Protecting Critical Company Assets – Part 3: The DTSA’s Ex Parte Seizure Procedure

Under the Defend Trade Secrets Act (“DTSA”), signed into law by President Obama on May 11, 2016, private employers now have a powerful and unprecedented tool to help them in the fight against trade secret misappropriation. As previously mentioned in Part I of this series, the DTSA provides a unique remedy which was never an option under the Uniform Trade Secrets Act.[1]

This remedy is an ex parte seizure provision which allows for “the seizure of property necessary to prevent the propagation or dissemination” of trade secrets. Ex parte means that an employer may petition a court to seize the property in question without prior notice to the other party, and the court can decide the issue without the “offending party” being present to defend him/herself. Under this seizure provision, if the court grants the request for seizure, then federal law enforcement officers will be authorized to enter private property and take the item(s) away and return them to the court. This article walks through the seizure provision of the DTSA in three parts. First, I examine how an application for seizure is made, acted on, and adjudicated by the courts. Second, I discuss the practical realities for employers seeking to utilize this remedy. Finally, I offer concluding remarks.

I. The DTSA’s Seizure Regime

Recognizing the potential for abuse that comes with an extraordinarily powerful remedy, the DTSA creates a high hurdle employers must meet when seeking this seizure relief. To receive a court ordered seizure, the employer must:

1. Set forth specific facts in an affidavit or verified complaint which establishes, among other things: a.) an immediate and irreparable injury if the seizure is not ordered; b.) a likelihood of success on the merits of the underlying trade secret claim; c.) the balance of harm favors the employer; d.) the identity and location of the material to be seized, with reasonable particularity; and e.) a showing that more ordinary procedures (such as a temporary restraining order under Federal Rule of Civil Procedure 65) would be ineffective because the seizure target would evade the order or destroy the evidence.
2.  Not have publicized the requested seizure.
3.  Post a bond sufficient to cover the damages should the seizure turn out to be invalid or excessive.[2]

If granting the requested relief, the DTSA requires that any seizure order be limited only to “provide for the narrowest seizure of property necessary.”[3] A court’s seizure order must also “clearly delineate[ ]” the scope of the executing official’s authority, as well as provide details as to how the seizure will be conducted, such as the hours that the seizure may be conducted and whether force may be used to access locked areas.[4]

Who can go with Law Enforcement on the Raid?

To minimize the risk of confrontations, an employer who obtains the seizure order is prohibited from participating in the seizure with the federal official. However, to ensure the seizure occurs properly, an unaffiliated technical expert may accompany the federal officials.[5]

Post Seizure Hearing

Once the property is seized, it will remain in the possession of the court until a hearing can take place where the interested parties have the opportunity to appear. The law prescribes that a court is to set a hearing at the earliest possible time, but not later than seven days after the seizure order is issued, although the party affected by the seizure may consent to a later date for a hearing. Furthermore, the party affected by the seizure or any third party harmed by the seizure order may move the court at any time to dissolve or modify the order after giving notice to the party who requested seizure.

II. The Practical Realities for Private Employers: Utilizing the DTSA’s Seizure Procedure

Employers may be all too familiar with this hypothetical: An employee leaves your company and you have strong reason to believe (or maybe even proof) that the employee has taken some of your valuable confidential information, some of which may qualify for “trade secret” protection, and may disclose it to his or her new employer. You are able to allege specific facts showing that the “former employee” is shifty, duplicitous, and unlikely to comply with a temporary restraining order. The clock is ticking and it may already be too late, but after careful consultation with counsel, you are convinced that you need to take action to secure the property which constitutes your company’s trade secret.

Seizure under the DTSA is intended for extraordinary relief only, which means that you must be able to show facts that will allow the court to determine that you will suffer both immediate and irreparable injury. For example, a court might question whether certain encrypted or piecemeal data that is stolen will take the “bad actor” or his/her compatriots time to decrypt or reverse-engineer such data. Moreover, irreparable injury generally requires that such a loss is not compensable with money damages. Employers will need to carefully consider the specific facts which they assert to establish these required elements.

What you are seizing – defining the items to be seized

In many cases, the employer may be able to identify, with reasonable particularity, the property it is seeking to seize; yet in others it may not be so easy. Describing and identifying the particular piece of property which contains the trade secret may be an employer’s toughest task, and experienced trade secret counsel should be consulted to help with this task.

For instance, if an employee leaves and secretly takes a flash drive containing electronically stored data or printed material, then identification is made easier. However, in today’s digital world, the particular item stolen may have been sent to the employee’s personal cloud service, email server or mobile storage device. An employer might make an application to seize the employee’s specific tangible mobile device, however it is not clear if such seizure would go beyond the “narrowest seizure of property necessary.”

If the employee has uploaded the trade secret data to a third party cloud provider like Dropbox or iCloud, can an employer seek a seizure of the employee’s account? It is unclear how the DTSA will address this situation. What is clear is that under the DTSA, ex parte orders may only be directed against wrongdoers, not against innocent third parties. As a result, the language of the DTSA suggests that a third party provider cannot be ordered to seize or shut down the accounts of the “bad actors” under this provision of law, and there may be a need to seek injunctive relief in this context to secure its valuable assets.

The Bond Requirement

Next, employers seeking seizure will be required to post a security, and the court retains discretion to determine the amount of that security based on its calculation of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure, or a wrongful or excessive attempted seizure. One can see how this requirement can quickly become a double edged sword for an employer: if, in its affidavit or amended complaint, it alleged that the value of the trade secret is so high and important that its loss will result in irreparable harm to the company, one could imagine a court setting this bond rather high. Moreover, employers should also be aware that this security posted will not act as a cap on damages if it is later determined that the property was wrongfully seized. Counsel should be consulted throughout the application and hearing process.

III. Concluding Remarks

The great advantage of the DTSA’s seizure remedy is its multi-state application. So often, an employee who misappropriates a trade secret moves or transfers the material to another state, which makes effective legal action more difficult and expensive as counsel must utilize out-of-state court procedures and subpoena processes. Moreover, states have adopted a largely dissimilar patchwork of trade secret law, and remedies and procedures vary. Now, under the DTSA, employers have the security of the federal court system and subpoena procedure to go after those who have misappropriated trade secrets. The new DTSA seizure provision now adds to this arsenal of relief and affords private employers the ability, in the right case, to seize and retrieve their trade secrets without having to worry about differing state laws and procedures.

The seizure provision of the DTSA is brand new, and this new tool for employers must be considered in the most egregious cases. Those private companies seeking to prevent the misappropriation of their trade secrets or take action to recover and obtain other appropriate remedies for actual or threatened misappropriation may contact Brad Tobias or any other member of Gentry Locke’s Employment Law Team for assistance.

[1] Virginia has adopted this act. The Virginia Uniform Trade Secrets Act does not contain a civil seizure mechanism.

[2] 18 U.S.C. § 1836(b)(2)(A)(ii).

[3] Id. § 1836(b)(2)(B)(ii).

[4] Id. § 1836(b)(2)(B)(iv).

[5] Id. § 1836(b)(2)(E).