Checking On The Defend Trade Secrets Act

By: Christopher J. Dugger

The Defend Trade Secrets Act (“DTSA”) went into effect on May 11, 2016. As the DTSA passes its half-year anniversary, we take a look at DTSA developments through the end of 2016 and what they tell us about the future of the DTSA.

Approximately 20 cases were filed citing to the amended code sections for the DTSA in 2016. The cases were spread across jurisdictions, with the most (3) filed in California. Only one of these cases had terminated by the end of 2016. M.C. Dean, Inc. v. City of Miami Beach, Florida, No. 16-21731-CIV, 2016 WL 4179807, which had been filed in the Southern District of Florida, was dismissed on August 8, 2016 pursuant to a motion to dismiss under 12(b)(6). Recently, Allstate Ins. Co. v. Rote, No. 3:16-CV-01432-HZ, 2016 WL 4191015, which had been pending in the District of Oregon, was dismissed on January 12, 2017, pursuant to a joint proposed stipulation for a permanent injunction. Thus, at the time of posting, 18 of the cases filed in 2016 were still pending.

Most of the DTSA cases that we reviewed alleged violations of both the DTSA and state trade secret laws. However, the courts in each of those decisions only explicitly analyzed the state law claims, generally stating that the two causes of action are parallel to each other. Further, none of the cases have addressed the DTSA’s unique whistleblower or seizure provisions. Thus, it appears that the DTSA’s impact so far has been in providing access to federal court for plaintiffs.

One of the last DTSA decisions of 2016 came in Free Country Ltd v. Drennen, a case concerning the departure of high level apparel executives to a competitor, pending in the Southern District of New York. Judge Jed S. Rakoff set forth a detailed analysis in a decision granting the plaintiff’s renewed motion for a temporary restraining order (TRO). In his decision, Judge Rakoff granted a TRO against defendants using or disseminating the plaintiff’s confidential information, but denied the TRO against defendants soliciting plaintiff’s customers. Free Country Ltd v. Drennen, 2016 WL 7635516 (S.D.N.Y. Dec. 30, 2016).

Defendants Drennen and Wyden had been employees of Free Country, an apparel manufacturer and wholesaler. Drennen was Vice President of Sales. Wyden was Director of Sales for Men’s outerwear. In October 2016 both left Free Country to accept jobs with a competitor, defendant Rousso. Prior to their departures, each transferred Free Country’s documents to himself. Wyden emailed copies of Free Country’s master contact list, four product designs from the 90s, and pricing information to his personal email address. Similarly, Drennen transferred nearly 50,000 files to his personal Dropbox account. Plaintiff discovered these transfers after examining Drennen’s work laptop after his departure. Plaintiff immediately issued cease and desist letters, filed this action, and sought a temporary restraining order and preliminary injunction.

The court followed the familiar pattern to determine if plaintiff was likely to succeed on the merits. It analyzed these alleged misappropriations by first noting that New York’s state misappropriation law is very similar to the DTSA. It then performed its analysis based on New York state law. The court first determined that none of defendants’ actions warranted an injunction.

For example, the court found that, under New York law, the contact list taken by Wyden was not a trade secret. In order to be a trade secret, the list must contain information “not otherwise readily ascertainable.” Id. at *4, quoting N. Atl. Instruments, Inc. v. Haber, 188 F.3d 38, 46 (2d Cir. 1999). In contrast, the list taken by Wyden contained information that was readily ascertainable through Google, Linkedin, calling the companies’ general lines, or even by reading Free Country’s complaint. Similarly, the pricing information Wyden took was not a trade secret because Free Country’s prices were not the result of a secret formula. Instead, the pricing information was created using “basic sourcing information” common in the industry. Id. at *5.

Turning next to Drennen, the court found that the information he copied, taken as a whole, constituted a trade secret. However, a neutral forensic expert had already confirmed that Drennen had deleted all of the information, and the court did not believe that “Drennen could have memorized gigabytes of data concerning Free Country’s [business].” Id. at 7. Therefore, Free Country failed to show that Drennen used, or was likely to use, that information for an improper purpose.

Finally, Free Country had not shown “imminent irreparable harm” from Drennen’s copying. Free Country had alleged that his copying would result in lost sales. However, those sales would not be negotiated until several months after the hearing. The court believed that Free Country would have sufficient time to determine if Drennen still had confidential information, or renew its request for a preliminary injunction, because the court allowed Free Country’s request for expedited discovery.

After deciding not to impose a preliminary injunction limiting the use of the misappropriated information, the court considered Free Country’s second request for relief. Free Country sought an order prohibiting Wyden and Drennen from soliciting Free Country’s customers. With respect to Wyden, Free County argued that Wyden would share pricing information with Rousso. The court found that New York law allowed a plaintiff to protect such information using a non-compete clause, or through the doctrine of inevitable disclosure. Id. at *5. However, in this case an injunction was not warranted because Free Country did not have a non-compete clause with Wyden, and because there was no evidence Wyden misappropriated any pricing information. (Even if, for the sake of argument, the pricing information was a trade secret that he would inevitably disclose.) Accordingly, the equities did not favor restraining Wyden’s employment. The court also found that the balance of the equities supported not preventing Drennen’s employment.

Free Country is not atypical among the DTSA cases we reviewed. Plaintiffs use the DTSA as an avenue to gain access to federal court, and a speedy TRO. However, the DTSA has not yet had a significant effect on the body of substantive law of trade secret misappropriation. Interestingly, since the courts are performing their substantive analysis using state laws, there is risk for inconsistencies or contradictions while the body of cases around the DTSA develops. Additionally, it remains to be seen if the new provisions of the DTSA, including the ex parte seizure and whistleblower provisions, will be more impactful.