Federal Court Denies Order to Show Cause with Temporary Restraints in Recent Defend Trade Secrets Act Case

A recent federal trade secret decision may spur employers to conduct forensic analyses of the computers of departing executives either before or immediately after their departures.

In McKinsey & Co., Inc. v. Shi, a consulting firm sued a former senior partner asserting violation of the federal Defend Trade Secrets Act (DTSA), among other claims. McKinsey alleged that the defendant misappropriated confidential McKinsey and client documents over the thirteen week period preceding his last day of work. Shi had worked at McKinsey or one of its affiliates for ten years before he began working for a competitor three days after his departure.

In an unusual fact pattern for DTSA cases, before McKinsey’s federal lawsuit was filed, the former employee had sued McKinsey in state court, alleging his entitlement to almost $1 million in discretionary compensation and asserting claims for fraud, misrepresentation, and breach of contract, among other claims. In the process of reviewing documents for discovery in the state court action, McKinsey allegedly discovered the misappropriation. It then filed a verified complaint in New Jersey federal court with an order to show cause for temporary restraints and request for expedited discovery. The court declined to enter the order to show cause, but did order expedited discovery.

Judge Shipp reasoned that although loss of a trade secret may demonstrate irreparable harm, McKinsey failed to meet its burden of showing that such irreparable harm was “immediate.” Because the alleged misappropriation had occurred between April and July 2018 and the defendant had started work for the competitor in July 2018, the court found the defendant in a position to misappropriate the trade secrets for at least fifteen months. The court nevertheless found good cause to order expedited discovery, viewing the alleged activity as “sufficiently concerning that it [wa]s appropriate to engage in expedited discovery to determine what confidential information or trade secrets were taken . . . and if that information ha[d] been disclosed or misappropriated.”

The decision may lead employers to consider conducting forensic analyses of departing executives’ computers or at least studying their outgoing e-mail correspondence either before or immediately after their departures, so that requests for judicial assistance (if necessary) are not considered stale or underserving of emergent relief.

Wendy R. Stein is a Director in the Gibbons Intellectual Property Department. She recently presented the Continuing Legal Education “Hot Topics in DTSA Litigation” on www.lawline.com and will be presenting a webinar on trade secret misappropriation for Clear Law Institute on January 8, 2020.
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