Ok, Fivers. You’ve got 21 shopping days left before the one-year anniversary of the federal Defend Trade Secrets Act (DTSA), which was signed into law on May 11, 2016. Do you know what you’re getting me? I for one plan to celebrate by buying a new USB drive, plugging it into my MacBook, and transferring copies of my confidential client list.

But seriously, I do have some special plans for this occasion. On May 16, 2017, I will host a live webcast at 12:30 Central from Texas State Bar headquarters called “One Year of Defend Trade Secrets Act Litigation.” With special guests: Jason Sharp, who recently joined Gardere as Senior Attorney, and Leiza Dolghih, Shareholder with Godwin Bowman & Martinez and publisher of the excellent blog North Texas Legal News. Texas lawyers can find registration information here.

If you can’t watch the webcast, don’t worry. I’m also celebrating with special DTSA Anniversary editions of Five Minute Law over the next four weeks. This first installment tackles the part of the DTSA that attracted more attention than any other.

Did the federal trade secret statute’s new ex parte seizure remedy live up to the hype?

There was a lot of talk last May about the Defend Trade Secrets Act’s ex parte seizure provisions. The DTSA allows a federal judge in a trade secrets case to order federal marshals to seize a defendant’s property—usually a computer or smartphone—without notice to the defendant. Critics worried about the potential for abuse of this extraordinary remedy.

I worried too, but not that much. The statutory requirements for getting an ex parte seizure order are strict, and last May I predicted here that “most federal judges are going to set the bar very high for obtaining such unusual ex parte relief.”

Has the first year of litigation under the DTSA proven me right on this point? Well, yes. But honestly, it wasn’t that difficult a prediction.

I haven’t done any comprehensive survey, but trade secrets litigator Paul Mersino recently wrote a nice summary of all the ex parte seizure cases he could find. He only knew of two cases that granted an ex parte seizure remedy under the DTSA, and one of them was so secret, he’d have to kill you if he told you about it.

So, the only case I have read that granted ex parte seizure under the DTSA is Mission Capital Advisors v. Romaka from the Southern District of New York.[1] The court first issued an order requiring the defendant to appear at a hearing to show cause why he should not be restrained from accessing, disclosing, or copying the employer’s client and contacts lists. When the defendant failed to appear, the court found that a Rule 65 order would be inadequate and issued an order directing the U.S. Marshal to seize the defendant’s contacts list from his computer (by copying them to a storage medium and deleting them from defendant’s computer).

Is this it? Is this all you can conjure, Saruman? After all the hand-wringing about federal marshals busting down doors and seizing iPhones from renegade insurance salesmen, we only get one or two ex parte seizure orders in a year? What gives?

There are many reasons ex parte seizure orders have been rare, but the most fundamental reason is this: federal judges can already do a lot with an “ordinary” Temporary Restraining Order under Rule 65 of the Federal Rules of Civil Procedure, and the DTSA itself says that an ex parte seizure order is only allowed when a Rule 65 order would be inadequate. See 18 U.S.C. § 1836(b)(2)(A)(ii)(I). 

Most federal courts addressing ex parte seizure requests have found an ordinary extraordinary remedy would be adequate

Balearia Caribbean v. Calvo, a case in the Southern District of Florida, was one of the first to address an application for an ex parte seizure order under the Defend Trade Secrets Act.[2] A ferry company called BCL sued its former CEO, Calvo, claiming that he hijacked the company’s negotiations to provide ferry service to a Bahamas casino. Before leaving, Calvo allegedly bought a Mac laptop, had it reconfigured to access the company’s electronic information systems, and forwarded confidential emails to his private Gmail account.

Now, I’m all for using a MacBook (which I typed this post on) and a personal Gmail account (which I also have). But come on, man. You just can’t do that stuff.

BCL sued Calvo in federal court under the DTSA and sought ex parte seizure of Calvo’s Mac laptop so that a forensic expert retained by BCL could image the hard drive. But the court found that the risk of Calvo improperly using or destroying the confidential information was not the kind of “extraordinary circumstances” required for ex parte seizure. Instead, the court granted a TRO requiring Calvo to preserve evidence and to appear at a hearing where the court would appoint a special master to take temporary custody of the Mac to have a forensic expert image the hard drive.

Magnesita Refractories v. Mishra, a case in the Northern District of Indiana, was similar.[3] It was another case of a rogue employee with confidential information on his personal laptop (allegedly). Magnesita, the employer, presented emails suggesting that the employee, Mishra, was in talks with a competitor about pursuing potential business ventures in competition with Magnesita.

At the initial ex parte hearing, the judge considered several options to deal with the laptop:

  • Alow Magensita to confiscate the laptop and have it imaged
  • Send the U.S. Marhsal to seize the laptop to be placed in custody
  • Order Mishra not to disseminate or destroy any material on the laptop and to bring the laptop to a hearing a couple days later.

The judge found that Magnesita met the requirements for an ex parte TRO under Rule 65 but declined to order seizure under the DTSA. The judge wrote:

Rather than involve the U.S. Marshal Service, and the potential reputational damage caused by them seizing Mishra’s personal property at his place of employment, I ordered Mishra to turn over to Magnesita’s counsel his personal laptop, which Magnesita would immediately deliver to the Clerk of Court to be secured. To ensure the protection of Mishra’s privacy, I ordered that “Magnesita shall not review any of the contents of the laptop prior to delivering it to the Clerk of Court.” In order to provide Mishra a way to expeditiously address any issues regarding the ex parte TRO, discuss the disposition of the laptop and potential appointment of a Special Master to image the laptop, and set a date for a preliminary injunction, I ordered the parties to appear at an in person hearing two days after I issued the ex parte TRO.

Mishra appeared and testified at the hearing two days later, but the judge found his testimony “far from persuasive” and denied his motion to dissolve the injunction. Mishra would suffer no damages if it was found that his laptop was improperly seized or imaged, the judge found, because the laptop would be returned to him as soon as it was imaged.

Lessons learned from one year under the DTSA’s ex parte seizure provisions

So what can we learn from the cases in the last year addressing the ex parte seizure provisions of the Defend Trade Secrets Act?

First, lawyers seeking to preserve their client’s confidential information or prevent it from being disclosed should usually opt for seeking a Temporary Restraining Order under Rule 65. There is no need to take on the higher burden of obtaining an ex parte seizure order if a TRO would be adequate.

Second, most federal judges are rightly hesitant to order a defendant’s property seized without giving the defendant some chance to respond to the plaintiff’s allegations. A TRO issued without notice is still an extraordinary remedy, but when a judge enters an ex parte TRO requiring the defendant to come to a hearing to turn over his computer for imaging of the hard drive, the defendant at least has some opportunity to respond before turning over his property.

In contrast, when a federal marshal shows up at the defendant’s door and says “I have a court order to seize your MacBook,” the defendant doesn’t have a lot of options.

Of course, the disadvantage of serving the defendant with a TRO first is that the defendant—who presumably already violated some duty of confidentiality—will ignore the commands of the TRO and conceal, delete, or transmit confidential information before turning over his devices. But this risk can be mitigated. Conduct like that almost always leaves some electronic trail, and judges have options like spoliation sanctions for dealing with disobedient litigants.

Agree? Disagree? Post your comments here, and Texas lawyers be sure to register for our live webcast on May 16.

________________________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Mission Capital Advisors, LLC v. Ramaka, No. 1:16-cv-05878-LLS (S.D.N.Y. July 29, 2016).

[2] Balearia Caribbean v. Calvo, No. 16-23300 (S.D. Fla. Aug. 5, 2016).

[3] Magnesita Refractories Co. v. Mishra, No. 2:16-CV-524, 2017 WL 655860 (N.D. Ind. Feb. 17, 2017).

 

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