This year, I am taking a different approach for my end of the year post. Instead of recapping the year's highlights, I would like to give my perspective on the most significant development in the law of trade secrets and non-competes we're likely to see in some time: the likely passage of the Defend Trade Secrets Act of 2015. Here's my take:
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On December 1, 2015, I added my name to a Trade Secrets Practitioners' Letter, which was sent to the U.S. House and Senate sponsors of the Defend Trade Secrets Act of 2015 (a copy of the proposed legislation can be found here).
The legislation, which is likely to pass with robust bi-partisan support, creates a federal civil cause of action for trade secrets misappropriation. If passed, federal law will protect all four branches of intellectual property rights - trade secrets, patents, trademarks, and copyright. It is no secret that trade secrets are an increasingly important component of our knowledge economy, and federal courts already are adept at handling these cases under their diversity jurisdiction call or as part of a case featuring a federal claim.
I was at first reluctant at supporting the DTSA, and I believed that state courts' traditional role at handling trade secrets and non-compete litigation was one that we lawyers should continue to honor. However, proponents of the DTSA have persuaded me to the merits of a federal cause of action. My rationale is different, though, than my counterparts. And although my specific reasons for supporting the bill are not contained in the Practitioners' Letter (my background is far to modest to even suggest offering changes), that's not essential to my endorsement of this potential new law.
So why do I support the DTSA? My reasons are two-fold. First, I believe federal courts have the muscle to parse out spurious claims of misappropriation and hold plaintiffs accountable for bad-faith filings. To this end, I think the existence of a federal cause of action will deter counsel from filing claims with a questionable factual basis, since federal district courts have a strong record of imposing fees for claims filed in bad-faith. State courts simply don't have this interest or capacity. The bench is often very close to the bar in state courts, meaning that judges understandably are reluctant to impose sanctions for frivolous claims. State judges also do not have the support of law clerks to conduct the necessary legal and factual research. They do not have the bandwidth to watch cases closely and are unable to engage in the type of analysis that is required to determine whether defense fee-shifting is appropriate.
Second, the changes to the Federal Rules of Civil Procedure (which went into effect today) are likely to reduce the cost of litigation and bring suits to trial more quickly than in state court. Federal courts, particularly with engaged and knowledgeable magistrates, have much greater capacity to monitor discovery for proportionality. The new rules are designed to achieve this end and should allow smaller litigants to defend cases more efficiently. State courts largely count on the cooperation of counsel to self-police discovery. Teeing up discovery disputes rarely leads to positive outcomes in state court, absent active judicial engagement. And unfortunately, many state courts lack this capacity. Therefore, I believe that the federal rules changes will cause counsel to try cases through the discovery phase more efficiently.
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On November 15, a group of law professors wrote a lengthy letter opposing the DTSA. I do not believe their concerns are sufficient to override the DTSA's benefits at reducing litigation cost and remediating bad-faith claims. These are the concerns:
1. The DTSA's Ex Parte Seizure Provision May Harm Small Businesses, Startups and Other Innovators.
The DTSA contains a controversial provision that allows for the seizure (on an ex parte basis) of the instrumentalities of trade secrets theft. This is not the law's most outstanding feature, to be sure. But it's not an independent reason to defeat the law. For starters, I have a hard time believing that federal courts will warm to the idea of this remedy. It will be deployed sparingly. And the professors give judges short shrift. Judges are competent enough to snuff out abuses and impose damages for an wrongful seizure of property. This remedy potentially is a paper tiger, and it will work itself out in practice.
2. The DTSA Appears to Implicitly Recognize the Inevitable Disclosure Doctrine.
This argument stems from the provision of the DTSA that says a court may impose injunctive relief to prevent 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."
How the professors conclude this endorses the "inevitable disclosure" rule is simply beyond me. No canons of statutory construction allow for this rather extraordinary position. Given the robust debate around the "inevitable disclosure" doctrine, the DTSA easily could have expanded the rights associated with seeking injunctive relief to bring the doctrine within the statutory language. It does not do so. To read some implicit endorsement of the doctrine is simply unreasonable.
3. The DTSA Likely Will Increase the Length and Cost of Trade Secret Litigation.
As discussed above, the opposite will occur - particularly given the change to the Federal Rules of Civil Procedure.
Separately, the Professors rely on a study showing that the cost of IP litigation ranges from $250,000 (for cases worth less than $1 million) to $1.6 million (for cases where over $25 million is at stake). However, this statistical evidence does not necessarily mean that trade secrets cases in federal court are more expensive. For starters, many of those cases are high-stakes patent cases. A lot of trade secrets claims are in the mold of employment (as opposed to IP disputes). Too, the Professors' reliance on this study assumes that the cost is lower in state court. I am not so sure about this, since state courts are more apt to grant continuances - the biggest cause of increased legal fees. With federal courts, you have some assurance that judges will enforce deadlines strictly.
4. The DTSA Will Likely Result in Less Uniformity in Trade Secret Law.
This justification also seems insufficient. The states have developed rules under the Uniform Trade Secrets Act, and with some exceptions, the law is indeed predictable. There are some differences in the Uniform Act concerning attorneys' fees availability and the statute of limitations. To this end, a federal law certainly will help bridge any differences.
It will take time for courts to resolve some areas of the law - like the "inevitable disclosure" doctrine - but it is very likely that courts will look to the laws in their states until such time as the circuit courts step in. That is a fairly long process that must play out, but it won't hurt parties and won't confuse lawyers. The permutations in trade secrets law among the states simply aren't that great that we will need to worry about having to cite to new law and new cases.
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I realize that the arguments on both sides of this debate are well thought-out and well-intentioned. But having absorbed this debate now for a couple of years, I remain convinced that trade secrets lawsuit in federal court will weed-out weak, spurious claims and will result in a quicker disposition of cases by judges who have the staff to handle them.
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