S.D.N.Y. Applies Defend Trade Secrets Act to Conduct Predating the Statute

The Defend Trade Secrets Act (DTSA), signed into law by President Obama on May 11, 2016, applies “to any misappropriation of a trade secret . . . for which any act occurs on or after the date of the enactment of this Act.” 18 U.S.C. 1836(e). On its face, this would seem to preclude actions based on misappropriation that occurred prior to the DTSA’s enactment. But a recent case from the Southern District of New York shows that it’s possible to sue under the DTSA based on conduct predating the statute’s enactment.

In Syntel Sterling Best Shores Mauritius Limited v. TriZetto Group, Inc., the plaintiff, a healthcare software company, sued a company that previously contracted with the plaintiff to provide software development and other services. According to the plaintiff, after the defendant terminated the parties’ master services agreement, the defendant accessed and downloaded the plaintiff’s confidential documents and used that information to pitch clients. The plaintiff sued for violations of the DTSA, among other claims.

The defendant moved to dismiss, arguing that the amended complaint alleged pre-DTSA conduct. The court rejected this argument:

The plain language of the Act defines misappropriation to include “disclosure or use of a trade secret without the consent of another.” 18 U.S.C. 1839(5) (emphasis added). Accordingly, as Defendants allege that Syntel continues to use its Intellectual Property to directly compete with Trizetto, the wrongful act continues to occur after the date of the enactment of DTSA.

Thus, according to the Southern District of New York, a plaintiff can bring a claim under the DTSA for using a trade secret prior to the DTSA’s enactment, as long as the use continues post-enactment.

Takeaway: Companies who discover misappropriation that began before May 11, 2016 need to investigate whether the defendant continues to use the trade secrets at issue. If continued use can be alleged in good faith, consider bringing a claim under the DTSA.

Syntel v. TriZetto

Protecting Trade Secrets Following an M&A Transaction

Many M&A transactions are motivated by a desire to acquire another company’s trade secrets. But the unique nature of trade secrets, as compared to other types of intellectual property, creates risks for the acquiring company.

For example, a company doesn’t know if its proprietary information is a trade secret until a judge says so, usually in the context of a misappropriation claim. If the acquired trade secrets are stolen after the M&A transaction, this determination will involve a judge’s analysis of how the target company protected the information at issue prior to the transaction.

I recently came across a case from the Northern District of Georgia, DS Waters of America, Inc. v. Fontis Water, Inc., that shows how this can play out. A copy of the opinion is linked below. DS Waters, the company behind Crystal Springs bottled water, acquired the assets of a bankrupt water company, including its customer list. In this case, DS Waters brought a claim under the Georgia Trade Secrets Act alleging misappropriation of the customer list.

The defendants argued that because the bankrupt company did not reasonably protect the customer list, the list is not a trade secret. The case ultimately settled. But if it hadn’t, a jury would have decided whether the bankrupt company took appropriate protections. If not, then DS Waters would have paid for a customer list that it cannot protect as a trade secret.

This highlights the need for in-depth due diligence into the target company’s trade secrets, with a focus on the protections used. These tasks are often farmed out to junior lawyers, who may not have sufficient familiarity with the way courts analyze reasonable protections in misappropriation cases. Resist the temptation to reduce costs by having inexperienced lawyers handle this aspect of the due diligence.

Instead, whenever you are involved in an M&A transaction in which there is value assigned to trade secrets, you should engage an attorney who is an expert in this area who can determine whether the target company’s protection efforts are likely to survive judicial scrutiny. Otherwise, you are taking a substantial risk that the assets you are purchasing cannot be protected as trade secrets.

DS Waters v. Fontis Water

5 Warning Signs That Your Trade Secrets Have Been Stolen

Many companies that suffer trade-secret theft have no idea for months, if not longer. In the meantime, these companies often suffer substantial damage. Effective trade-secrets protection thus requires more than just proactive measures, such as restrictive covenants. Active monitoring is necessary to determine whether former employees, business partners, etc. are engaged in misappropriation.

Obviously, someone who is illegally using your trade secrets will try to keep their activity hidden. As a result, misappropriation can be difficult to detect. But there are warning signs. Here are five common red flags:

  1. A new competitor emerges. If a new competitor appears in your industry, investigate whether any of your former employees or business partners is involved. Particularly if there are high barriers to entry in your industry. This usually requires in-depth investigative work, which may require outside counsel, since the bad actors will try to hide their involvement.
  2. Your former employee lied. Hopefully, you’re conducting exit interviews when  employees leave your company. During that interview, ask where the employee will be working next. If he or she ends up at a competitor instead, there’s reason for concern.
  3. Data was downloaded. Whenever an employee with access to your proprietary information and trade secrets leaves, work with your IT department to determine whether there was any unusual downloading or exporting of key documents or information leading up to the employee’s departure.
  4. A business partner terminates an agreement unexpectedly. If your business partner had access to your trade secrets, be wary if they unexpectedly terminate what seemed like a mutually beneficial relationship.
  5. Clients leave suddenly. If one of your key sales/customer-relations employees leaves, keep an eye on the clients they worked with. If those customers take their business to your former employee’s new company, you have a problem.

Some of these may seem obvious, but companies are often so focused on their day-to-day business that they miss these warning signs. If you encounter any of the above, or there’s something else that makes you suspect trade-secrets theft,  contact an attorney who specializes in trade-secrets law immediately. Time is always of the essence in these situations.

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