Before the Defend Trade Secrets Act (“DTSA”) became federal law in the spring of 2016, Supreme Court watchers would likely care little about prospective justices’ approach to trade secrets matters.  Such matters were the province of state law, and the phrase “trade secret” might be avoided, even in passing, in the opinions of the Supreme Court for entire terms or more.  But with DTSA cases being reported with increasing regularity, differences in interpretation are beginning to emerge.  Supreme Court attention may follow.

Because DTSA says that “misappropriation of a trade secret” can involve unlawful acquisition of a trade secret, or improper disclosure of a trade secret, or unauthorized use of a trade secret, the impact of the statute’s May 11, 2016 “effective date” has been the subject of some debate.  For instance, should the act apply to a trade secret unlawfully acquired on May 10, 2016 but improperly used or disclosed on May 12, 2016 or thereafter?  Likewise, what if a trade secret unlawfully acquired and used before May 10, 2016 is used again after May 11, 2016?  These issues have come up in cases in March and January 2017 in the Northern District of California, in March 2017 in the Eastern District of Pennsylvania, and earlier in the Middle District of Florida.  The answers and analysis found in these opinions is not always entirely consistent, which suggests that this issue under DTSA  as well as others will continue to be litigated.

Should differences arise between circuits, the Supreme Court might be called upon to interpret the reach of DTSA. In that vein, one might wish to look at the Court’s newest member, Neil Gorsuch, and his opinions while a 10th Circuit judge in Storagecraft Technology Corp. v. Kirby, 744 F. 3d 1183 (10th Circuit 2014), and in Russo v. Ballard Medical Products, 550 F. 3d 1004 (10th Circuit 2008). Each reveal interesting elements of Judge — now Justice — Gorsuch’s approach to trade secrets matters.

Storagecraft proves interesting opinion on several levels.  That case involved the Utah trade secrets act in a case coming to the 10th Circuit after being brought in the federal district court as a matter of diversity jurisdiction.  In addressing one of the appealing defendant’s arguments, the Gorsuch opinion rejected the notion that one need show that a defendant facilitated another’s commercial gain to recover under the statute:

Continue Reading Court’s Newest Member Has Trade Secret Protecting Track Record

Featured on Employment Law This Week: Non-competes are coming under the microscope of the U.S. Treasury.

A recent report from the Treasury calls for more transparency in non-compete agreements and better communication around their use. Approximately 18 percent of the workforce is subject to these restrictive covenants, and there is increasing scrutiny around them on both the state and federal levels. A recent Utah statute restricts non-competes to no more than one year, while Oregon and Alabama recently tightened their statutory restrictions.

View the episode below or read more about this story in a previous blog post.

James P. Flynn
James P. Flynn

The State of Utah recently enacted Utah Code Annotated 34-51-101 et seq., the so-called Post-Employment Restrictions Amendments, which limit restrictive covenants entered into on or after May 10, 2016 to a one-year time period from termination. Although this could curtail certain employers’ plans, the amendments enacted provide some important exceptions and are in fact much more favorable to employers than those first proposed, which would have precluded virtually all post-employment restrictions in Utah. The statute and the exceptions and limitations are discussed below.

The statute as written declares a non-conforming “post-employment restrictive covenant” is “void.” Because Utah courts have not specifically adopted the “blue-pencil approach,” and any approach to reformation is unclear from case law or unresolved, the implications of the statute are unclear. Will voiding the “post-employment restrictive covenant” void the entire agreement of which it is a part, or just the post employment restrictions? Such questions remain to be answered.

The new law does have several important exceptions. It does not apply to (1) a “reasonable severance agreement,” (2) any restrictive covenants stemming from the sale of a business, (3) non-solicitation agreements, (4) nondisclosure agreements, and (5) confidentiality agreements. Perhaps most importantly, it is not retroactive. Of course, whether or not the statute will apply to an amendment to a pre-existing non-compete with a restricted period greater than one year remains to be seen.

Additionally, the statute’s exceptions must themselves be examined and applied with care. For example with respect to severance agreements, the statute will only allow enforceable post-employment restrictions “mutually and freely agreed upon in good faith at or after the time of termination.” Thus, employees may argue that the very use of a form restriction weighs against enforceability. Utah employers will need to carefully consider how to approach these issues, and to make any updates or changes to existing agreements before May 10, 2016.

Finally, and perhaps of most practical importance, Section 34-51-301 of the statute allows employees to recover attorneys’ fees where a post-employment restriction is found unenforceable:

If an employer seeks to enforce a post-employment restrictive covenant through arbitration or by filing a civil action and it is determined that the post-employment restrictive covenant is unenforceable, the employer is liable for the employee’s:
(1) costs associated with arbitration;
(2) attorney fees and court costs; and
(3) actual damages.

This provision could have a practical impact on the risk calculus associated with pursuing enforcement of restrictive covenants. Just another consideration among the many that are occasioned by this new statute.

In a decision recently issued by the Utah Court of Appeals, CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC et al., the court broadly interpreted the preemption clause in the Uniform Trade Secrets Act (“UTSA”) to hold that it “preempts claims based on the unauthorized use of information, irrespective of whether that information meets the statutory definition of a trade secret.”

With various modifications, the UTSA has been adopted by all but a handful of states. One of its provisions expressly preempts conflicting tort and other common law or statutory civil causes of action “for misappropriation of a trade secret.” (The preemption provision does not, however, preempt contractual or criminal remedies, regardless of whether they are based upon misappropriation of a trade secret, or other civil remedies not based upon misappropriation of a trade secret.)

Some courts have interpreted the UTSA’s preemption clause narrowly, holding that it only preempts claims based on information that meets the statutory definition of a trade secret. Their rationale is that if the UTSA was held to preempt claims based on theft of information that is not a statutory trade secret, a wronged plaintiff might be left without any remedy.

Other courts (a majority that have addressed the issue, according to the opinion in CDC Restoration & Construction) take a broader view of the UTSA’s preemption clause, and hold that it preempts any claim based on the unauthorized use of information – regardless of whether that information meets the statutory definition of a trade secret, and regardless of whether such a broad reading might deprive a plaintiff of a remedy for the misappropriation of information which does not constitute a statutory trade secret. As explained in CDC Restoration & Construction, “[a] contrary approach would render the statutory preemption provision effectively meaningless, leaving prior law untouched and converting an exclusive remedy into just another basis for recovery” (internal quotations omitted).

Employers should draw two lessons from this case. First, when prosecuting or defending misappropriation of trade secrets claims, employers need to be aware of the different interpretations of the UTSA’s preemption provision in different states; a valid claim in one state may be preempted in another. Second, employers should protect themselves against broad UTSA preemption by having employees sign contractual provisions protecting their confidential information – regardless of whether such information constitutes a “trade secret” for purposes of the UTSA. After all, the UTSA does not preempt contractual remedies.