Ex Parte Seizure Orders under the Defend Trade Secrets Act: Guidance from the Courts during the Statute’s First Year

On May 11, 2016, Congress signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), which created, for the first time, a federal cause of action for trade secret misappropriation. The DTSA includes a provision permitting a party, upon ex parte application, to seek issuance of an order providing for the seizure of property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” (18 U.S.C. § 1836(b)(2)(A)(i)).

Litigants seeking an ex parte seizure order under the DTSA have an uphill climb. Not only are such orders limited to “extraordinary circumstances,” but also a court “may not” issue an ex parte seizure order “unless the court finds that it clearly appears from specific facts” that eight separate statutory requirements are satisfied. (Id. § 1836(b)(2)(A)(ii)). Therefore, it is unsurprising that only a handful of litigants have sought an ex parte seizure order during the statute’s first year in existence. Nevertheless, these preliminary cases shed light on how courts may construe and apply this powerful statutory procedure going forward.

Application of the DTSA’s Ex Parte Seizure Provision During its First Year in Existence

In Dazzle Software II, LLC v. Kinney, the owner of software used in the pawn broker business sued an individual and his pawn broker business for violation of the DTSA for actions related to the unauthorized removal and use of plaintiffs’ trade secret information maintained on a computer in the possession of a third party. (Verified Complaint and Jury Demand ¶¶ 8, 24–29, 61–70, No. 2:16-cv-12191 (E.D. Mich. June 14, 2016), ECF No. 1). Plaintiffs submitted an ex parte application for seizure of the computers and computer storage devices allegedly containing misappropriated information. (Ex Parte Application for Seizure of Computer Storage Devices and Computers Pursuant to the Defend Trade Secrets Act of 2016 (June 14, 2016), ECF No. 2). The court declined, without explanation, to grant the requested relief on an ex parte basis but instructed plaintiffs to serve the application on defendants, after which the court would schedule a hearing. (Order Declining to Grant Application for Seizure of Storage Devices and Computers on an Ex Parte Basis (ECF #2) at 1–2 (June 15, 2016), ECF No. 3).

After being served, defendants filed a brief in opposition, arguing that the alleged misappropriation could not violate the DTSA because the statute had not been enacted as of the date of the alleged misappropriation. (Defendants’ Brief in Opposition to Plaintiffs’ Ex Parte Application for Seizure of Computer Storage Devices and Computers; or in the Alternative for Stay of Hearing Pending Completion of Expedited Discovery, at 4–7 (July 7, 2016), ECF No. 15). This argument also served as the basis for defendants’ motion to dismiss. (Defendants’ Motion to Dismiss Count IV of Plaintiffs’ Complaint with Prejudice, at 4–6 (June 24, 2016), ECF No. 14). The court, without written explanation, denied the application. (Order (1) Denying Plaintiffs’ Application for Seizure of Defendants’ Computer Storage Devices and Computers (ECF #2), and (2) Granting in Part and Denying in Part Defendants’ Motion for Expedited Discovery (ECF #16) (July 18, 2016), ECF No. 20). However, the court granted the motion to dismiss because – according to this court – conduct supporting a DTSA claim must post-date enactment of the statute. Specifically, the court permitted plaintiffs to seek leave to amend their complaint based on “conduct following the effective date of the DTSA” and directed plaintiffs to “plead with specificity any alleged conduct by Defendants post-dating the effective date of the DTSA.” (Order Granting Motion to Dismiss Claim Under the Defend Trade Secrets Act of 2016 (ECF #14) at 1 (August 22, 2016), ECF No. 26).

In Mission Capital Advisors LLC v. Romaka, a finance firm alleged its then-employee stopped coming to work, was interviewing for jobs in the same industry, and had downloaded Mission’s contact list and other proprietary information. (Complaint ¶¶ 12–16, 1:16-cv-5857 (S.D.N.Y. July 22, 2016), ECF No. 1). Mission sued, alleging violation of the DTSA, and moved for a temporary restraining order and preliminary injunction under Rule 65 as well as an injunction and seizure order under the DTSA. (Temporary Restraining Order and Order to Show Cause (July 22, 2016), ECF No. 5; Seizure Order (July 29, 2016), ECF No. 7).

In support, Mission submitted two affidavits: one from its IT director and another from a third party forensic computer consultant. (Affidavit of Patryk Braganza-Gallagher (August 2, 2016), ECF No. 9; Affidavit of Alex Ramirez (August 2, 2016), ECF No. 10). Prior to the lawsuit, Romaka permitted Mission, accompanied by the computer consultant, to image Romaka’s home computers. (Affidavit of Alex Ramirez ¶¶ 3–4 (August 2, 2016), ECF No. 10). Having done so, Mission could identify the nature and location of its misappropriated trade secrets with specificity. For instance, in his affidavit, the computer consultant asserted that “a file named ‘report14695979787161.xls’ which was a copy of Mission’s entire contact list,” as well as a “temporary file named ‘~$MCA Contact List.xlsx,’” was found on Romaka’s desktop. (Id. ¶ 6). The affidavits described the other allegedly misappropriated information less specifically as “documents discussing how Mission operates and how it manages itself,” or, alternatively, “several .zip files that appeared to be related to Mission.” (Id. ¶ 7; Affidavit of Patryk Braganza-Gallagher ¶ 14 (August 2, 2016), ECF No. 9).

In partially granting the motion, the court seemed to focus on the nature of the proprietary information as well as the level of detail provided in Mission’s papers. As to the contact lists, the court directed the United States Marshals Service (“USMS”) to seize information “which as of July 7 was saved as a file called ‘report14695979787161.xls’ in the computer’s ‘download’ folder, and a temporary file called ‘~$MCA Contact List.xlsx’ in the computer’s ‘desktop’ folder.” (Seizure Order at 5 (July 29, 2016), ECF No. 7). However, as to the other allegedly misappropriated information, the court denied the application because Mission did not spell out facts surrounding confidentiality and irreparable harm “with sufficient particularity.” (Id. at 4).

The court also seemed to focus on the inadequacy of Rule 65 in providing effective relief. Romaka had evaded service on two occasions and did not appear at a show cause hearing. (Id. at 2). Based on these circumstances, coupled with the allegation that Romaka was interviewing for positions in Mission’s industry, the court found Rule 65 “would be inadequate because Defendant would evade, avoid, or otherwise not comply with such as order.” (Id.).

In Balearia Caribbean Ltd., Corp. v. Calvo, the CEO of Balearia (Calvo) led negotiations with a Bahamas-based casino to provide ferry service between Miami and the casino. (Sealed Order at 1–2, No. 1:16-cv-23300 (S.D. Fla. August 5, 2016), ECF No. 10). After Calvo announced his resignation effective several months later and advised Balearia that, in the interim, he would train his replacement and keep the replacement advised of his subsequent undertakings on behalf of Balearia, he continued negotiations with the Bahamas-based casino unbeknownst to the trainee or Balearia. (Id. at 2). As an alleged part of these negotiations, Calvo received proprietary Balearia information via his work e-mail account, which he forwarded to a personal e-mail account. (Id. at 2–3).

After Calvo left his position, Balearia could not locate its file relating to the casino ferry negotiations. (Id. at 3). Ultimately, the Bahamas-based casino struck a deal with a different entity for the ferry service, and a picture of the ferry to be used in that service revealed an internet domain name painted on its side registered to a company owned by Calvo. (Id. at 3–4). Balearia sued Calvo for violation of the DTSA and sought an ex parte seizure order under the DTSA (relating to Calvo’s personal laptop computer) and a temporary restraining order under Rule 65. (Id. at 4).

The court granted the temporary restraining order and denied the application for an ex parte seizure order. (Id. at 1). In denying the application, the court relied on two of the eight statutory requirements in § 1836, namely that injunctive relief under Rule 65 would be inadequate “because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order,” and that the person against whom seizure would be ordered “would destroy, move, hide, or otherwise make such matter inaccessible to the court” if notified in advance. (Id. at 6–7 (quoting 18 U.S.C. § 1836(b)(2)(A)(ii)(I) & (VII))).

To evaluate these standards, the court looked to the legislative history of the DTSA as well as the treatment of applications for ex parte seizure orders in other contexts. (Id. at 4–5 & n.1). The court first referenced the statement of Senator Chuck Grassley, then Chairman of the Judiciary Committee, that the DTSA be applicable in “instances in which a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately or is otherwise not amenable to the enforcement of the court’s orders.” (Id. at 5 n.1). As to other contexts in which applications for ex parte seizure orders have been requested, the court, referencing a Cable Communications Policy Act case, explained that “ex parte seizures are proper only if providing notice to the defendant would render fruitless the further prosecution of the action,” and that the applicant for a seizure order “must show that the defendant, or persons involved in similar activities, had concealed evidence or disregarded court orders in the past.” (Id. at 4 & 7 (quoting AT&T Broadband v. Tech Commc’ns, Inc., 381 F.3d 1309, 1319 (11th Cir. 2004))). Looking to the Lanham Act context, the court found ex parte seizures appropriate “where destruction of evidence is likely and where entities similar to the defendants had a history of destroying evidence and disobeying court orders.” (Id. at 7–8 (citing SATA GmbH & Co. Kg v. Wenzhou New Century Int’l, Ltd., No. CV 15-08157-BRO (Ex) (C.D. Cal. Oct. 19, 2015), ECF No. 12 at 17-18; Dell Inc. v. BelgiumDomains, LLC, No. 1:07-cv-22674-AJ (S.D. Fla. Nov. 21, 2007), ECF No. 23 at 2-5)).

Balearia attempted to satisfy these standards by arguing about “the meticulously planned and allegedly nefarious nature of Calvo’s misappropriation” and the fact that the electronic format of the misappropriated information made it susceptible to concealment. (Id. at 8). The court concluded “these assertions do not constitute the ‘extraordinary circumstances’ contemplated by the DTSA or meet the standards set forth in decisions regarding ex parte seizures in other contexts.” (Id.). The court declined to even consider the remaining six statutory requirements. (Id. at 8 n.2).

In Jones Printing LLC v. Adams Lithographing Co., former employees who recently resigned and accepted employment with a competitor allegedly misappropriated trade secret information and were using it to draw away customers to their new employer. (Order at 2–3, No. 1:16-cv-442 (E.D. Tenn. November 3, 2016), ECF No. 8). Jones Printing asserted a claim under the DTSA and sought an ex parte seizure order. (Id. at 1–2).

In denying the application, the court concluded that “Plaintiff provides only selective portions of the specific information and legal arguments required by § 1836.” (Id. at 3). The court was especially concerned about Jones Printing’s failure to specify why relief under Rule 65 was inadequate. (Id.). Listing a string citation of cases as support, the court explained its view that a Rule 65 injunction “appears to be the preferred form of injunctive relief under § 1836 to date.” (Id. (citing Trulite Glass & Aluminum Solutions, LLC v. Smith, No. 2:16-01798-cv-JAM-CKD (E.D. Cal. October 6, 2016), ECF No. 64; Earthbound Corp. v. MiTek USA, Inc., No. C16-1150 RSM (W.D. Wash. August 19, 2016), ECF No. 46; Allstate Ins. Co. v. Rote, No. 3:16-cv-01432-HZ (D. Or. August 7, 2016), ECF No. 37; Henry Schein, Inc. v. Cook, No. 16-cv-03166-JST (N.D. Cal. June 22, 2016), ECF No. 19)).

In OOO Brunswick Rail Management v. Sultanov, former employees allegedly sent confidential documents to their personal e-mail accounts without authorization and one of the employees refused to return a company-issued mobile phone and laptop. (No. 5:17-cv-00017-EJD (N.D. Cal. Jan. 6, 2017), ECF No. 15 at 2). Brunswick sought, inter alia, a seizure order under the DTSA (relating to the company-issued laptop and mobile phone), a seizure and preservation order under Rules 64 and 65, a temporary restraining order, and an order to show cause for why a preliminary injunction should not issue. (Id. at 1).

After imposing a preservation order, granting a temporary restraining order, and issuing an order to show cause, the court found that seizure under the DTSA was unnecessary. (Id. at 2-4). Specifically, the order to show cause required that the devices at issue be delivered to the court at the time of the hearing. (Id. at 4). In the meantime, according to the court, the temporary restraining order prevented the defendants from accessing or modifying the devices. (Id.).

Takeaways for Litigants Considering Applying for an Ex Parte Seizure Order under the DTSA

These cases provide an important glimpse into how courts, so far, have construed and applied this powerful statutory provision. Given the paucity of case law addressing this provision, courts in the future may rely heavily on the approaches taken by the first courts to grapple with these issues. Therefore, when deciding how to craft an application for an ex parte seizure order, or when evaluating the decision to seek one in the first instance, litigants should use the following pointers, derived from the above cases, as guideposts to lead their decision-making:

• Describe the information to be seized with as much specificity as possible. If misappropriated information is in electronic format, provide all information known regarding brand and type of electronic storage device, electronic file organization, and file names.
• Focus on “specific facts” to establish a defendant would evade, avoid, or disobey an injunction order, or might destroy, move, or hide misappropriated information. Mere improper motives or the ease with which electronic information can be hidden is likely insufficient. A litigant should focus on prior disregard for court orders, evasion of service, and failure to attend hearings. It may also be helpful to point out that similarly situated defendants possessed these characteristics in other circumstances.
• Affirmatively support each one of the eight statutory requirements for issuance of an ex parte seizure order. A court is precluded from issuing an ex parte seizure order unless all eight requirements are satisfied.
• Remember that – as at least one court has found – the DTSA, including the ex parte seizure provision, applies only to information misappropriated after the date of the statute’s enactment.
• Emphasize why a preliminary injunction or temporary restraining order would be inadequate.
• Consider how courts have decided applications for ex parte seizure orders in other contexts, such as the Lanham Act or the Cable Communications Policy Act.

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This article was first published on Bloomberg BNA on June 26, 2017. (login required)