Making a Federal Case Out of It: When trade secrets go walking out the door, employers have a new vehicle to try to get them back

Monday, November 13, 2017 - 16:40

The reality for almost every business is that not all of its employees are going to be happy in their jobs and that, at any given time, one or more is going to be seeking greener pastures. Many times those pastures are owned by competitors, and any business owner or CEO who fails to anticipate and plan for employee defections may also be inviting the loss of substantial business.

For generations, the playbook for attorneys advising business clients about employee defections has involved two phases. First, they urge clients to plan for the inevitable defections by trying to secure their trade secrets and confidential business information, and by having employees execute confidentiality agreements and post-employment restrictions – typically nonsolicitation ones but sometimes noncompetition ones as well. And once defections occur, the lawyers provide advice on the employer’s litigation options.

The predeparture discussions often involve input from management and human resources personnel as to the scope of the trade secrets and the confidential information sought to be protected. This is essential if the goal is to head off problems and, if that is not possible, to better position the employer to pursue post-departure remedies. The factors and issues to be considered in preparing employment agreements and protecting trade secrets would take up an article by themselves. But our interest here is in the available post-departure remedies, of which the options have long been fairly limited.

In the past, ex-employers were usually compelled to sue the defecting employee in state court, often where the employee resided, and pursue state law claims for breach of contract, trade secret misappropriation and perhaps some other torts if the employee engaged in particularly egregious misconduct. The venues could be inconvenient, the local rules byzantine in nature and the local judges (who could soon be up for reelection) not often sympathetic to claims that could put family breadwinners on the street in a poor economy. Local court backlogs could also delay hearings for many weeks, if not months. The challenges in getting prompt relief for the ex-employer could be daunting.

Then along came Congress. Concerned about foreign economic espionage, Congress passed the Defend Trade Secrets Act (DTSA), which took effect in May 2016 and will probably have far more of an impact on domestic trade secret cases than on international misappropriations and espionage. The DTSA provides federal protection for trade secrets used in interstate commerce, which is quite a broad category. Since the DTSA is substantively rather similar to the uniform trade secret laws that have already been passed in 48 states, one might wonder why it would have any impact on already existing law. What makes it a potential game changer is that it essentially federalizes post-employment disputes beyond just those involving trade secrets. 

In the pre-DTSA world, an ex-employer seeking relief due to acts of a defecting employee would often sue based on post-employment restrictions in agreements, as well as for actual, threatened or likely trade secret misappropriations. Each of these were state court claims and, unless the parties were from different states, the claims would have to be brought in state court. In the post-DTSA world, though, if an employer can allege that the ex-employee has misappropriated trade secrets used in interstate commerce (a fairly low burden to meet), the employer can now sue in federal court, and not just on the DTSA claim. Rather, any available state claims – such as breach of employment contracts and breach of fiduciary duty – can tag along and be litigated in federal court. The DTSA opens the door to have federal courts resolve what have to date been primarily state court employment disputes.

With this change in mind, the initial conversation that occurs between counsel and employer following the defection of an employee must change. If there is evidence of misappropriation by the ex-employee, and if the misappropriated trade secrets were used in interstate commerce, then there should be serious consideration of filing a claim in federal court under the DTSA. That discussion should include an assessment of the standard of review to be used by state courts versus federal court, the convenience or inconvenience of the locations of possible courthouses, how quickly the federal or state court can hear the matter, and the ease or difficulty of complying with local court rules.

Also to be considered in that discussion is whether there is a need to physically recover the trade secrets. One of the unique aspects of the DTSA, and one not usually found in state trade secret laws, is that it permits ex parte seizures of misappropriated trade secrets. While the criteria for getting that relief can be challenging, it is something to be considered.

Another factor to weigh in picking a forum is whether there is a strong claim for exemplary damages due to willful and malicious misappropriation. While this remedy is generally available under both state uniform trade secrets acts and the DTSA, the DTSA adds a qualifier. Such damages are not available unless the employer, in any confidentiality agreement, informs the employee of his/her whistleblower rights. Of course, the absence of such language does not preclude the basic claim for misappropriation under the DTSA, but what it may do is compel the filing of an additional misappropriation claim under state law. Fortunately, the DTSA does not preempt state law claims, so the employer is free to seek relief under both federal and state claims.

If counsel and the employer believe that, because of the information known to the ex-employee, it is essential that this person be barred from even working for a competitor because the employee will have to use the trade secrets to do the new job, there is another reason to join a state law claim to the DTSA one. Under the DTSA, a court is barred from enjoining the hiring of an employee merely based on the fact that the person has knowledge of trade secrets. There must be actual or threatened misappropriation. By contrast, many states have adopted the “inevitable disclosure” doctrine, which allows a court to block such employment if there is a sufficient likelihood or substantial threat that the trade secrets will be disclosed in the new position, even if the employee acts in good faith to try to avoid doing so. Consequently, if the employer wants to file an inevitable disclosure claim, that should be done under state law.

A final consideration that may be appropriately broached in the pre-litigation discussion is whether the misappropriation is serious enough to involve law enforcement authorities. After all, the DTSA was intended to address foreign espionage. There are stiff criminal remedies available under the act: a possibility of 10 years imprisonment, a $5 million fine and restitution of up to three times the value of the misappropriated trade secrets. While it is not likely that the U.S. Attorney General’s Office will have much interest in what may be perceived as a local employment dispute, if the matter involves conduct by foreign entities or governments, or large scale intentional misconduct, that perception could change.

It is probably too early to tell whether many attorneys and clients will try to “make a federal case” out of what have traditionally been local contract and tort issues. The door, though, has clearly been opened by Congress. Now we will see what types of cases go through it.


Alan R. Boynton Jr. is a member McNees Wallace & Nurick LLC. He is the chair of the injunction group and, in related capacities, is also a member of the litigation and intellectual property groups. He can be reached at aboynton@mcneeslaw.com.