Intellectual Property

The Decade In Trade Secret Litigation

By focusing on the developments in trade secret litigation post-DTSA, we can acquire some useful insights into “modern” trade secret litigation as it has developed nationwide.

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Compliments of Lex Machina, I was fortunate to get an early look at its just-released 2020 Trade Secret Litigation Report, covering the past decade in trade secret litigation in district courts nationwide. Because of the passage of the Defend Trade Secrets Act (“DTSA” — signed into law by President Barack Obama in May 2016) during the coverage period of the report, reviewing it is especially useful since it allows us to consider what changes in trade secret litigation the DTSA has wrought. Put another way, by focusing on the developments in trade secret litigation post-DTSA, we can acquire some useful insights into “modern” trade secret litigation as it has developed nationwide.

Before diving into the report’s findings, some thoughts on trade secrets generally, from two perspectives. First, from the perspective of a litigator who has handled trade secret misappropriation cases in federal and state courts: Trade secret cases are fun to litigate, especially when they involve alleged theft of technology. In some ways, they share the best characteristics of patent cases, in terms of presenting the opportunity to engage experts and acquire a deep understanding of valuable innovation. Likewise, trade secret cases, as with their patent brethren, demand learning about the competitive dynamics in the client’s industry, an inquiry that I have always found invigorating.

At the same time, trade secret cases can also mimic some of the more distasteful aspects of patent litigation, starting with the potential for unrealistic expectations by the IP owner as to the value of their contribution or the damage done by the alleged misappropriation. Another difficulty that trade secret litigation often presents is the potential for interminable fights over what the contours of the alleged trade secrets at issue actually are, an exercise in unproductive posturing often exacerbated by procedural tricks or difficulty in getting the court onboard with prioritizing the endeavor. This is not to say that zealous litigation around the identity and scope of the trade secret at issue is not warranted. Only that, as with claim construction in patent cases, the path to resolution of this threshold issue can sometimes resemble taking the smelly staircase rather than the sleek elevator to get up to your hotel room. (Remember hotels?)

Second, from the perspective of someone who teaches trade secrets to high school students as part of a year-long IP survey course: Teaching trade secret law can be tricky. On the one hand, students readily grasp the value to their owners of the classic trade secret examples like the Coca-Cola or Mrs. Fields recipes. But perhaps because of their lack of workplace experience, the idea that much of trade secret law revolves around employment contracts and questions of employee mobility can offend the sensibilities of younger students. At the same time, the students do tend to get their moral ire up at prominent examples of misappropriation, such as clear-cut corporate espionage. That same ire, however, was strangely missing when I discussed with them the ongoing case between luxury hotels in Beverly Hills that I profiled in these pages last month. (The Peninsula doesn’t want my students on their jury, if that case ever gets that far.)

The report, however, confirms that employment-related issues and trade secrets are often intertwined. A connection that manifests itself in a number of interesting ways. For example, I was a bit surprised to learn that the most active current plaintiffs in trade secret disputes are “insurance and financial services companies” because they often “use a licensing or franchising system where individuals or small groups maintain privately owned offices using the companies’ name and materials.” Which results in misappropriation claims when users “fail to pay the requisite fees or move to another company without returning the materials.” Less surprising was the fact that many trade secret cases also include claims for breach of contract, either in the form of an NDA violation or a failure to abide with an employment contract’s provisions; the latter usually when an employee departs for a new opportunity, but with a fully loaded thumb drive in the back pocket, for example.

Considering the employment-related nature of many trade secret claims, it was not a surprise to see that the most active law firms handling trade secret cases “tend to be law firms known for their employment practices.” Or that trade secret cases are widely distributed nationwide, even as the “most active districts tend to be large population centers,” where large corporate employers and trade-secret savvy startups are likely to have offices. Moreover, the resource imbalance between trade secret owners and ex-employees accused of misappropriation is a major contributing factor to the high numbers of trade secret disputes that are resolved by consent injunction. It is probably also a factor in the high 80% grant rate for permanent injunctions in contested cases, especially considering the ease in showing irreparable harm to the trade secret owner if the trade secret misappropriation is allowed to continue. Finally, it probably also contributes to the fact that damages in trade secret cases that do not involve other claims trend to the lower side, at least in relation to patent disputes. In short, trade secret cases tend to settle or resolve in favorable terms for the IP owner when an employee defendant or their new employer can’t afford a protracted fight.

Thanks to the data available from Lex Machina and others, it is easier than ever to quickly get a snapshot of historical litigation activity concerning trade secrets. While the past decade introduced a new paradigm with the DTSA, it also provided some prominent examples of the importance of trade secrets in protecting developing technologies — such as the mega-dispute between Google and Uber on self-driving car technology. At the same time, the stats are clear regarding the origin of most trade secret disputes in employer-employee relations. Considering the major changes the ongoing pandemic has already brought to the modern “office,” it will be very interesting to see what impact the changing workplace dynamic will have on trade secret cases in the near future. Until things shake out, we should remember that learning from the past is perhaps the best preparation for an uncertain future.

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Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

 

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