23 May Fact patterns alleged in first trio of lawsuits under the new DTSA reveal a need for expertise in grasping the complexities of trade secrets laws.
Fact patterns alleged in first trio of lawsuits under the new DTSA reveal a need for expertise in grasping the complexities of trade secrets laws.
Since becoming effective on May 12, 2016, the new federal trade secrets law has spawned at least three lawsuits alleging violations of those provisions, with the first two filed in the Southern District of Florida and the third in the Northern District of Texas. The fact patterns alleged in the suits and public commentary by attorneys on the lawsuits reveal a need for expertise in grasping the complexities of trade secrets laws in general and the interaction of the new federal law with diverse state trade secret laws in particular.
Attorneys with provincial or dilettante practices in trade secret law may fail to recognize the legal protections for trade secrets offered by different state laws, and often misapprehend the legal character of trade secret misappropriation. For example, in one of three new lawsuits alleging violation of the Defend Trade Secrets Act, the City of Miami Beach required disclosure of certified payrolls from the contractor and subcontractors renovating the city’s convention center. The certified payrolls included confidential employee information of one subcontractor's highly skilled and highly trained electricians: personally identifying information including name and address, social security number, and driver’s license number; and competitive employment information including pay rates, fringe benefits, hours worked, and the like. When a Miami Beach local of an electrical workers union requested the subcontractor’s certified payroll information from the City, the subcontractor objected with supporting affidavits establishing that the information constituted the subcontractor’s trade secret information under Florida law. The lawsuit alleges that the information was nonetheless improperly disclosed – and retained:
12. Upon receipt of this position statement, the City determined that it would only disclose redacted certified payrolls to Local 349. However, on or about the afternoon of March 21, 2016, a city clerk improperly and “inadvertently” disclosed unredacted copies of the payrolls to Local 349.
13. The City informed M.C. Dean of the wrongful disclosure on the morning of March 22, 2016. M.C. Dean immediately requested that the City take appropriate steps to secure the return of the unredacted copies from Local 349. M.C. Dean also demanded that Local 349 delete any digital or electronic copies of the information and destroy any physical copies of the information. Local 349 has refused to do so and has refused to return the information to the City. Defendants have misappropriated M.C. Dean’s trade secrets which misappropriation is ongoing.
A lawsuit by the subcontractor against the City and the union local included allegations of violation of the DTSA and the Florida Uniform Trade Secrets Act.
Public commentary on the DTSA count within the subcontractor’s complaint includes criticism of the suit for not alleging a contractual obligation of confidentiality by the general contractor, through which the certified payrolls were passed to the City. However, breach of contract is not the sole form of trade secret misappropriation under most state trade secret laws, which typically prohibit acquiring trade secrets through any improper means. Most state laws impose legal obligations of confidentiality without contract in certain circumstances – such as disclosure of confidential information to governmental entities and regulatory agencies. Florida law includes such obligations, imposing a legal duty not to disclose trade secrets acquired due to disclosure requirement of a governmental entity like the City of Miami Beach, and expressly exempting such trade secret information from dissemination under public records requests:
The Legislature finds that it is a public necessity that trade secret information as defined in s. 812.081, and as provided for in s. 815.04(3), be expressly made confidential and exempt from the public records law because it is a felony to disclose such records. Due to the legal uncertainty as to whether a public employee would be protected from a felony conviction if otherwise complying with chapter 119, and with s. 24(a), Art. I of the State Constitution, it is imperative that a public records exemption be created. The Legislature in making disclosure of trade secrets a crime has clearly established the importance attached to trade secret protection. Disclosing trade secrets in an agency’s possession would negatively impact the business interests of those providing an agency such trade secrets by damaging them in the marketplace, and those entities and individuals disclosing such trade secrets would hesitate to cooperate with that agency, which would impair the effective and efficient administration of governmental functions. Thus, the public and private harm in disclosing trade secrets significantly outweighs any public benefit derived from disclosure, and the public’s ability to scrutinize and monitor agency action is not diminished by nondisclosure of trade secrets.
The City of Miami Beach’s requirement that the certified payrolls be provided under the renovation contract, therefore, obligated the general contractor to maintain confidentiality of the information, even without a separate contractual obligation of confidentiality between the general contractor and subcontractor. The DTSA’s new private cause of action when “a trade secret that is misappropriated” does not limit such actions to occurrences of criminal economic espionage or theft under federal law, but explicitly references state law claims for misappropriation.
The timing of the DTSA count was also mentioned in commentary on the complaint, since the initial disclosure by the City occurred prior to the effective date of the new federal law. However, that criticism misses the character of trade secret misappropriation as a continuing tort, with each misuse of improperly acquired trade secret information constituting a new violation. The subcontractor demanded return of the improperly disclosed certified payrolls and destruction of copies. According to the allegations in the complaint, the City of Miami Beach refused (and apparently continues to refuse) to require return of the inadvertently disclosed payroll information, and the union local defiantly refuses to return or destroy the information. Those acts constitute separate misappropriations on or after the DTSA’s effective date since the DTSA provision that “a continuing misappropriation constitutes a single claim of misappropriation” applies only to the subsection establishing a three-year statute of limitations, not to the new causes of action in general.
Trade secret misappropriation can also play a role in more complex fact patterns implicating other legal violations. The second of the three new lawsuits alleging violation of the DTSA is part of a pair of suits filed three days apart by a Florida crabmeat importer and distributor. In one suit, a former employee is alleged to have absconded with confidential customer, packer and sales forecast information in accepting employment with an existing competitor (where, again, failure to return the trade secret information constitutes an ongoing violation). The other suit by the crabmeat importer alleges Racketeer Influenced and Corrupt Organizations Act violations by a Venezuelan packer under exclusive contract but seeking to establish its own distribution subsidiary. The separate suits carefully allege no connection, other than coincidental timing between October of last year and February to March of this year. Read in conjunction, however, the two complaints suggest a need for discovery into whether any concerted action occurred. An understanding of the role that trade secrets play in the larger body of unfair competition law is necessary to fully protect an enterprise’s business.
The third new suit under the DTSA involves a virtual Gordian knot of facts involving four enterprises and two different employees (of different ones of the enterprises) located in three different states: the plaintiff security services firm, based in California, acquired Texas-based Competitor A, which had previously acquired Competitor B. Employee X, previously employed by Competitor B, formed Nebraska-based Competitor C following expiration of a non-compete clause with Competitor B. Employee Y, employed with Competitor A when acquired by the plaintiff and for a short time afterwards, then became involved with Competitor C, ultimately securing the contract for Competitor C for security services at the customer location where Employee Y worked. The plaintiff relies upon both the trade secrets acquired with acquisition of Competitor A (including those previously acquired by Competitor A with the prior acquisition of Competitor B) and its own trade secrets. With such complex facts, proof of trade secret misappropriation by Employee Y, who merely remained working at the same customer location, would seem to present a challenge. Moreover, the plaintiff also brought suit in Texas and invoked the Texas Uniform Trade Secrets Act along with the DTSA rather than California trade secret laws, without mentioning any choice-of-law provisions in any of the contract involved – another problem to be unraveled. Finally, the interplay between the trade secrets and non-compete agreements being asserted will become an issue because Texas law requires consideration other than mere continued employed for an enforceable non-compete provision.
The need for substantial expertise in advising enterprises on trade secret matters is not new to the DTSA. However, public comments regarding initial filings under that law reveal why such expertise is even more important with the additional level of complexity that has now been introduced.