The Defend Trade Secrets Act of 2016 and Its Coexistence with Massachusetts Law

chow_steveby Stephen Y. Chow

Legal Analysis

The Defend Trade Secrets Act of 2016 (“DTSA”) creates a federal private right of action for misappropriation of trade secrets — hitherto the province of state unfair competition law.  It now provides original federal court jurisdiction for these questions, as for infringement of other “intellectual property” such as patents, copyrights and federally-registered trademarks.  However, the jurisdiction is not exclusive, and the DTSA does not preempt state trade secret law, raising questions about the coexistence of the DTSA and Massachusetts law governing trade secrets.  This Article explains salient aspects of the DTSA and differences from Massachusetts law that may be considered in asserting either or both.

I.Highlights of the DTSA

The DTSA has four important aspects:

  • The DTSA allows “owners” to sue for “misappropriation”[1] of “trade secrets” that are “related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). For purposes of the DTSA, a trade secret is “all forms and types of financial, business, scientific, technical, economic, or engineering information . . . if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”  18 U.S.C. § 1839(3).
  • Courts may issue ex parte orders of “the seizure of property necessary to prevent the propagation or dissemination of the trade secret.” 18 U.S.C. § 1836(b)(2).
  • Courts may issue injunctions to prevent “actual or threatened misappropriation,” provided that the order does not:

“(I) prevent a person from entering into an employment relationship, and . . . conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows; or

“(II) otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”  18 U.S.C. § 1836(b)(3)(A)(i).

  • “Whistleblowers” are given immunity from federal or state trade secret suits for confidential disclosures made to government or the courts “solely for the purpose of reporting or investigating a suspected violation of law,” without otherwise preempting existing state law remedies for misappropriation of trade secrets. 18 U.S.C. §§ 1833, 1838.

II. What Is “Misappropriation” of “Trade Secrets”?

Massachusetts has not enacted the UTSA (enacted by 47 other states), which is the basis for the DTSA’s definition of “misappropriation” (see note 1).  Instead, M.G.L. c. 93, § 42, provides:

Whoever embezzles, steals or unlawfully takes, carries away, conceals, or copies, or by fraud or by deception obtains, from any person or corporation, with intent to convert to his own use, any trade secret, regardless of value, shall be liable in tort. . . .

(Emphasis added.)  “Trade secret” is defined in M.G.L. c. 266, § 30(4), as

anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement.

(Emphasis added.)

In the decade following enactment of those provisions, the Supreme Judicial Court embraced Section 757 of the 1939 Restatement of Torts and its principles for defining “trade secrets” in its comment b.  Today, Massachusetts courts apply Section 757 as equivalent to those two statutory provisions.[2]

Massachusetts federal district courts have tested for trade secret “misappropriation” by asking if the defendant “used improper means, in breach of a confidential relationship, to acquire and use that trade secret.”[3]  However, as shown in the following table setting forth its text and that of the DTSA for comparison (emphases added), Section 757 recognizes some misappropriations that do not require acquisition by improper means.[4]  The DTSA adds a distinct misappropriation of acquisition by “improper means” without requiring “use.”

1939 Restatement § 757 DTSA, as codified in 18 U.S.C. § 1839(3)
the term `misappropriation’ means–

(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

One who discloses or uses another’s trade secret, without a privilege to do so, is liable to the other if (B) disclosure or use of a trade secret of another without express or implied consent by a person who–
(a) he discovered the secret by improper means, or  (i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was–
(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his duty to the other, or (I) derived from or through a person who had used improper means to acquire the trade secret;

(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

(d) he learned the secret with notice of the facts that it was a secret and that its disclosure was made to him by mistake. (iii) before a material change of the position of the person, knew or had reason to know that–

(I) the trade secret was a trade secret; and

(II) knowledge of the trade secret had been acquired by accident or mistake;

1939 Restatement § 757 cmt. B DTSA, as codified in  18 U.S.C. § 1839(3)
A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. . . . [I]t is not simply information as to single or ephemeral events in the conduct of the business. . . . A trade secret is a process or device for continuous use in the operation of the business. . . . Some factors to be considered in determining whether given information is one’s trade secret are: . . .

(5) the amount of effort or money expended by him in developing the information;

the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
(3) the extent of measures taken by him to guard the secrecy of the information; (A) the owner thereof has taken reasonable measures to keep such information secret; and
(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business;. . . (4) the value of the information to him and to his competitors; . . .and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others (B)  the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information

As the table above shows the DTSA does not maintain a continuous-use requirement.[5]  (Some Massachusetts decisions have applied that requirement of continuous use to dismiss misappropriation claims that did not allege current use by the plaintiff, even where the plaintiff alleged it had been put out of business by the misappropriation.[6])  Notwithstanding that difference, both comment b and the DTSA focus on reasonable protection of non-public information of economic value.

The DTSA, more clearly than Massachusetts law, protects information that is not currently used by the “owner,” as well as information acquired by improper means, but not currently used by the defendant.

III. Remedies for Misappropriation

Another significant difference between Massachusetts trade secret law and the DTSA is the remedies that are available.

Under Massachusetts law, a trade secret plaintiff may recover its direct damages (primarily lost profits) — potentially doubled under M.G.L. c. 93, § 42 — but not restitution (value to the defendant) or reasonable royalties (unless lost profits cannot be shown).[7]  It is uncertain if injunctions may be granted against inchoate use of trade secrets.  (See note 3.)

In contrast, under federal law, a trade secret plaintiff may now recover in more ways than under Massachusetts law:

First, it may recover a non-duplicative combination of direct damages and unjust enrichment (restitution) or, alternatively, reasonable royalties.  See 18 U.S.C. § 1836(b).  Any of those remedies may be trebled, and the court may award attorney’s fees as well.

Second, it can get an injunction.  Under the DTSA, except for employee protection, a court may enter an injunction “to prevent any actual or threatened misappropriation.” 18 U.S.C. § 1836(b)(3).

Third, it can get ex parte seizure of the misappropriated property.  For this remedy, found in 18 U.S.C. § 1836(b)(2), a plaintiff must produce a verified application, among other things, specifying the property and its location and showing why other procedures (such as an ex parte temporary restraining order under Fed. R. Civ. P. 65) are inadequate.  Ex parte seizure under section 1836(b)(2) is permitted “only in extraordinary circumstances” and only after the court considers protections for third parties and the target party, including a post-seizure hearing and wrongful seizure remedies.  As such, it seems unlikely that the provision will be applied often.

IV. Employee Protection

The DTSA includes two significant protections for employees, who make up a large proportion of the defendants in trade secret cases (see note 4).

First, “to protect employee mobility,” the limitations quoted in section 1 prevent DTSA injunctions from (1) applying the “inevitable disclosure doctrine” (which bases a noncompetition injunction on the notion that a former employee will “inevitably” misuse his or her former employer’s trade secrets in new competitive position benefiting from those secrets) or (2) interfering with state laws limiting the enforceability of non-competition agreements and similar limits on employment (such as California’s broad prohibition on noncompetition agreements).[8]  Massachusetts courts are divided on the applicability of the inevitable disclosure doctrine.[9]  Concurrent assertion of the DTSA, which clearly rejects the doctrine, should not affect application under Massachusetts law, except perhaps tipping against such application by focusing on definitions of “trade secrets” that do not clearly include mental information that might be inevitably used,[10] compared to the broader definition at UTSA § 1(4).

Second, whistleblowers received immunity for disclosures to the government of “a suspected violation of law.”  Title 18 U.S.C. § 1833(b)(3)-(4) requires “notice of the immunity [be given] . . . in any contract or agreement with an employee that governs the use of a trade secret or other confidential information,” including “any individual performing work as a contractor or consultant for an employer.”  If that notice is not given, the employer cannot receive treble damages or attorney’s fees in a DTSA action.  Employers should therefore provide the notice, even if by cross-reference to a policy document (which federal law permits).

V. Conclusion

The DTSA does not alter how to protect proprietary information in Massachusetts — reasonable measures are still required — but, importantly, does provide clearer protection for proprietary information not currently used and against threatened wrongful use.  It also provides the possibility of ex parte seizure and greater potential in damages.

Moreover, with a broad jurisdictional grant without a threshold amount, claims under the DTSA provide easy access to federal court and the broad interstate discovery in federal-court proceedings.  Claims under the DTSA may also be asserted in state court, but some of the federal-court procedures, such as ex parte seizure, may require adaptation.

[1] The DTSA definition of “misappropriation” drew from the definition used in the 1979/85 Uniform Trade Secrets Act (“UTSA”), available at http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf (visited Jan. 10, 2017).  Compare 18 U.S.C. § 1839(5), with UTSA § 1(2) (“misappropriation”); compare also 18 U.S.C. § 1839(6), with UTSA § 1(1) (“improper means”).  However, the DTSA term is applied to a “trade secret” and “owner” as defined by the Economic Espionage Act of 1996, 18 U.S.C § 1839(3) and (4), which are more consonant with the criminal targets of that statute, id. §§ 1831 and 1832, than with the civil unfair competition targets of the UTSA (which eschewed the concept of an “owner” and applies to more general “information” than the EEA “types”).

[2] E.g., Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972) (citing Restatement (First) of Torts § 757 cmt. b (Am. Law Inst. 1939)). See Incase Inc. v. Timex Corp., 488 F.3d 46, 52 n.10 (1st Cir. 2007) (“The statutory and common-law claims may be essentially equivalent.”).

[3] E.g., Infinity Fluids, Corp. v. General Dynamics Land Sys., 2016 U.S. Dist. LEXIS 134613 at *26 (D. Mass. 2016).  Massachusetts cases are split on whether actual, current “use” is required for misappropriation; the Supreme Judicial Court has declined to address the issue.  See Lightlab Imaging, Inc. v. Axsun Tech., Inc., 469 Mass. 181, 186-87 (2014),

[4] Most trade secret cases involve “breach of confidential relationship,” where information is properly acquired by employees or business associates, but its use allegedly exceeds  limits permitted by the relationship.  See Almeling, et al., A Statistical Analysis of Trade Secret Litigation in State Courts, 46 Gonz. L. Rev. 57 (2010).

[5] The UTSA (which, again, Massachusetts has not enacted) also lacks a continuous-use requirement.  A comment to the UTSA explains that such a requirement “extends protection to a plaintiff who has not yet had an opportunity or acquired the means to put a trade secret to use.”  UTSA § 1(4), cmt.

[6] E.g., Portfolioscope, Inc. v. I-Flex Solutions Ltd., 473 F. Supp. 2d 252, 255 n.6 (D. Mass. 2007).

[7] Jet Spray Cooler, note 2 supra; Curtiss-Wright Corp. v. Edel-Brown Tool & Die Co., 381 Mass. 1 (1980).

[8] Cal. Bus. & Prof. Code § 16600.

[9] Compare Safety-Kleen Sys., Inc. v. McGinn, 233 F. Supp. 2d 121, 125 (D. Mass. 2002) (inapplicable as threatened use), with U.S. Elec. Serv., Inc. v. Schmidt, 2012 U.S. Dist. LEXIS 84272 (D. Mass. 2012) (applicable for irreparable injury, not likelihood of success), with Corporate Tech., Inc. v. Harnett, 943 F. Supp. 2d 233 (D. Mass. 2013) (applicable for likelihood of success).

[10] Consider the theft-and-conversion language of Chapter 93, Section 42 and the EEA crimes against “owners” (note 1 supra).  Can one “own” what is in another’s memory, experience and skills?

Stephen Y. Chow, Burns & Levinson LLP, litigates technology disputes, prosecutes patent applications, and develops technology policies, strategies and licenses.  He has been a Massachusetts Uniform Law Commissioner since 1994.

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