New Law Sends Many Business Disputes to Federal Courts

June 1st, 2016

The new, federal Defend Trade Secrets Act went into effect May 11. Until the DTSA, the law governing claims alleging misappropriation of protected trade secrets was drawn from statutes in each of the states, leading to preliminary considerations as to which states’ laws might apply to a particular case and how those differing laws were applied in their respective states. The DTSA aims to provide more uniform rules for these claims throughout the country, and extending even to international transactions.

While talk of trade secrets may conjure up images of industrial espionage, the most common fact pattern is the departing employee who seeks to use his former employer’s information to establish a competing venture. The information may include customer lists, profiles or histories, means and methods of production, internal cost structures, or even “secret sauce” items that the employer may not have patented. A current or departing employee can often easily transfer this information by e-mailing attached files out of the firm, or by downloading larger files onto a flash drive.

Many of these cases have already been finding their way into the federal courts, by way of what is known as diversity jurisdiction. An aggrieved party may file a suit in federal court even when the claims involved arose strictly under state law, if the parties are from different states and the dispute involves $75,000 or more.

But the DTSA does more than just provide a uniform national standard. By making trade secret cases a federal law issue, it confers federal court jurisdiction over all of these cases, irrespective of the residency of the parties or the amount in dispute.

In Virginia, the shifting of these cases from state to federal courts will likely be felt mostly in the legal costs incurred in litigating. Federal courts allow many pretrial motions, including motions to resolve the case without trial, to be pursued using only affidavits or deposition testimony; Virginia’s state courts do not allow the use of out-of-court testimony in this way. While the stated objective of the federal rule is to save expense by seeking to shorten litigation, in practice the federal rule encourages the filing of whole series of pretrial motions not seen in the state courts. Experienced practitioners know that litigating in federal court is typically much more expensive than in Virginia’s state courts. Larger companies often bank on this, strategizing that their lesser capitalized rivals will not be able to afford to fight back effectively.

The federal law also brings a new remedy to those claiming injury from misappropriation of trade secrets. The party suing may, even before notifying the defendants of the filing of the case, ask a court to have the U.S. Marshal Service seize any property necessary to prevent the defendants from using the information supposedly taken improperly. How often courts will actually grant this relief remains to be seen, however, as historically courts are very reluctant to intervene so severely after hearing only one side of a dispute. Moreover, anyone obtaining such a seizure will open themselves up to a counterclaim for any harm caused if it should later be determined that the seizure was improperly obtained. Thus, while some fear that this provision could be abused to launch an attack on a competitor, the magnitude of the counterclaim that an improper seizure could generate should lead any suing party to think twice before asking a court to authorize one.

With or without that additional aspect of litigation, the likely shift of many cases previously left to the state courts into the federal system will no doubt change the landscape of much business litigation. Even when the chief thrust of a suit is, e.g., over an employment agreement’s non-compete provisions, the DTSA can now be used to drag the entire dispute into the federal courts.