Trade-Secrets Litigation under Michigan Law and the New Defend Trade Secrets Act

Trade-Secrets Litigation under Michigan Law and the New Defend Trade Secrets Act

By: Deborah Brouwer and Nicholas Huguelet, Nemeth Law, P.C.

In this increasingly knowledge-based economy, protection of trade secrets and confidential information has become a more critical issue for employers. The importance of protecting trade secrets is no longer exclusive to mega-corporations like KFC maintaining the secrecy of the Colonel's recipe or Coca-Cola protecting its formula. Rather, employers of all sizes and in all industries may well possess information constituting a trade secret, such as proprietary manufacturing methods, pricing lists, customer lists and preferences, and financial data. At the same time, it is becoming increasingly difficult for a company to protect these trade secrets, given today's highly mobile workforce, which has access to ever-evolving methods of copying and transmitting data. Now, it can take mere seconds for an employee with a cell phone to snap a picture of a confidential customer pricing sheet, or use a flash drive to copy proprietary design specifications.

To protect trade secrets, every state and the District of Columbia have adopted some form of trade-secrets law. For example, Michigan enacted the Uniform Trade Secrets Act (MUTSA) in 1998.[1] Trade secrets litigation thus has been typically a matter of state law, reaching federal court only in diversity cases or when combined with a separate federal claim (often a claim under the Computer Fraud and Abuse Act).[2] That has now changed.

After receiving nearly unanimous support in Congress, the Defend Trade Secrets Act (DTSA) was signed by President Obama in May 2016. For the first time, the DTSA provides a federal civil cause of action for the misappropriation of trade secrets. Previously, employers had to rely on a patchwork of state laws to bring such claims. Now, employers will have access to the federal judiciary and federal law and remedies. Not only will this allow the federal court system to craft a more consistent body of law, it will make it easier for companies to protect trade secrets across the nation. In addition, the DTSA provides a host of new remedies for employers, as well as new protections for employees.

Importance of Trade-Secrets Law to MDTC Members

At first blush, it may seem odd to discuss a new cause of action and how that cause of action could benefit clients of MDTC members. We are, after all, defense counsel. Nevertheless, the DTSA and MUTSA are laws designed to be used by the clients that we are most likely to represent – businesses. Accordingly, it is important to be aware of these laws and how they benefit our clients even if that requires us to step outside of a purely defense-counsel role.

What are "trade secrets"?

The DTSA and MUTSA define "trade secrets" similarly. Generally, "trade secrets" include information (e.g. formulas, patterns, compilations, methods, techniques, processes, etc.) that (1) the owner has taken reasonable efforts to keep secret, and (2) derives independent economic value from not being generally known or readily ascertainable by others.[3] Under MUTSA, trade secrets historically have included: knowledge of vendors, vendor capabilities, and pricing;[4] strategies and techniques for obtaining governmental certification;[5] manufacturing design specifications; [6] and customer lists, marketing and sales strategies, contractual details for customers, regional pricing lists and profit margins.[7] Such information is of enormous significance to many companies and, in some instances, can be worth millions (or billions) of dollars.

Protecting Trade Secrets through Litigation

Under both MUTSA and DTSA, trade secrets such as those described above are protected from "misappropriation," which includes acquisition of the trade secret through improper means, improper disclosure to another, or the improper use of a trade secret.[8] To enforce this protection, the DTSA and MUTSA permit owners of trade secrets to bring a lawsuit within 3 years after the misappropriation is discovered or should have been discovered.[9] To state a claim for misappropriation under MUTSA, the plaintiff must establish that (1) the information at issue amounted to "trade secrets," and (2) that the defendant did not have the express or implied consent to disclose or use the information.[10]

Remedies

Under both statutes, a wide range of remedies are available to the owner of trade secrets. The DTSA includes a new, relatively expansive remedy – the ability to seek, ex parte, a civil seizure order. It is not uncommon for an employee with knowledge of a trade secret to leave a company for a competitor, and to take a trade secret with him. Non-compete agreements provide one method of avoiding this, but enforcement of such agreements can be costly and time-consuming and often come into play only after the trade secret has been disclosed. Even a preliminary injunction may not be effective at preventing the disclosure of trade secrets. As a result, the DTSA now allows an employer to petition a federal court (without notice to the employee or possible defendant) to have the government seize all property in the possession of the defendant necessary to prevent dissemination of a trade secret.[11] The seized property is held in the custody of the court under "appropriate measures to protect the confidentiality of the seized materials" until a hearing can be held.[12]

A court may order such an ex parte civil seizure upon a showing of (1) the requirements for an injunction (imminent irreparable harm, weighing of respective harms, and likelihood of success on the merits), (2) that an injunction would be inadequate to prevent the dissemination of the trade secret, (3) the defendant has actual possession of the trade secret, (4) the materials to be seized are identified with particularity, (5) the defendant would destroy, move, hide, or make the trade secret inaccessible to the court with prior notice of the action, and (6) the application for seizure has not been publicized.[13] Such an order may even permit police to use force to access locked areas.[14] While ex parte seizure orders are available only in "extraordinary circumstances," they do offer a new remedy for the employer.[15]

If an individual is subject to a wrongful or excessive civil seizure order, the DTSA provides a cause of action against the applicant for the seizure order.[16] Damages for a wrongful or excessive seizure could include lost profits, costs of materials, loss of good will, punitive damages for bad faith, reasonable attorneys' fees, and prejudgment interest.[17]

Ex parte civil seizure orders are available only under the DTSA, and not under MUTSA. Accordingly, if a threat of trade secret misappropriation presents "extraordinary circumstances" that requires an immediate and severe response, employers should consider an action under the DTSA.

The DTSA and MUTSA also provide for injunctive relief (affirmative and negative), damages, and attorneys' fees in certain circumstances. Damages include actual economic loss, unjust enrichment, or the payment of a reasonable royalty to the owner of a trade secret.[18] Unlike MUTSA, the DTSA also permits recovery of exemplary damages up to two times actual damages.[19] Exemplary damages may be awarded under the DTSA in cases where the trade secret is willfully or maliciously misappropriated.[20] Accordingly, in certain cases, the DTSA may provide greater damages than would otherwise be available under Michigan law.

Inevitable-Disclosure Doctrine

Some avenues of relief for employers are narrower under the DTSA than under some state trade-secrets laws. For example, while the DTSA allows an employer to sue to prevent a former employee's employment with a competitor – often allowed under state trade secret laws – under the DTSA, the employer first must demonstrate "evidence of threatened misappropriation."[21] Under many state-law trade-secret statutes, employers have been able to bring similar suits under an "inevitable disclosure claim," arguing that misappropriation is likely simply because of the information held by a former employee and the former employee's employment in a similar position by a competitor. In this regard, the DTSA is friendlier towards employee mobility and limits an employer's ability to pursue such claims.

Courts in Michigan have been critical of the doctrine, however. In Degussa Admixtures, Inc v Burnett, the Western District of Michigan noted that "the doctrine has never been adopted in Michigan and, even where it has been discussed, it has only been suggested to be applicable to high executives and key designers of the company's strategic plans and operations."[22] In CMI International, Inc v Internet International Corp, the Michigan Court of Appeals required that parties must show more than a competitor's employment of a former employee who has knowledge of a trade secret.[23] The CMI court also ruled that "[e]ven assuming that the concept of 'threatened misappropriation' of trade secrets encompasses a concept of inevitable disclosure, that concept must not compromise the right of employees to change jobs."[24] Accordingly, while the lack of a cause of action under the DTSA based on inevitable disclosure doctrine may be significant in some jurisdictions, the refusal of courts in MUTSA cases to apply the doctrine undercuts the importance in cases arising solely in Michigan.

Other Considerations

Before commencing a trade secrets action under the DTSA, attorneys should consider the potential benefits offered by filing under state law. Because MUTSA was enacted in 1998, the courts have had an opportunity to interpret and apply the law. With a better-defined body of case law, MUTSA litigants may be offered a greater degree of certainty as to how their case will be adjudicated. On the other hand, because the DTSA is a recent enactment, there are no case decisions interpreting its provisions. Instead, until a body of case law is developed, parties will be required to rely upon statutory interpretation arguments and the persuasiveness of state court decisions with similar provisions.

Additionally, claims under MUTSA must be filed in business court, where the appropriate circuit has a business court. Procedurally, this means that the plaintiff must verify on the complaint that the case meets the requirements to be assigned to the business court.[25] Practically, this means that the parties can expect quicker resolutions with an emphasis on alternative dispute resolution, particularly mediation scheduled early in the proceeding.[26]

Whistleblower Protections

In addition to providing federal remedies for employers, the DTSA also includes express protection for employee whistleblower activities. This immunity provision protects individuals from civil and criminal liability when disclosing a trade secret "in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney and solely for the purpose of reporting or investigating a suspected violation of law" or "in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal."[27] The DTSA also permits the disclosure of a trade secret to an attorney or to a court under seal in a lawsuit alleging retaliation for a whistleblower report.[28] No such immunity is provided under MUTSA.

Importantly, the DTSA requires employers to post or provide notice of the immunity provision (i.e., a whistleblower notice) before collecting exemplary damages or attorney fees under the statute in a suit against an employee for a trade-secret violation under the DTSA.[29] In other words, if an employer sues an employee for a trade-secret violation under the DTSA, and notice of the statute's immunity provision was not provided to the employee, the employer is foreclosed from seeking these remedies. The requisite notice can be provided in any contract or agreement with an employee governing the use of a trade-secret or other confidential information, such as a non-compete agreement, employment contract, or employee handbook.[30] Further, under the immunity provision of the DTSA, the term "employee" includes contractors or consultants for an employer.[31] Thus, the whistleblower notice should also be included in any independent-contractor agreements.

This notice requirement applies to all contracts and agreements "entered into or updated" after the date of enactment of the DTSA – which occurred when the President signed the law on May 11, 2016.[32] Employers should immediately have all applicable documents and contracts reviewed by counsel to ensure compliance. Absent this provision, an employer likely will not be able to recover significant damages even if successful in an action under the DTSA.



[1] 1998 Public Act 448, MCL 445.1901, et seq.

[2] 18 USC 1030.

[3] 18 USC 1839(3); MCL 445.1902(d).

[4] Wysong Corp v MI Indus, 412 F Supp 2d 612, 630 (ED Mich, 2005).

[5] Giasson Aerospace Science, Inc v RCO Eng'g, Inc, 680 F Supp 2d 830 (ED Mich, 2010).

[6] Mike's Train House, Inc v Lionel, LLC, 472 F3d 398 (CA 6, 2006).

[7] Kelly Servs v Eidnes, 530 F Supp 2d 940 (ED Mich, 2008).

[8] 18 USC 1839(5); MCL 445.1902(b).

[9] 18 USC 1836(d); MCL 445.1907.

[10] Sherman & Co v Salton Maxim Housewares, Inc, 94 F Supp 2d 817, 821-22 (ED Mich, 2005).

[11] 18 USC 1836(b)(2).

[12] 18 USC 1836(b)(2)(D)(iii).

[13] 18 USC 1836(b)(2)(A)(ii).

[14] 18 USC 1836(b)(2)(B)(iv)(II).

[15] 18 USC 1836(b)(2)(A)(i).

[16] 18 USC 1836(b)(2)(G).

[17] Id.

[18] 18 USC 1836(b)(3)(B); MCL 445.1904.

[19] 18 USC 1836(b)(3)(C).

[20] Id.

[21] 18 USC 1836(b)(3)(A)(i)(I).

[22] Degussa Admixtures, Inc v Burnett, 471 F Supp 2d 848, 856 (WD Mich 2007), aff'd 277 Fed Appx 530 (CA 6, 2008).

[23] CMI International, Inc v Internet International Corp, 251 Mich App 125; 649 NW2d 808 (2002)

[24] Id. at 133-34.

[25] MCR 2.112(O)(1).

[26] Administrative Order No. 2013-6.

[27] 18 USC 1833(b)(1).

[28] 18 USC 1833(b)(2).

[29] 18 USC 1833(b)(3).

[30] 18 USC 1833(b)(3)(A), (B).

[31] 18 USC 1833(b)(4).

[32] 18 USC 1833(b)(3)(D).

Categories: Volume 7 #1

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