When to Sue Under the Federal Defend Trade Secrets Act

The short answer, expanded

The Defend Trade Secrets Act of 2016 did not change what a trade secret is or what counts as taking one. Texas law already covered that, and the 2017 Texas amendments made the two definitions nearly identical. What the DTSA changed is the courthouse. A trade secret owner now has a federal claim and, with it, federal jurisdiction, federal procedure and a federal judge.

So the decision is less about which law is stronger and more about where the case should be tried. The federal claim is pleaded alongside the Texas claim in almost every federal filing, and the Texas claim is pleaded alone in almost every state filing. The question is which room you want to be in.

What the DTSA requires that Texas law does not

One extra element. Section 1836(b)(1) gives a civil action to the owner of a trade secret that is misappropriated if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. For most operating businesses this is easy: a product sold to customers in another state, a service delivered online, supplies bought across state lines. A purely local business with a purely local secret should check the element before filing, because without it the federal court has no jurisdiction over the claim.

Everything else tracks Texas law. The federal definitions of trade secret, misappropriation and improper means are in 18 U.S.C. § 1839, and the Texas definitions in section 134A.002 of the Civil Practice and Remedies Code were rewritten in 2017 to match them. What those definitions require is set out in what counts as a trade secret in Texas.

Side by side: the federal Act and the Texas Act

The Texas remedies are described in more depth in the Texas Uniform Trade Secrets Act, explained.

Reasons to file in federal court

The federal route tends to make sense in four situations.

• The defendant is out of state. A former employee who moved to Denver, or a competitor headquartered in Atlanta, is often easier to bring before a federal court in Dallas than a Texas state court, and the federal rules on service and discovery are the same in every district.
• The conduct crosses state lines. When files were taken in Texas, uploaded to a server elsewhere and used by a sales team in three states, a single federal forum avoids parallel state cases.
• There is a companion federal claim. A Computer Fraud and Abuse Act claim for unauthorized access to company systems belongs in federal court anyway, and the DTSA claim rides with it. The limits of that claim are covered in investigating a departing employee's devices and accounts.
• Procedure fits the case. Federal courts apply the Federal Rules of Civil Procedure, with mandatory initial disclosures, a scheduling order early in the case and a single judge assigned from filing to judgment. Some owners prefer that structure for a document-heavy case.

Reasons to stay in Texas state court

Federal court is not always the better room. The Texas claim alone is enough where the defendant is local, the secret is local, and the case is mainly about getting an injunction quickly and then settling or trying it in the county where everyone lives. State court does not require the interstate commerce showing. Texas temporary injunction practice is familiar to Dallas County judges, and the Texas rules on expedited hearings and bond are set out in the Texas Rules of Civil Procedure rather than left to a judge's discretion under the federal rule.

A state filing also keeps the case out of reach of removal only if no federal claim is pleaded and no diversity of citizenship exists. If the defendant is an out-of-state company and the amount in controversy is large enough, the defendant may remove the case to federal court even when the owner pleaded only Texas law. That possibility belongs in the first conversation about where to file. The general rules are in will my business case be in state or federal court.

Example

Suppose a Plano engineering firm discovers that its former operations director downloaded its pricing models and process documentation two weeks before joining a competitor based in Oklahoma City, and that the competitor has since bid against the firm on projects in Texas, Oklahoma and Arkansas. The firm's services are sold to customers in all three states.

The interstate commerce element is met. Both defendants have ties to another state. The firm wants the laptop examined and the pricing models barred from use everywhere, not only in Texas. A federal filing in the Northern District of Texas with a DTSA claim, a Texas claim under chapter 134A and a Computer Fraud and Abuse Act claim for the downloads lets one judge order the forensic examination and enter an injunction that binds the competitor wherever it bids. The same facts could be filed in Collin County district court under Texas law alone, but the competitor would likely remove the case to federal court anyway, and the firm would have lost the chance to choose its own federal claims.

The ex parte seizure order: rare by design

The DTSA's most talked-about feature is section 1836(b)(2), which lets a court order federal marshals to seize property necessary to prevent the propagation or dissemination of a trade secret, without notice to the defendant. Congress limited it to extraordinary circumstances and required the applicant to show, among other things, that an ordinary injunction would be inadequate because the defendant would evade or disobey it, that immediate and irreparable injury will occur without seizure, and that the applicant has not publicized the requested seizure. The court must hold a hearing promptly after the seizure, and a wrongful seizure gives the defendant a claim for damages.

In practice, most federal courts asked for a seizure order have found that a temporary restraining order with an order to preserve and turn over devices does the job. The seizure remedy matters for the case where the defendant is likely to destroy or move the data the moment a lawsuit arrives, and it is worth asking for only when the evidence supports that fear.

The whistleblower notice most employers miss

Section 1833(b) of title 18 gives employees, contractors and consultants immunity from trade secret liability for disclosing a trade secret in confidence to a government official or an attorney solely to report a suspected violation of law, or in a sealed court filing. It then puts a duty on the employer: any contract or agreement with an employee that governs the use of a trade secret or other confidential information must give notice of that immunity, either in the agreement or by cross-reference to a policy document provided to the employee.

The penalty for omitting the notice is specific. In a DTSA action against an employee who was not given the notice, the employer may not be awarded exemplary damages or attorney's fees under the Act. The rule applies to agreements entered into or updated after May 2016. An employer whose confidentiality agreements predate the notice, or whose forms never added it, still has its injunction and its actual damages in federal court, and still has exemplary damages and fees under the Texas Act. It has given up the federal versions against that employee.

Can I bring both claims?

Yes, and most federal trade secret complaints do. Section 1836(f) says the Act does not preempt or displace any other remedies provided by state or federal law. Once a federal court has the DTSA claim, it can hear the Texas claim and related contract and fiduciary claims under supplemental jurisdiction, 28 U.S.C. § 1367, because they arise from the same facts. The result is one case with both statutes pleaded, and the owner elects its remedy at the end rather than at the start.

A Texas state court may also hear a DTSA claim, because section 1836(c) gives the federal district courts original but not exclusive jurisdiction. Pleading the federal claim in state court, though, hands the defendant a basis to remove the case. Most owners who want the federal claim simply file in federal court.

The deadline is the same in both

Section 1836(d) gives three years from the date the misappropriation was discovered or, by the exercise of reasonable diligence, should have been discovered, and treats a continuing misappropriation as a single claim. Texas section 16.010 is the same. Choosing the forum does not buy time. What does shorten the time is the injunction: a court in either system will want to know why an owner who knew in the spring waited until the fall to ask for emergency relief.

How the choice is usually made

The forum decision comes down to who the defendants are, where the harm is spreading, what other claims exist and how the owner wants the first 30 days to go. A Dallas litigator who tries these cases in both courts can lay the options side by side before the first filing, which is the only time the choice is fully the owner's. Tina Wysk represents businesses in trade secret cases in Texas state courts and the federal courts; the practice is described at trade secret litigation.