April 8, 2020
Westlaw Journal Intellectual Property
The Defend Trade Secrets Act of 2016, 18 U.S.C.A. § 1836, provided an unprecedented remedy for trade secret owners: the ability to obtain a court order on an ex parte basis — meaning with no opposition from the adverse party — directing law enforcement to seize a defendant’s property.
The seizure provision garnered significant attention as it moved through the legislative process.
Detractors thought it was unnecessary given the existing remedies available to trade secret owners, such as injunctions and temporary restraining orders.
Others felt it was impracticable or even unconstitutional.
Certain advocates of the provision, like U.S. Reps. Bob Goodlatte, R-Va., and Jerry Nadler, D-N.Y., viewed it as mechanism to stop trade secret thieves before they abscond to another country to profit from their theft.
In the nearly four years since the DTSA’s enactment, fewer than 20 ex parte seizures have been requested, with about half being granted.
So regardless of how one views the appropriateness of the new provision, it has not dramatically changed the legal landscape.
While the provision’s impact has been muted, the decisions to date still provide useful insight for future litigants. Below are several takeaways.
Ex Parte Seizures Not for Stopping Fleeing Thieves
As one commentator noted, the “grab-and-go” scenario sounds more like the premise of a Hollywood blockbuster movie than the subject of a request for a court order.1
While some plaintiffs have raised concerns that the accused might flee abroad with their trade secrets, none have actually alleged that such nefarious conduct was afoot.
The time between applying for a seizure and getting a court order reinforces that the most effective remedy for a true “thief-on the- run” situation likely remains what it has always been — law enforcement.
One seizure order (Shumway) did not issue until three weeks after the request was filed, and others (Solar Connect, Axis Steel, Mission Capital and Ruby Slipper) issued around five to seven days after filing.
While one was granted in two days (Blue Star) and another in just one (Thoroughbred Ventures), even that amount of time is likely too long to stop a thief headed to the airport.
And that does not even account for the time needed to draft a detailed application once the theft is discovered. Seizure orders simply do not seem apt for stopping the fleeing thief. And sometimes, a seizure may be granted no faster than a traditional TRO.
’Extraordinary Circumstances’ Remains Unclear
An ex parte seizure order can be granted only in “extraordinary circumstances” and only if the court finds it “clearly appears” the plaintiff’s application has satisfied the DTSA’s eight ex parte seizure requirements.2
Seizure orders simply do not seem apt for stopping the fleeing thief.
Those requirements include finding that an injunction or TRO under Rule 65 of the Federal Rules of Civil Procedure “would be inadequate” because the defendant would “evade, avoid or otherwise not comply with such an order.”3
Consistent with this “inadequacy” requirement, it should be unsurprising that courts granting seizure orders have found that the defendant had attempted to hide prior misconduct.
For example, in Shumway v. Wright, No. 19-cv-58, 2019 WL 8137119 (D. Utah Aug. 26, 2019), the court found an ex parte seizure was warranted where the defendants had shown a willingness to provide false and misleading information, to conceal their identity and to hide information instead of complying with contractual obligations concerning the plaintiffs’ proprietary and trade secret materials.4
Two other cases where seizure orders were granted involved similar misconduct. In both Axis Steel Detailing Inc. v. Prilex Detailing LLC, No. 17-cv-428, 2017 WL 8947964 (D. Utah June 29, 2017), and Solar Connect LLC v. Endicott, No. 17-cv-1235, 2018 WL 8786166 (D. Utah Feb. 16, 2018), the defendants attempted to delete data and information from computers and showed a willingness to provide false and misleading information.
In Solar Connect, like in Shumway, the defendants tried to conceal their identity and to hide computer files rather than comply with requests to cease using the plaintiff’s proprietary information.
Yet another example where a seizure was granted is Mission Capital Advisors LLC v. Romaka, No. 16-cv-5878, 2016 WL 11517104 (S.D.N.Y. July 29, 2016), where the defendant (while absent from work for weeks) downloaded the plaintiff’s trade secret materials to his personal computer and then told the plaintiff he had deleted the data once his activity was discovered.
Before seeking the seizure, the plaintiff conducted a forensic analysis of the personal computer and uncovered its trade secrets under a changed name using a masked file type.
While these cases arguably provide a useful guideline for what kind of misconduct might be necessary to show that a Rule 65 order would be inadequate, other case law seems to cloud the issue.
In OOO Brunswick Rail Management v. Sultanov, No. 17-cv-17, 2017 WL 67119 (N.D. Cal. Jan. 6, 2017), the defendant sent the plaintiff’s confidential documents to his personal email and tried to cover it up.
Once confronted, the defendant refused to return a company-issued phone and laptop.
Despite this evasive behavior, the court concluded that seizure was unnecessary. In its view, an order directing the defendant to deliver the devices to the court at a later scheduled hearing (without modifying or accessing them in the meantime) would suffice.
Similarly, in Cochrane USA Inc. v. Filiba, No. 18-cv-341, opinion issued (D.D.C. Mar. 9, 2018), the defendant attempted to cover up the alleged misappropriation by destroying evidence and failing to return data when the owner demanded it back.
While the court was concerned by this conduct, it nevertheless found that extraordinary circumstances were not present and denied the request.
Unlike in cases where courts granted a seizure, the Cochrane court focused on the lack of evidence that the defendant intended to flee the country or disseminate the data to a third party.
Finally, in ARB Labs Inc. v. Woodard, No. 19-cv-116, 2019 WL 332404 (D. Nev. Jan. 25, 2019), the court denied a request for seizure notwithstanding the fact that the defendant kept his company computer (which housed the plaintiff’s trade secret information) after resigning, sent and received emails from his work account after resigning, and later entered one of the plaintiff’s facilities and removed three boxes without permission.
According to the court, although these facts raised the possibility that the defendant would ignore an order under Rule 65, they did not clearly show he would.
Although every case is fact-specific, these denials show that merely attempting to cover up misconduct will not always warrant a seizure.
With this in mind, plaintiffs should highlight all facts revealing or pointing to an actual or suspected cover-up, flight risk or dissemination to a third party.
Seizure Orders Often Contain Little Factual Detail
Although the DTSA requires courts to include findings of fact when granting an ex parte seizure, courts have often included little detail in their orders.
Plaintiffs should highlight all facts revealing or pointing to an actual or suspected cover-up, flight risk or dissemination to a third party.
For example, in Axis Steel, the court pointed to no specific facts supporting its finding that the defendants would evade, avoid or otherwise not comply with a TRO. Nor did it identify support for its conclusion that the plaintiff was likely to succeed in showing it had protectable trade secrets. In fact, the entire order cites almost nothing factual from the plaintiff’s moving papers.
The same was true in Solar Connect and Blue Star, where neither court pointed to specific facts showing why a seizure was appropriate.5
In all three cases, the decisions read more like a recitation of statutory language than detailed legal opinions.6
These cases can be contrasted with Shumway, where the court spent numerous pages covering the facts before reaching its decision.
In some respects, the lack of detail makes sense. An application for seizure naturally indicates that the plaintiff believes exigent circumstances are present, so if courts are to respond quickly, litigants should not necessarily expect detailed analysis.
The level of detail in the orders seems to correspond with the timing of the courts’ decisions.
The order that took the longest to issue (Shumway) was also by far the most detailed, whereas the short opinions in Solar Connect, Axis Steel and Mission Capital issued two weeks sooner.
When an order issues immediately or contains no meaningful analysis, one might fairly question whether the court blindly accepted the one-sided view of the facts portrayed by the plaintiff instead of fully assessing whether extraordinary relief was warranted.
Perhaps no case illustrates this point better than Thoroughbred Ventures LLC v. Disman, No. 18-cv-318, 2018 WL 3752852 (E.D. Tex. Aug. 8, 2018), as the seizure order and corresponding TRO were granted the fastest (one day), but the court later dissolved the ongoing restraints once the defendant had a chance to oppose and showed the ex parte requests lacked merit, indicating that perhaps the seizure should have never been granted in the first place.
Even if granting a seizure is the correct outcome, that pill will undoubtedly be harder for a defendant to swallow when little or no detail is provided in the court’s order.
Parties should be mindful that courts may simply have to balance being thorough and getting it right with getting it done quickly.
Requisite Bond Amount: Whether Property Is Taken or Just Copied
To obtain a seizure order, the plaintiff must provide adequate security (as determined by the court) for the potential payment of damages to any person subjected to a wrongful or excessive seizure.7
What is “adequate” obviously depends on the circumstances.
To date, amounts have varied based on whether the seized property was taken or only copied.
In Solar Connect and Axis Steel, both courts required a bond of only $5,000, finding additional security was unnecessary because the seizure only required that copies be made and the defendants would maintain possession of their computers and files.
Reaching a similar conclusion, the Mission Capital court determined that a $1,000 bond was sufficient for copying and deleting files from the defendant’s computer.
Conversely, $250,000 was required in Blue Star, where the court ordered that any devices (smartphones, tablets, laptops, etc.) containing the plaintiff’s trade secret information be taken.
The reasons for the discrepancy in the bond amount are not always so clear, though, as the Shumway court levied a $10,000 bond despite ordering that files and computers be taken.
Plaintiffs should be mindful that even if the bond amount is insubstantial, the posted security is not the limit of the potential recovery for a wrongful seizure; an aggrieved defendant may sue for additional damages.8
While wrongful seizure claims have been uncommon, given their highly factual nature, they may not be easily dismissed.
At least one court has ruled that determining what property was taken and whether it fits within the confines of the seizure cannot be resolved on a motion to dismiss.9
Technical Experts Employed to Aid the Seizure
When computers and electronic data are targeted (the typical scenario), courts have uniformly found that the participation of a neutral, third-party technical expert will make executing the seizure more efficient and less burdensome.
Some applicants have provided the court with both a recommended expert and a draft confidentiality undertaking that would bind the expert for the court’s approval.
Each time a party recommended a specific expert, the court accepted the recommendation and appointed that expert in the seizure order.
Parties should be mindful that courts may simply have to balance being thorough and getting it right with getting it done quickly.
In Mission Capital, where the applicant did not identify a potential expert, the court ordered the plaintiff to recommend one and to file a proposed non-disclosure agreement to bind the expert.
Plaintiffs can put themselves in the best position to prevail by handpicking an expert ahead of time.
Doing so allow will reduce the burden on the court and minimize the likelihood that a granted seizure is delayed until an expert is retained.
Evidence Preservation Orders Routinely Issued
In seeking a seizure order, parties have often sought a corresponding “evidence preservation order.”
When granting a seizure, not one court has denied a request to preserve evidence in the defendant’s possession.
While that should be expected given the long-standing requirement to preserve potentially relevant evidence when anticipating litigation, courts have also issued preservation orders directing third parties — such as Microsoft, Dropbox and Google — to copy and preserve data linked to accounts associated with defendants and to provide reports of historical activities on those accounts.
Because personal email, backups and cloud storage can make it more difficult to achieve an effective seizure, plaintiffs should carefully consider all ways a defendant may be storing electronic data and tailor their requested relief accordingly.
DTSA and Rule 65 Requests: Essentially the Same Result
An ex parte seizure under the DTSA is not the only way to “seize” property. Courts have recently granted requests for TROs (where no DTSA seizure request was made) that required the defendants to voluntarily turn over their laptops and related items.10
As one court noted when granting an ex parte TRO that required the defendant to surrender a laptop, there is no need to issue a seizure order under the DTSA if a TRO-based seizure does the trick.11
In other words, if the defendant will comply with the order to turn over the materials, a DTSA-based seizure involving law enforcement is unnecessary.
Although that result is exactly what the statute mandates, seizure applicants should consider concurrently requesting comparable relief under both the DTSA and Rule 65.
Because the briefing for both requests will be similar, costs can be reduced and efficiencies gained, while the odds of obtaining some measure of relief will increase.
One downside of seeking a TRO in parallel is that the court may allow the defendant to oppose. (Courts have the option to issue a TRO under Rule 65 without giving the adverse party notice).
However, this potential drawback may be nullified by the timing of the court’s ruling on the DTSA-based seizure request, which will likely come before the defendant gets to respond to the TRO request.
Although most seizure requests are filed in tandem with a new complaint, they need not be. In Ruby Slipper Café LLC v. Belou, No. 18-cv-1548, 2020 WL 491228 (E.D. La. Jan. 29, 2020), the plaintiff filed suit claiming its former employee had taken its trade secrets and used them to start a competing
restaurant.
When initiating the lawsuit, the plaintiff also moved for a TRO that would require the former employee to stop using the plaintiff’s trade secrets and to return them to the plaintiff.
The defendants did not oppose the motion and even consented to the requested relief. The court then issued the TRO, and the defendants later certified to the court that they had complied with the court’s order.
About 1.5 years later, while the litigation was ongoing, the plaintiff learned that the defendants had retained the trade secret materials and continued to use them.
The plaintiff then applied for an ex parte seizure order to obtain all copies of its trade secrets from the defendants, which the court unsurprisingly granted.
Ruby Slipper demonstrates how seizures can be used in later stages of a case, especially if court orders and possible sanctions do not sufficiently motivate a defendant to return stolen property.
As DTSA jurisprudence continues to develop, it should become clearer which cases are outliers and which (if any) represent the future norm.
For now, parties considering a seizure application should consider the above takeaways and analyze any additional case law to ensure they are best suited to respond to the threat at hand.
Endnotes
1 See Eric Goldman, Ex Parte Seizures and the Defend Trade Secrets Act, 72 WASH. & LEE L. REV. ONLINE 284 (2015).
2 See 18 U.S.C.A. § 1836(b)(2)(A)(ii)(I)-(VIII).
3 Courts have explained that, beyond the “inadequacy” requirement, the necessary elements for a seizure order under the DTSA largely mirror those for a TRO under Rule 65. See Ctr. for Advancing Innovation Inc. v. Bahreini, No. 18-cv-1119, 2018 WL 2100279 (D. Md. May 4, 2018).
4 The Shumway court also noted that one defendant had disobeyed a court order and made material misrepresentations in a court filing.
5 See Blue Star Land Servs. LLC v. Coleman, No. 17-cv-931, 2017 WL 6210901 (W.D. Okla. Dec. 8, 2017).
6 Courts have been even more cursory in denying applications for seizure. See, e.g., Sportsgear Outdoor Prods. LLC v. Leonard, No. 19-cv-267, order issued (W.D. Mo. Apr. 8, 2019).
7 18 U.S.C.A. § 1836(b)(2)(B)(vi).
8 18 U.S.C.A. § 1836(b)(2)(G).
9 See Complete Logistical Servs. LLC v. Rulh, No. 18-cv-3799, 2018 WL 4101823 (E.D. La. Aug. 21, 2018). Other questions on “wrongful seizures” remain unresolved — such as whether courts will interpret “wrongful” to include an intent requirement, and how courts will measure a defendant’s
damages for a wrongful seizure.
10 See Earthbound Corp. v. MiTek USA Inc., 16-cv-1150, 2016 WL 4418013 (W.D. Wash. Aug. 19, 2016); Panera LLC v. Nettles, 16-cv-1181, 2016 WL
4124114 (E.D. Mo. Aug. 3, 2016).
11 See Magnesita Refractories Co. v. Mishra, No. 16-cv-52 4, 2017 WL 365619 (N.D. Ind. Jan. 25, 2017).
©2020 Thomson Reuters. Originally published by Westlaw Journal Intellectual Property. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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