Defend Trade Secrets Act: As time goes by, Part 1

As the time interval from the effective date of the federal Defend Trade Secrets Act [hereinafter the Act] increases, more issues inevitably arise, and so we address some of them here. In Next Payment Solutions Inc. v. CLEAResult Consulting, Inc., 2019 WL 3637356 (N. D. Ill. July 31, 2018) the court denied the defendant’s motion to dismiss, and where the motion was based in part upon the defendant’s reliance upon the Act’s reverse engineering provision. Although reverse engineering is lawful under the Act, the plaintiff alleged that the defendants unlawfully distributed its trade secrets outside the scope of a confidentiality agreement between the parties. As a result, there could have been distribution of the plaintiff’s trade secrets to unauthorized persons, and reverse engineering could have occurred in this unlawful manner.

There is at least one sovereign immunity decision under the Act.  In Fast Enterprises LLC v. Pollack, 2018 WL 4539685 (D. Mass. Sept. 2, 2018) the court granted the motion to dismiss where Ms. Pollack, as the Director of the Massachusetts Department of Transportation, authorized distribution of bid information of private entities to the public.  According to the court, the Act does not include otherwise lawful acts of government agencies within its scope, and so there is no liability as a matter of law.

For the Act to apply, there must be subject matter jurisdiction based upon alleged trade secrets being directly related to or part of interstate or international activities of a plaintiff. To date, several decisions have addressed whether this subject matter jurisdiction requirement was sufficiently alleged in a  complaint. For example, in Sun Distribution Company v. Corbet et al., 2018 WL 4951966 (S.D. Calif. Oct. 12, 2018) the court granted a temporary restraining order where the plaintiff alleged distribution of trade secret related publications outside its principle state of business.  In Revolution FMO LLC v. Mitchell, 2018 WL 2163651 (E. D. Missouri May 10, 2018), the court denied the motion to dismiss based upon subject matter jurisdiction because the plaintiff sufficiently alleged that it (i) reviewed its trade secrets for compliance with numerous states’ regulations and (ii) licensed trade secrets outside its state of incorporation.

Similarly, in Video Gaming Technologies Inc. v. Castle Hill Studios LLC et al., 2018 WL 3437083 (N. D. Okla. July 17, 2018) the court granted a motion to amend a complaint where the amended complaint would allege that (i) the plaintiff’s games were used across multiple states and (ii) its proprietary game algorithms were submitted for potential use outside the state of the plaintiff’s principle business. In all of these cases the courts found that the Act’s subject matter jurisdiction was based upon interstate activities which were sufficiently related to alleged trade secrets. However, a different result was reached in DLMC, Inc. v. Flores et al., CV No. 18-00352 DKW-R (D. Hawaii January 23, 2019). In this litigation the elder care company plaintiff alleged that the defendant former employees unlawfully transferred confidential client lists to a business competitor. The plaintiff alleged subject matter jurisdiction based upon (i) federal funding and (ii) federal patient identification numbers. Nevertheless, the court granted a motion to dismiss without prejudice, because these allegations bore no relationship to the client lists and there were no allegations of how either company provided interstate services.

© 2019 Adrienne B. Naumann, Esq., all rights reserved. Ms. Naumann does not sponsor or endorse the advertisements at adriennebnaumann.wordpress.com

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