Effective as of October 1, 2018, Massachusetts will become the 49th state to adopt a version of the Uniform Trade Secrets Act (leaving New York as the only holdout). Massachusetts did so as part of a large budget bill recently signed into law, which also resulted in the adoption of the Massachusetts Noncompetition Agreement Act. (The text of the Massachusetts version of the Uniform Trade Secrets Act is set out on pages 47-52 of the bill, H. 4868, while the effective date is set out on page 117. Here is a link to the entire budget bill.)

While there are differences from existing Massachusetts law regarding trade secrets, the new law is similar in most respects to the federal Defend Trade Secrets Act (“DTSA”). Nevertheless, the remedy provisions of the two laws are not identical, and there will be situations where greater relief is available under one statute than the other. For example, ex parte seizure orders are only available under DTSA, and attorney’s fees and exemplary damages are only available under DTSA if certain required disclosures about whistleblower immunity were made in agreements containing confidentiality provisions. The new Massachusetts law allows attorneys’ fees in circumstances of willful and malicious misappropriation and/or where claims or defenses are pursued in bad faith.

Additionally, employers should be aware that the Massachusetts statute does not apply to “misappropriation occurring prior to” October 1, 2018 or to “continuing misappropriation that began prior to” that date but continued after it.

In E.J. Brooks Company v. Cambridge Security Seals, the Court of Appeals of New York narrowed the scope of permissible damage claims plaintiffs can assert in trade secret actions under New York law. The ruling denies plaintiffs the ability to recover costs that defendants avoided through misappropriating trade secrets (known as “avoided costs” theory), making New York law less attractive to certain types of trade secret actions due to the state’s conservative approach in calculating damages.

E.J. Brooks Company d/b/a TydenBrooks (“TydenBrooks”), the largest manufacturer of plastic indicative security seals in the United States, brought an action in federal district court against rival manufacturer Cambridge Security Seals (“CSS”), asserting causes of action that included common law misappropriation of trade secrets, unfair competition and unjust enrichment. TydenBrooks alleged that former TydenBrooks employees misappropriated trade secrets after defecting to CSS and sought damages based on an “avoided costs” theory.

Under an “avoided costs” calculation, the plaintiff estimates damages based on the amount the defendant saved in research and development costs by unlawfully acquiring the plaintiff’s trade secrets. At trial, the jury found CSS liable under all three claims and awarded TydenBrooks a $3.9 million judgment based solely on the TydenBrooks’ avoided cost theory.

On appeal, the Second Circuit requested guidance from the New York State Court of Appeals on the issue of whether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages measured by the costs the defendant avoided due to its unlawful activity. Prior New York precedent had not conclusively addressed whether a plaintiff could recover damages based solely on the cost avoidance of a defendant’s unlawful misappropriation of trade secrets.

In a 4-3 decision, the Court of Appeals held that a plaintiff may not elect to measure its damages by the defendant’s avoided costs in lieu of the plaintiff’s own losses. The majority went on to explain that the calculation of damages must be narrowly focused on the economic injuries incurred by the plaintiff. The minority noted that the decision departs from the predominant rule accepted by most states and may even encourage unlawful theft of trade secrets in circumstances where the unlawful actor’s benefit far exceeds the likely cost of defending against a trade secret action. Other jurisdictions, such as the Fifth, Tenth and Eleventh Circuits, have either allowed actions based solely on an “avoided cost” theory, or allowed a calculation of reasonable royalty[1] in lieu of a calculation of the plaintiff’s own losses.

Companies should be aware of New York’s conservative approach to damage calculations when entering into litigation surrounding trade secrets. Plaintiffs should also pay special attention to choice of law and choice of forum provisions in their contractual dealings with employees and contractors, as these may have an impact on the type of calculations that can be used to assess damages.

It is also important to note that the federal government expanded protections for trade secrets in adopting the Defend Trade Secrets Act (“DTSA”) of 2016. DTSA claims were not at issue in this case, because it predated DTSA’s enactment, but are an important consideration given the current case law in New York.

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[1] A reasonable royalty is similar to “avoided costs” because it allows a plaintiff to recover damages in lieu of showing actual loss.

This post was written with significant assistance from Eduardo J. Quiroga, a 2018 Summer Associate at Epstein Becker Green.

Epstein Becker Green attorneys Peter A. Steinmeyer, Robert D. Goldstein, and Brian E. Spang are pleased to be presenting 2017 Year in Review: Trade Secrets and Non-Compete Developments webinar on Wednesday, December 6, 2017 from 1:00 p.m. — 2:15 p.m. with Practical Law.

This webinar will provide insights into recent developments and expected trends in the evolving legal landscape of trade secrets and non-competition agreements. This webinar will focus on how to navigate this continually developing area and effectively protect client relationships and proprietary information.

Topics will include:

  • A review of recent developments and litigation trends under the Defend Trade Secrets (DTSA) since its enactment in 2016.
  • Newly passed state statutes addressing restrictive covenants, including who can enter into them, industry restrictions, and temporal restrictions.
  • Increased usage of “garden leave” clauses in lieu of non-competes.
  • Recent decisions regarding restrictive covenants, including whether a LinkedIn “invitation to link” is an improper solicitation.
  • Significant recent trade secret cases, including the level of detail required when pleading the existence of a trade secret.
  • Administrative agency developments regarding confidentiality clauses, including shifting agency trends under the Trump administration.
  • When are employers actually filing suit against former employees?

Click here for more information and to register for the webinar.

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As the law’s first anniversary approaches, federal courts continue to adjudicate claims arising under the Defend Trade Secrets Act (“DTSA”).  Enacted on May 11, 2016, DTSA provides the first private federal cause of action for trade secret misappropriation, allowing parties to sue in federal court for trade secret misappropriation.  Although the law is in its infancy, employers and legal practitioners filing complaints that assert DTSA claims must nevertheless adhere to longstanding rules of pleading set forth by the Supreme Court and the Federal Rules of Civil Procedure (“FRCP”).  Two recent decisions address this fundamental concept and serve as reminders that all complaints must follow basic pleading precepts.

Rules of Pleading Under DTSA

Rule 8(a)(2) of the FRCP requires a pleading to contain a “short and plain statement of the claim showing facts that the pleader is entitled to relief.” A complaint must contain sufficient factual matter, accepted as true, “to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).  A claim becomes plausible if its “factual content . . . allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”  Should the well-pleaded facts support no “more than the mere possibility of misconduct,” then dismissal pursuant to FRCP 12(b)(6) is warranted.  Applying these standards to claims brought under the DTSA, a plaintiff must allege facts demonstrating that it is the owner of a trade secret that was misappropriated.  18 U.S.C. § 1836(b)(1).  Generally speaking, a “trade secret” is information that the owner “has taken reasonable measures to keep . . . secret” and that “derives independent economic value . . . 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.” Id. § 1839(3).  Thus, a plaintiff asserting a DTSA claim bears the burden of alleging sufficient facts to demonstrate that it took reasonable steps to maintain the secrecy of the protected information.

Two Recent DTSA Decisions Reach Opposite Results

In Raben Tire Co. v. Dennis McFarland, Case No. 16-CV-00141, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24, 2017), a Kentucky federal court dismissed with prejudice a claim for misappropriation of trade secrets under DTSA for failure to state a claim. The plaintiff Raben Tire (a seller and installer of tires for commercial vehicles and construction equipment) sued two of its former employees and their new employer because, prior to resigning, the former employees allegedly transferred “confidential and proprietary information” to their new employer, including sales commission reports and the names of the individuals responsible for tire purchases.  Other than labeling that information as “confidential” in its complaint, Raben Tire did not allege any facts showing that it took any steps to protect the information from disclosure.  This omission was fatal to Raben Tire’s claim for misappropriation of trade secrets under the DTSA.

By contrast, a North Dakota federal court denied a motion to dismiss such a DTSA claim in Aggreko, LLC v. Guillermo Barreto & Elite Power, LLC, Case No. 16-cv-00353, 2017 U.S. Dist. LEXIS 35573 (D.N.D. Mar. 13, 2017), finding that the complaint satisfied the pleading standards. Just like in Raben Tire, the plaintiff Aggreko (a company that rents generators to customers) sued a former employee and his new employer because, prior to resigning, the employee allegedly downloaded Aggreko’s trade secrets and confidential information relating to Aggreko’s operations, customers, business proposals, and pricing strategies onto his personal hard drive for the benefit of his new employer. Aggreko’s complaint included one critical allegation missing from the complaint in Raben Tire:  the former employee was bound by confidentiality and employment agreements intended to protect Aggreko’s confidential information and to ensure that the information was not removed from the workplace or used by former employees and competitors.  In light of these allegations, the court denied the former employee’s motion seeking dismissal of Aggreko’s trade secret claim because it was “certainly plausible.”

Raben Tire and Aggreko confirm that claims brought under DTSA must be pleaded with the longstanding federal pleading principles in mind.  Employers and practitioners must take care to allege facts asserting plausible claims that not only describe the trade secrets at issue but also detail what measures the employer took to protect them.  Otherwise, like the plaintiff in Raben Tire, the complaint may be subject to dismissal on a motion to dismiss pursuant to Rule 12(b)(6).

David Clark, contributor to this blog and Senior Counsel at Epstein Becker Green, is featured on Employment Law This Week, discussing the Defend Trade Secrets Act of 2016 (DTSA).

Under the DTSA, employers can now sue in federal court for trade secret misappropriation. Though there is some overlap with the Uniform Trade Secrets Act—adopted in some version by 48 states—the DTSA marks a notable change in how these cases are litigated, creating a federal civil cause of action. The new law contains broad whistleblower protections and new requirements for employers to give notice of these protections.

View the episode below and a Thomson Reuters Practical Law Q&A co-authored by Mr. Clark with Peter Steinmeyer.

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”), which became effective immediately. The DTSA provides the first private federal cause of action for trade secret misappropriation, and it allows parties to sue in federal court for trade secret misappropriation—regardless of the dollar value of the trade secrets at issue.

Although the DTSA’s remedies largely overlap with those in the 48 states that have adopted some version of the Uniform Trade Secrets Act, the DTSA will nevertheless significantly alter how trade secret misappropriation cases are litigated. Additionally, the DTSA has broad whistleblower protections, and it requires that employers provide certain notices of these whistleblower protections in employment-related agreements that govern trade secrets or other confidential information entered into or amended after May 11, 2016.

For more information concerning the impact of the DTSA on employers, please see our “Q&A” on this topic, published by the Practical Law Company.