Chapter 4: Misappropriation of Trade Secrets

I.   Overview

§4.1   The law of trade secret protection has developed primarily through common law and has been greatly influenced by other laws and statutes, including unfair competition, copyright, trademark infringement, and patent law. Consequently, before the creation of the Uniform Trade Secrets Act (UTSA), there was very little uniformity in the law governing trade secret protection, and even since the act’s passage, courts still look to the preexisting common law for guidance.

In 1998, Michigan joined the majority of states that have adopted the Uniform Trade Secrets Act (MUTSA), MCL 445.1901 et seq. Under MUTSA, a court can enjoin actual or threatened misappropriation of trade secrets, compel affirmative acts necessary to protect a trade secret, and award damages for misappropriation. Misappropriation includes the disclosure or use of a trade secret without consent. MCL 445.1902(b)(ii). A party claiming trade secret protection under MUTSA must establish, at a minimum, that the information constitutes a “trade secret” and that the alleged violator had neither express nor implied consent to use the information. Mike’s Train House, Inc v Lionel, LLC, 472 F3d 398 (6th Cir 2006); Sherman & Co v Salton Maxim Housewares, Inc, 94 F Supp 2d 817, 821–822 (ED Mich 2000). The United States District Court for the Eastern District of Michigan, applying MUTSA, articulated the policies underlying trade secret protection:

Our legislatures have passed trade secret laws to encourage both business ethics and innovation. Such laws enable businesses to enter into good faith transactions, form stable relationships, and share confidential information, which in turn assists in product development. Also, trade secret laws encourage research and development by supplementing the patent system and supporting innovators who seek to retain the value of the discoveries. Further, trade secret laws punish industrial espionage and deny competitors an advantage they have obtained by unfair means.

Ford Motor Co v Lane, 67 F Supp 2d 745, 749 (ED Mich 1999) (citing Kewanee Oil Co v Bicron Corp, 416 US 470, 481–482 (1974)).

Michigan’s common law of trade secrets was well established before MUTSA’s adoption. While cases predating MUTSA’s adoption remain instructive in applying the general principles contained within MUTSA, it should be noted that section 8 of MUTSA specifically displaces conflicting tort or other state laws providing civil remedies for misappropriating trade secrets. MCL 445.1908; Stromback v New Line Cinema, 384 F3d 283 (6th Cir 2004); Appalachian Railcar Servs v Boatright Enters, 602 F Supp 2d 829, 852–854 (WD Mich 2008); Wysong Corp v MI Indus, 412 F Supp 2d 612, 622–623 (ED Mich 2005); Bliss Clearing Niagara, Inc v Midwest Brake Bond Co, 270 F Supp 2d 943, 946 (WD Mich 2003); CMI Int’l, Inc v Intermet Int’l Corp, 251 Mich App 125, 132, 649 NW2d 808 (2002). The court in Bliss concluded that the disputed status of information as a trade secret does not preclude a court from determining whether a claim is displaced by MUTSA. See §4.4 for further discussion of Bliss.

MUTSA, however, does not preempt contractual or criminal remedies “whether or not based on misappropriation of a trade secret” or other “civil remedies that are not based upon misappropriation of a trade secret.” MCL 445.1908. It does not preempt all common-law unfair competition claims, only those that are based on misappropriation of trade secrets. Planet Bingo, LLC v VKGS, LLC, 319 Mich App 308, 900 NW2d 680 (2017). MUTSA also does not displace claims that are based on wrongful conduct that is independent of the alleged misappropriation of trade secrets. Wysong Corp, 412 F Supp 2d at 623 (palming off claim not displaced by MUTSA because it was not factually and legally based on misappropriation of trade secrets but instead related to allegation that defendants sold confusingly similar products). MUTSA does not affect confidentiality agreements (discussed in §4.4) or noncompetition agreements, which are governed by other law. See UTSA Commissioner’s Comment, §7, 14 ULA 323 (1987). Such agreements can, of course, provide additional protection for a business’s confidential information and trade secrets, but under both common law and MUTSA, Michigan law protects a business’s proprietary rights in trade secret information even if the business has not obtained noncompetition or confidentiality agreements from its employees. Superior Consultant Co v Bailey, No 00-CV-73439 (ED Mich Aug 22, 2000). Similarly, MUTSA does not displace a common-law unfair competition claim where the plaintiff alleges misconduct that could be deemed unethical or unfair irrespective of whether trade secrets are involved. Dana Ltd v American Axle & Mfg Holdings, Inc, No 1:10-CV-450 (WD Mich Oct 17, 2011).

While most trade secrets issues will be litigated under state law, there are examples of analogous civil actions brought under federal statutes. For example, in Fiber Sys Int’l, Inc v Roehrs, 470 F3d 1150 (5th Cir 2006), the court held that plaintiff had standing to pursue a civil claim under the Computer Fraud and Abuse Act (CFAA), 18 USC 1030.

On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA), Pub L No 114-153, 130 Stat 376 (2016), establishing a federal right of action for trade secret theft. The new law is intended to give trade secrets the same federal protections that patents, trademarks, and copyrights have long received. Sara Jodka & Emma Wolfe, The Defend Trade Secrets Act. It’s Coming: What You Need to Know (May 2016) (Dickinson Wright client alert). While the new law largely mimics the UTSA in substance (e.g., the definitions of “misappropriation” are the same), it does not preempt state law; thus, plaintiffs have a choice of filing in state or federal court. DTSA §2(f).

In addition to damages, the DTSA goes further than any state law yet in that it allows for ex parte seizure of stolen trade secrets in “extraordinary circumstances” based on an affidavit or verified complaint. DTSA §2(a), 18 USC 1836(b)(2)(A)(i). The “extraordinary circumstances” language appears to set a standard that is higher than required to obtain a temporary restraining order under the Federal Rules of Civil Procedure. A party seeking seizure must show that

• relief under Fed R Civ P 65 or other equitable relief would be inadequate;
• an “immediate and irreparable injury” would occur if seizure is not ordered;
• the harm to the applicant outweighs the harm to the legitimate interest of the target person;
• the person misappropriated, or conspired to misappropriate, the trade secrets by improper means;
• the matter to be seized and its location are described with “reasonable particularity”;
• the target person has “actual possession of … the trade secret … and … any property to be seized”;
• if notice were to be provided to the target person, that person would “destroy, move, hide, or otherwise make such matter inaccessible to the court”; and
• “the applicant has not publicized the requested seizure.”

DTSA §2(a), 18 USC 1836(b)(2)(A)(ii).

Another noteworthy feature of the DTSA is a provision for whistleblower immunity. DTSA §7(a), 18 USC 1833(b). An individual who discloses a trade secret is granted immunity from civil and criminal liability if the disclosure is made in confidence to a government official or to an attorney “solely for the purpose of reporting or investigating a suspected violation of law.” DTSA §7(a), 18 USC 1833(b)(1)(A)(ii). Disclosures made during an antiretaliation lawsuit are also covered by the act’s whistleblower protection. DTSA §7(a), 18 USC 1833(b)(2) (employees in this situation may only disclose trade secret to their attorneys or in document filed under seal).

In addition, the new law rejects the “inevitable disclosure” doctrine (see §4.14), which allows employers to seek to enjoin former employees from working for a competitor in a comparable fashion because of the inherent potential for a disclosure of a trade secret. The DTSA says a court may not grant an injunction to “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” DTSA §2, 18 USC 1836(b)(3)(A)(i)(I).

Finally, the DSTA awards exemplary damages to the plaintiff if the defendant’s misappropriation was “willful and malicious” and attorney fees to the defendant if the plaintiff makes a misappropriation claim in bad faith. DTSA §2(a), 18 USC 1836(b)(3)(C–D).