A Change of Venue for Trade Secret Disputes: How the Defend Trade Secrets Act will impact Minnesota law
In May President Obama signed the federal Defend Trade Secrets Act. And though it shares much in common with existing state law, Minnesota attorneys must reckon with the changes it brings—chief among them a shift to original jurisdiction in the federal courts and a new set of complications involving trade secrets and whistleblowing claims.
The Defend Trade Secrets Act (DTSA), which became federal law on May 11, will significantly alter trade secrets litigation, the drafting of confidentiality agreements, efforts to protect trade secrets, and whistleblower retaliation lawsuits in Minnesota. The law’s enactment means that, for the first time, federal courts have original jurisdiction over trade secrets disputes, much as they have long exercised jurisdiction over other types of intellectual property cases, such as patents, trademarks and copyrights. The DTSA expressly provides that it does not preempt state law, and Minnesota’s Uniform Trade Secrets Act (MUTSA), codified as Chapter 325C of Minnesota statutes, will continue to have the full force and effect of law in Minnesota. As a practical matter, however, Minnesota attorneys must be aware of how state and federal laws now interact in the area of trade secrets and whistleblowing.
The DTSA passed overwhelmingly in Congress, receiving support from both political parties in an era often characterized by federal legislative gridlock. Support for the measure was apparently driven in part by continued concerns about economic espionage and cyber-hacking from foreign competitors (and even foreign governments), as well as a conclusion that the law regarding protection of trade secrets was inconsistent, unpredictable, and difficult to enforce across the 50 states. Several Minnesota-based companies that depend on innovation, including Medtronic and 3M, sent letters of support for the new law.
Minnesota’s existing trade secret law, the MUTSA, follows the Uniform Trade Secrets Act established by the National Conference of Commissioners on Uniform State Laws in 1979. Minnesota was the first state to adopt the uniform law in 1980. Commissioners voted to amend the uniform law at their annual conference in Minneapolis in 1985, and Minnesota adopted these changes. The Uniform Trade Secrets Act was meant to address inconsistencies among the states in this area of the law, and all but two states, Massachusetts and New York, have adopted the Uniform Act in some form. Many aspects of the DTSA are very similar to the MUTSA, including the definitions of “trade secrets” and “misappropriation,” the civil remedies available, and the statute of limitations, among others.
Definitions and Comparisons with Minnesota Law
The DTSA was codified as a series of amendments to the existing statutory skeleton of the Economic Espionage Act of 1996, 18 U.S.C. §§1831-1839 (EEA), which made theft of trade secrets a potential federal crime. The DTSA therefore borrows and only slightly amends the definition of “trade secret” from the EEA, as follows:
(3) “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—
(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;
(4) the term “owner,” with respect to a trade secret, means the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed.1
This definition is very similar, but not identical, to the definition of trade secret under Minnesota law:
“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
The existence of a trade secret is not negated merely because an employee or other person has acquired the trade secret without express or specific notice that it is a trade secret if, under all the circumstances, the employee or other person knows or has reason to know that the owner intends or expects the secrecy of the type of information comprising the trade secret to be maintained.2
The federal definition of trade secrets specifically refers to “financial, business, scientific, technical, economic, or engineering information,” which might be helpful if a company is attempting to protect financial reports or engineering diagrams, but the Minnesota definition is actually broader in that it includes any “information” that otherwise meets the test. Neither statute specifically mentions customer lists, which are often a point of dispute in these types of cases.
The definition of “misappropriation” in the DTSA will be very familiar to Minnesota litigators:
“(5) 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
“(B) disclosure or use of a trade secret of another without express or implied consent by a person who—
“(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—
“(I) derived from or through a person who had used improper means to acquire the trade secret;
“(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
“(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
“(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;
“(6) the term ‘improper means’—
“(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and
“(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition[.]3
This language is very similar to the definition in Minnesota state law.4 The DTSA and Minnesota law are also similar in that they both allow for injunctive relief and actual damages, as well as exemplary damages up to two times actual damages.5 The statute of limitations for a claim under federal or state law is also the same—three years from when the act of misappropriation was or should have been discovered.6
A novel aspect of the DTSA is a provision allowing federal courts to issue an ex parte seizure order in a civil action “to prevent the propagation or dissemination” of a trade secret. This “civil seizure” mechanism, codified in 18 U.S.C. §1836(b)(2), is unlike anything previously available to civil litigators, and is to be applied “only in extraordinary circumstances.” It allows a federal judge to order “law enforcement officials” to seize the alleged property, potentially using “force to access locked areas.” The Act requires the seized property to be placed in the custody of the court, subject to a seizure hearing to be held as soon as possible but no later than seven days thereafter. The new law directs courts to protect the person against whom a seizure order is issued from publicity, which suggests seizure procedures will be performed, at least in part, under seal.
New Notice Requirements and Whistleblower Protections
Perhaps the most controversial provision of the DTSA, and one that is garnering attention from attorneys and commentators, is an embedded whistleblower provision in the law that allows, under specific circumstances, employees and independent contractors to disclose trade secrets of their employer to a “federal, state or local government official” under seal “solely for the purpose of reporting or investigating a suspected violation of law.”7 The DTSA also allows individuals who file a whistleblower retaliation lawsuit to use trade secret information in their litigation, and to provide the information to their attorney, so long as it is filed under seal.8 Congress has recently seemed to have a love affair with whistleblower protections, and many recent federal laws contain these provisions.
Not only does the DTSA provide a mechanism for employees to use trade secrets to report suspected wrongdoing or to support a whistleblower retaliation lawsuit, it requires employers to provide notice of these rights in any confidentiality or non-disclosure agreement signed after the Act takes effect. Specifically, the Act provides as follows:
“(A) IN GENERAL—An employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.
“(B) POLICY DOCUMENT—An employer shall be considered to be in compliance with the notice requirement in subparagraph (A) if the employer provides a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.
“(C) NON-COMPLIANCE—If an employer does not comply with the notice requirement in subparagraph (A), the employer may not be awarded exemplary damages or attorney fees under subparagraph (C) or (D) of section 1836(b)(3) in an action against an employee to whom notice was not provided.
“(D) APPLICABILITY—This paragraph shall apply to contracts and agreements that are entered into or updated after the date of enactment of this subsection.
“(4) EMPLOYEE DEFINED—For purposes of this subsection, the term ‘employee’ includes any individual performing work as a contractor or consultant for an employer.9
In short, an employer must provide notice of whistleblower protections in its confidentiality and non-disclosure agreements, or reference a separate “policy document” with the same disclosures, or it will not be able to seek and obtain double damages and attorneys’ fees as a prevailing plaintiff in a DTSA lawsuit. This does not mean a company that fails to include notice language is without remedies to protect trade secrets. That company could still avail itself of Minnesota state law (including double damages and attorney’s fees) and could still seek injunctive relief and actual damages under the DTSA.
Of course, failure to include the notice language does not change or diminish whistleblower protections for a company’s employees. And, it must be repeated, this federal law states, “An employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” (emphasis added) Failure to comply with this federal mandate might have serious and as of yet unknown consequences for a company seeking to enforce a contract to protect not only trade secrets but also a broader category of confidential information. Most large or national employers will likely decide to include the required notice in employee non-disclosure agreements executed after May 11, 2016, or establish a separate whistleblower policy as part of their handbook or other policies in order to be assured that they can avail themselves of all rights and remedies in any state across the country. Minnesota attorneys should strongly consider including the notice in all employee agreements for any sized company.
Report to Congress
Of little concern to Minnesota practitioners but perhaps of interest to the next president, the DTSA also requires the U.S. Attorney General to provide a report to Congress within one year, updated biannually thereafter, setting forth the scope and breadth of the theft of trade secrets of U.S. companies and whether trade secret theft is being sponsored by foreign governments.10
Implications for Minnesota Litigation
Litigation involving claims of trade secrets misappropriation, and related claims of breach of restrictive covenants, will more likely be filed in U.S. District Court. Because the DTSA allows for federal question jurisdiction, without regard to the amount in controversy, plaintiffs will always have the option to initiate litigation in federal court and to bring a pendent claim under the MUTSA as well. Federal court will often be a more attractive forum for plaintiffs because it offers: (A) a civil seizure mechanism; (B) easier out-of-state enforcement; and (c) all of the protections of state law. Previously, if a company based in Minnesota suspected a former employee in Minnesota of stealing trade secrets, it would be limited to bringing claims in state district court. The number of trade secrets cases litigated in state court in the future will therefore likely diminish, which means that there will be fewer decisions from state appellate courts interpreting trade secret law. There is, of course, an existing body of Minnesota case law going back to 1980, but many new issues will likely be decided by federal courts, barring a certified question to the Minnesota Supreme Court. Many, but certainly not all, lawsuits alleging a breach of non-compete or non-disclosure agreement often involve a parallel claim alleging misappropriation of trade secrets. Those cases, too, may be diverted to the federal forum.
Whistleblower claims may become even more contentious for Minnesota employers. Minnesota’s Whistleblower Statute,11 which was amended in 2013, provides liberal protection for employees who suffer an adverse employment action for reporting an illegality, refusing to perform an action the person believes is illegal, or participating in a government investigation. New whistleblower protections in the DTSA, and the notice requirements, may even further encourage such claims by providing a road map for disgruntled employees to abscond with company information. Even though the Act seeks to protect trade secrets in these types of actions, any company ought to be nervous about having its “crown jewels” delivered to a local government official by a disgruntled employee.
The DTSA might be the nail in the coffin for the inevitable disclosure doctrine in Minnesota. The “inevitable disclosure doctrine” was first established by the 7th Circuit Court in Pepsico v. Redmond.12 In jurisdictions where it applies, the doctrine allows a court to prohibit a former employee from working for a competitor even though the former employee did not sign a non-compete agreement, because the knowledge and information possessed by the employee, and the nature of his new position, are such that the employee would inevitably disclose trade secrets. The doctrine has been mentioned in several decisions in Minnesota state and federal court, but has never been explicitly adopted, or rejected, in Minnesota.13
As a result of criticism of the 2015 version of the Defend Trade Secrets Act bill, Congress amended the language of the 2016 Act to place a high priority on protecting employee mobility. As a result, the DTSA provides as follows (emphasis added):
REMEDIES – In a civil action brought under this subsection with respect to the misappropriation of a trade secret, a court may –
(A) Grant an injunction –
(i) to prevent any actual or threatened misappropriation described in paragraph (1) on such terms as the court deems reasonable, provided the order does not –
(I) prevent a person from entering into an employment relationship, and that 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.14
This language is intended to prevent federal courts from applying the inevitable disclosure doctrine to inhibit individual defendants from working. The statutory prohibition under federal law may result in federal judges being especially cautious about applying the doctrine under Minnesota state law, unless specifically authorized by the Legislature.
Attorneys in Minnesota that advise companies or litigate cases involving trade secrets or whistleblowing should prepare for a different legal landscape now that federal law governs trade secrets.
V. JOHN ELLA is a shareholder at Trepanier MacGillis Battina P.A. and regularly litigates cases involving trade secrets and restrictive covenants.
1 18 U.S.C. §1839 (3) and (4).
2 Minn. Stat. §325C.01, Subd. 5.
3 18 U.S.C. Section 1839(5).
4 Minn. Stat. §325C.01, Subd. 2 and 3.
5 18 U.S.C. §1836(b)(3).
6 18 U.S.C. §1836 (d).
7 18 U.S.C. §1833.
9 18 U.S.C. §1833 (b)(3).
10 Defend Trade Secrets Act of 2016, Section 4 (uncodified).
11 Minn. Stat. §181.932.
12 Pepsico v. Redmond, 54 F.3d 1262 (7th Cir. 1995).
13 See, e.g., Katch, LLC v. Sweetser, Case No. 15-cv-3760 (D. Minn. 11/10/2015) at n. 13.
14 18 U.S.C. §1836 (b)(3) (2016).