When the Defend Trade Secrets Act was enacted in 2016, one aspect that garnered significant attention was the ex parte seizure provision, a new remedy that allows a trade secret owner to obtain — with no opposition from an adverse party — a court order directing law enforcement to seize a defendant's property to "prevent the propagation or dissemination" of a trade secret.[1]
A few years after the DTSA's enactment, we offered some initial insights on the courts' handling of the seizure provision.[2] With four more years of decisions on the books, we are revisiting the topic to determine how jurisprudence on ex parte seizures has developed and to address any seminal cases that have issued.
In short, not much has changed, which may be expected given the low occurrence of ex parte seizure applications.
But one thing remains as clear today as it did four years ago: No bright line has emerged on what qualifies as extraordinary circumstances warranting a seizure.
Courts have not clearly demarcated what constitutes "extraordinary circumstances."
To recap, under the DTSA, a court may grant an ex parte seizure order only in extraordinary circumstances, and only if the court finds it clearly appears that the plaintiff's application satisfies the DTSA's eight ex parte seizure requirements.[3]
Those requirements include finding that an injunction or temporary restraining order under Rule 65 of the Federal Rules of Civil Procedure would be inadequate because the defendant would "evade, avoid or otherwise not comply with such an order."[4]
Some courts have found that this threshold was met where the defendant had attempted to hide prior misconduct.[5] But other courts have concluded that such behavior was not sufficient for a seizure order.[6] The lack of a clear line remains.
For example, in DermSource Inc. v. CityMedRX LLC in the U.S. District Court for the Eastern District of New York in January 2023, DermSource proffered evidence indicating that CityMedRX had directed a key former DermSource employee to hack into DermSource's computer system.
Based on this and other evidence, the court found that CityMedRX "would likely destroy, move, hide or otherwise make assets inaccessible" if DermSource proceeded with notice to CityMedRX, and it granted an ex parte TRO.
However, consistent with the TRO grant, the court declined to grant DermSource's ex parte seizure application.
According to the court, the DermSource had failed to make a "clear showing" that the TRO would be inadequate. Viewed another way, despite finding that CityMedRX would likely destroy or hide evidence of their misconduct, the court did not believe CityMedRX would evade or otherwise not comply with a TRO.
Although the court did not expressly explain why a TRO was adequate under the circumstances, given the authority it cited in reaching its decision,[7] the absence of false and misleading statements or prior attempts to hide misconduct seemed to be the distinguishing factor.
Other cases, however, still show that evidence of such misconduct is not always enough for a seizure order.
In All Star Recruiting Locums LLC v. Ivy Staffing Solutions LLC in the U.S. District Court for the Southern District of Florida in April 2022, the court granted a preliminary injunction that required Ivy Staffing to stop using All Star Recruiting's trade secrets, and to delete any such information in their possession.
As in DermSource, the court denied the All Star's associated request for an ex parte seizure, concluding that All Star had failed to demonstrate extraordinary circumstances were present.
However, unlike in DermSource, Ivy Staffing's behavior was tantamount to a prior attempt to provide false and misleading information. In response to the All Star's cease-and-desist letter, two defendants signed affidavits admitting they possessed the All Star's confidential information but affirming that they would not use it in the future.
Yet, despite the sworn promise, All Star later learned that one defendant was still using its confidential information, which prompted a second cease-and-desist letter.
Notwithstanding this so-called deceptive behavior, the court deemed that the alleged misconduct was typical in most trade secret cases, and that calling the circumstances exceptional would make the exception swallow the rule.
While courts continue to take divergent views on what may be needed to establish extraordinary circumstances, plaintiffs seeking an ex parte seizure order should anticipate needing to provide evidence of a cover-up or similar misconduct in order to persuasively show that the adverse party is likely to disregard a TRO.
Either way, as these and other cases demonstrate, plaintiffs pursuing seizure orders would be wise to seek a TRO or other injunctive relief in parallel with an ex parte seizure application. After all, the briefing for both requests should be similar and the odds of obtaining some measure of relief will likely increase.
Two other seizure cases merit discussion — one for its procedural significance, the other for its warning to litigants and counsel.
Third Circuit determines ex parte seizure orders are not immediately appealable.
In Janssen Products LP v. eVenus Pharmaceuticals Laboratories Inc. in June 2023, in a case of first impression, the U.S. Court of Appeals for the Third Circuit considered whether an ex parte seizure order is immediately appealable.
Through discovery in separate patent and trade secrets cases, Janssen became convinced that eVenus spoliated evidence, so it filed an ex parte seizure application in the trade secrets case, seeking seizure of eVenus's network servers, stored data, laptops and cell phones.
The court denied the application after concluding Janssen failed to make an adequate showing on five of the eight DTSA seizure requirements. Janssen timely appealed.
Rather than address the merits of the district court's decision, the Third Circuit focused on whether it had jurisdiction to hear the appeal at all. The Third Circuit employed a three-part functional test to determine if a seizure order is effectively injunctive and therefore immediately appealable.
The court ruled that no DTSA seizure order could satisfy the first or second prongs of the functional test. Namely, that the order is "directed to a party" and "may be enforced by contempt."
As to the first prong, because the DTSA requires law enforcement to execute seizure orders, the court deemed that seizure orders are necessarily directed to law enforcement, not a party.
For the same reason, the court explained that a party cannot be held in contempt for failing to comply with a seizure order, the second prong, because such orders do not direct the party to do or refrain from doing anything. Thus, the Third Circuit concluded, the district court's order did not effectively deny an injunction.
The Third Circuit also analyzed whether Congress evinced an intent for DTSA ex parte seizure orders to be immediately appealable.
The court rejected Janssen's argument that the Third Circuit's prior determination that it has jurisdiction over Lanham Act ex parte seizure denials indicates that it also has jurisdiction over DTSA seizure decisions.
The court explained that the Lanham Act's seizure provisions are part of the injunctive relief section of the act and that the statute permits district courts to grant ex parte seizure applications under their power to grant injunctions.
Unlike in the Lanham Act, the court explained, the DTSA's civil seizure provisions are not linked to its injunction provisions.
The court also noted that Congress expressly provided the federal appellate courts with jurisdiction over certain interlocutory appeals in the section of the Economic Espionage Act immediately preceding the DTSA but not in the DTSA, which, in the court's view, suggests Congress did not intend to confer jurisdiction over DTSA ex parte seizure rulings.
Concluding there was no clear indication that Congress intended DTSA ex parte seizure rulings to be immediately appealable, the Third Circuit held that it lacked jurisdiction over Janssen's appeal.
It could be a while before a different appellate court considers whether a DTSA seizure order is immediately appealable.
So even if another circuit court may rule differently on this issue, the Third Circuit's decision will invariably dissuade parties from seeking immediate appellate review. It could even have presuit implications, as some litigants may file suit outside of the Third Circuit to avoid dealing with binding authority.
Either way, with Janssen standing alone on this issue for now, litigants considering an appeal of a DTSA ex parte seizure order outside of the Third Circuit should assess whether the jurisdiction they are in would follow a framework similar to the Third Circuit's in determining if a seizure order may be immediately appealed.
An Ohio federal court dissolves a seizure order, and awards attorney fees and a $10,000 bond to a defendant.
In Magnesium Machine LLC v. Terves LLC in 2020, the U.S. District Court for the Northern District of Ohio granted a DTSA seizure order,[8] dissolved it the next day,[9] and later ruled that the seizure application was a significant factor in its award of attorney fees to Terves.[10]
The court also ordered that a $10,000 bond Magnesium Machine had posted in connection with the seizure order be disbursed to Terves.[11]
The underlying dispute stemmed from a separate patent-infringement lawsuit involving Terves.[12] In response to a subpoena Terves had issued to a third party, Terves received a copy of an agreement between the third party and Magnesium Machine.
About two months later, after Terves had agreed to treat the agreement as "attorney's eyes only," and confirmed to Magnesium Machine that all copies had been deleted except for counsel's own copy, Magnesium Machine sued Terves for trade secret misappropriation. Asserting that the agreement held a trade secret and that its business was now highly at risk, Magnesium Machine also sought an ex parte seizure order.
Moved by the Magnesium Machine's plea, the district court granted the seizure request, and law enforcement immediately retrieved a laptop, storage devices, and a cellphone from Terves' company president.
The next day, the court held an evidentiary hearing and vacated the seizure order. The court was skeptical that the agreement contained any trade secret, much less one that had been misappropriated.
The court found it implausible that Terves would have recognized the purported trade secret buried in the agreement — which was apparently just three words referencing a patent that did not exist.
Magnesium Machine's argument that there had been misappropriation also puzzled the court, given that Terves had received the unmarked agreement — i.e., with no confidentiality marking — pursuant to a valid subpoena.
Accordingly, the court dissolved the seizure order and ordered law enforcement to immediately return the seized items to Terves' president.
After the evidentiary hearing, Terves successfully moved to dismiss the case, and it later moved for attorney fees, which the district court granted.
In the court's eyes, Magnesium Machine had brought its claim in bad faith and acted with improper motive because of the extraordinary means by which it prosecuted the case, including seeking truly exceptional relief in the form of the seizure order while making a calculated overstatement about the nature and value of the information Terves allegedly obtained.
Pertinent here, the court deemed that Terves was subjected to harassment, interference and intrusion into their professional and personal lives by way of the ex parte seizure order.
And because Magnesium Machine's counsel supported the claim and continued to push the case forward after the evidentiary hearing, the court also held them jointly and severally liable for the attorney fees.
Magnesium Machine appealed the district court's dismissal of the complaint and sought a reversal of the award of attorney fees, but the U.S. Court of Appeals for the Sixth Circuit affirmed the district court in both respects.[13]
Following the Sixth Circuit's decision, the district court set the amount of attorney fees at $195,651. Terves also moved for disbursement of the $10,000 bond that Magnesium Machine had posted in connection with its ex parte seizure application, and the court granted Terves' request. Thus, by the end of the lawsuit, Magnesium Machine owed Terves over $205,000.
This case presents several considerations relating to DTSA seizure orders. First, it underscores that courts do not take seizure orders lightly. Although the court granted the seizure in this case, it promptly held a hearing and dissolved the order as soon as it became evident that the order should not have issued.
While it is unclear whether the court would have awarded attorney fees absent the seizure request, the extraordinary and intrusive nature of the seizure played a key role in the court's decision to award fees.
The Magnesium Machine ruling also reiterates that posting a bond is not like making a temporary deposit with a bank — even plaintiffs that prevail on a seizure request are not guaranteed to get their bond back.
Indeed, even if the court had decided that attorney fees were not warranted there, given the court's ultimate view that the seizure request was improper, Magnesium Machine was still likely to lose its $10,000 bond.
And finally, this case serves as a reminder that although seizure applications are made on an ex parte basis, the adverse party will get to tell its side of the story eventually.[14]
So as with any case, litigants should not overstate their position when seeking a seizure, as doing so may lead to negative consequences or even sanctions.
Conclusion
As seizure applications continue to percolate through the courts, clear patterns may eventually emerge regarding the types of circumstances that will qualify as extraordinary and warrant a seizure.
But even if not, before seeking a seizure order, parties should carefully consider if a DTSA seizure is truly necessary and whether their evidence supports such a request.
As Janssen and Magnesium show, resolution of the initial application is not always the end of the issue. Parties may have to handle appeals or sanctions motions relating to the underlying application, and additional issues can be expected to crop up as DTSA seizure jurisprudence evolves.
Originally published by Law360.
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