempted by CUTSA. See, e.g., K.C. Multimedia, Inc. v. Bank of Am. Tech. & Operations, Inc., 171 Cal. App. 4th 939, 954 (Cal. Ct. App. 2009); Mattel, Inc. v. MGA Ent., Inc., 782 F. Supp. 2d 911, 987 (C.D. Cal. 2011). If DTSA passes, courts will undoubtedly face the question of whether DTSA, like CUTSA, preempts state tort claims which are based on the same nucleus of facts as the trade secrets claim.
  • It is unclear at this point whether DTSA will provide uniformity or at least serve as a beneficial complement to the existing trade secret framework established under CUTSA and UTSA in sister states. However, DTSA is still being shaped and the time is now for practitioners to speak up so DTSA stands a fighting chance of accomplishing its goals.

Reprinted with permission from the December 11, 2015 edition of The Recorder© 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.