Early Returns (Part 3 of 3): California Federal Court First to Rule Under New Defend Trade Secrets Act of 2016

Here at TSW, we continue to watch closely the case law developing under the new Defend Trade Secrets Act of 2016 (DTSA), which attempts to harmonize divergent state laws by creating a single federal framework for trade secrets misappropriation lawsuits. The Northern District of California appears to have won the race to be the first federal court to enter a written decision under the DTSA. The early rulings in this case already give us some food for thought when it comes to litigating trade secret claims under the DTSA.

In the case, Henry Schein, Inc. v. Cook, No. 16-CV-03166-JST, Plaintiff Henry Schein, Inc. (HSI) sought a temporary restraining order (TRO) and preliminary injunction, against a former employee, Jennifer Cook. HSI distributes and sells medical, dental and veterinary supplies and equipment. Ms. Cook served as a field sales consultant to HSI from 2005 through May 2016, when she decamped to an HSI rival. Despite signing agreements that required her to hold “in strictest confidence” any confidential information “concerning the products, processes, services, business, suppliers, and customers of HSI,” and to “neither copy nor take any such material upon leaving Company’s employ,” Ms. Cook is alleged to have looted HSI’s confidential trade secret documents and information, such as customers’ ordering and purchasing data, with the apparent goal of diverting HSI’s customers to her new employer.

The court granted the motion for a TRO, barring Ms. Cook from accessing, using, or sharing any of this data, or violating the confidentiality obligations of her agreements with HSI. She also was enjoined from contacting, or soliciting business from any HSI customers whose accounts were assigned to her while she was employed by HSI. Matters improved somewhat for Ms. Cook two weeks later, when the Court entered a preliminary injunction in HSI’s favor but on narrower grounds than the TRO. Ms. Cook submitted evidence that most of her HSI clients were also existing customers of her new employer, and by forcing her to ignore those clients, the TRO endangered her livelihood. The preliminary injunction ruling lifted the ban on Ms. Cook contacting or doing business with her clients.

Two aspects of this decision are noteworthy as we track the development of DTSA case law. First, the main effect of the DTSA here, at least thus far, was to get the case into Federal court. The DTSA claim was one of eight counts pled in the complaint; the rest were state law claims. The Court noted that it had subject matter jurisdiction over the case due to the DTSA claim, and exercised supplemental jurisdiction over the remaining claims. The Court’s analysis did not distinguish between the DTSA and California Uniform Trade Secrets Act (CUTSA). The Court noted the similarities between the two laws (for instance, their nearly identical definitions of a trade secret) and then analyzed HSI’s claims under both statutes collectively.

Second, the Court resolved a battle between the trade secrets claim and California’s law against non-compete agreements in favor of Ms. Cook. California Business & Professional Code Section 16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” HSI argued that an injunction against Ms. Cook contacting her customers was needed here to protect its trade secrets. While some prior cases had blessed this “exception” to the California law against non-competes under the CUTSA, HSI’s argument here failed because Ms. Cook had not shown an unwillingness to obey court orders requiring compliance with trade secret law, nor had HSI offered specific evidence that she was using trade secret information to solicit customers.