In the USA, trade secrets are protected by the following:
An individual or corporate entity may bring claims under the DTSA and a state’s trade secret law simultaneously because the DTSA does not pre-empt state trade secret laws. The UTSA, however, contains a pre-emption clause that displaces common law trade-secret causes of action.
The interpretation of federal trade secret law is within the jurisdiction of the federal courts, with the Supreme Court of the United States acting as the final court of appeal for such interpretation. Interpretation of each state’s statutory law is within the jurisdiction of the specific state within which the respective law was enacted. Federal and state case law serves to guide litigants’ understanding of the metes and bounds of any particular trade secret law.
In general, a trade secret consists of commercially valuable information that is valuable because of its secrecy. A trade secret also has to satisfy a minimum standard of novelty to avoid being unprotected common knowledge.
Under the DTSA, a trade secret includes “all forms and types of financial, business, scientific, technical, economic, or engineering information” (18 USC Section 1839(3)).
Under the UTSA, a trade secret is information in the form of a “formula, pattern, compilation, program, device, method, technique, or process” (Uniform Trade Secrets Act Section 1(4)).
Under the common law, a trade secret is “any formula, pattern, device or compilation of information which is used in one’s business, and which gives [the business] an opportunity to obtain an advantage over competitors who do not know or use it” (Restatement of Torts Section 757, Comment b).
Examples of a trade secret under the DTSA and state trade secret laws modelled after the UTSA include:
Examples of a trade secret under the common law, which is still the applicable law in New York, and continues to be persuasive precedent in UTSA states, include: “any formula, pattern, device or compilation of information which is used in one’s business” such as pricing-related information, customer lists, or source code (Restatement of Torts Section 757, Comment b; Laro Maint Corp v Culkin, 700 NYS 2d 490, 492 (1999); E Bus Sys, Inc v Specialty Bus Sols, LLC, 739 NYS 2d 177, 179 (2002); MSCI Inc. v. Jacob, 992 NYS 2d 224, 225 (2014)).
Under the DTSA and state trade secret laws, a claimant must prove the following three elements to prevail on a claim of trade secret misappropriation:
Under the DTSA, and the various state trade secret laws modelled after the UTSA, a claimant has to prove the existence of a trade secret by showing the following:
Additionally, some state trade secret laws explicitly state that the owner must have taken reasonable measures under the circumstances to maintain the secrecy of the trade secret. See, eg, Alta Devices, Inc, 343 F Supp 3d at 877.
In New York, there are six factors that generally are considered when determining whether a trade secret exists:
Some courts in UTSA states continue to consider these six factors in determining the existence of a trade secret, despite having adopted the UTSA.
In order to prove trade secret misappropriation in New York, a claimant must prove that:
Trade secret owners generally must show that they took reasonable measures to protect their trade secrets. Some examples of reasonable measures include:
An employee has an implied duty not to disclose an employer’s trade secret. Disclosing a trade secret to an employee who cannot perform their job without knowledge of the trade secret does not destroy the trade secret. If, however, the trade secret is further disclosed to employees who do not need to know it to perform their jobs, and precautions are not taken to protect the confidentiality of the trade secret, then there may be a risk that trade secret protection will be lost.
Trade secret protection cannot be used against a party who independently discovered or reverse-engineered the alleged trade secret. In other words, trade secret misappropriation is not a “strict liability” offense, unlike patent infringement. Misappropriation would not lie against an independent developer in part because there was no acquisition from the trade secret owner (nor from another party with an obligation to the trade secret owner).
Similarly, reverse engineering the alleged trade secret from a commercially available product would not be an “improper means” of acquiring the information under trade secret laws (although such activity could violate agreements including those imposed by “shrink-wrap” or “click-wrap” licences). Both independent development and reverse engineering suggest that the alleged trade secret is not difficult to properly acquire or duplicate, a factor often considered in evaluating whether trade secret protection is merited. Independent development and reverse engineering can therefore be valuable defences to a defendant faced with allegations of trade secret misappropriation.
Two parties could conceivably develop the same trade secret independently and without knowledge of the other’s development, and both parties would have independent causes of action against third parties for misappropriation. For the same reasons discussed above, however, neither party would be able to successfully recover against the other for trad secret misappropriation.
Certain aspects of computer software and technology, such as proprietary source code and internal software design and architecture materials, may be protectable trade secrets under the DTSA and various state trade secret laws if the ordinary standards for trade secret protection are met. There are no specific protections that are unique to computer software and/or technology.
Aspects of software that are apparent to an end-user, such as the software’s general functionality or user interface, are unlikely to receive trade secret protection unless the end-user licence or other agreement imposes an obligation to keep this kind of information secret.
The Computer Fraud and Abuse Act (CFAA) also establishes civil and criminal penalties for knowingly or intentionally accessing either a protected computer (without authorisation) or exceeding their authorised level of access.
Trade secrets may remain protected indefinitely, so long as the trade secret owner maintains the secrecy of the trade secret. Accidental or intentional public disclosure may terminate trade secret protection but such considerations are generally fact-based inquiries.
Controlled disclosure of a trade secret, eg, for licensing or limited disclosure to third-party vendors and employees for business purposes generally does not nullify trade secret protection. Owners of trade secrets should accompany any controlled disclosure of their trade secret with nondisclosure agreements, company policies, or alternative safeguards that maintain the confidentiality of the trade secrets.
A trade secret owner has a right to licence the trade secret to a licensee through a contract or licensing agreement. The licensee may pay the trade secret owner royalties in exchange for using the trade secret.
The trade secret owner still must take reasonable steps to maintain the secrecy of the trade secret to retain trade secret protection. For example, the licensing agreement may contain a confidentiality restriction or a nondisclosure provision.
The licensing agreement may require the licensee to pay the trade secret owner royalties even if the licensed information is no longer sufficiently secret to qualify as a trade secret, unless the agreement specifically states otherwise. See Warner-Lambert Pharm Co v John J Reynolds, Inc, 178 F Supp 655 (SDNY 1959), aff'd, 280 F 2d 197 (2d Cir 1960).
One primary difference between patent and trade secret protection is public disclosure. Unlike a trade secret, which does not have to be registered and cannot be publicly disclosed, patents can only be obtained by applying to the US Patent and Trademark Office. During that process, the patent application and granted patent will be disclosed publicly.
Once the individual’s patent application has been granted, the patent provides a 20-year monopoly right from the filing date of the earliest priority application, after which the patented invention enters the public domain and may be used by anyone.
Because of this mandatory disclosure, protecting information as a trade secret may be preferred to protecting it via patent. One disadvantage, however, is that although trade secrets can theoretically be protected indefinitely, trade secrets, unlike patents, can be independently discovered or reverse engineered, after which there may be no further protection.
In the USA, patent, trade mark, copyright, and trade secret are separate and independent forms of legal protection for intellectual property. Plaintiffs can, and do, frequently assert claims under more than one of these legal protections, simultaneously, based on the same or related conduct.
An individual cannot seek both patent and trade secret protection for the same information. They may, however, obtain overlapping rights in a single product, such as protecting the design of the product with a patent, while protecting the composition of the product as a trade secret.
Copyright and trade secret laws may overlap in the computer software field since computer software may receive protection from both.
In addition to federal or state trade secret claims, plaintiffs should consider whether other common law or statutory claims may apply to the conduct at issue, including, for example: breach of contract, tortious interference with contractual relations, unfair competition, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, or unjust enrichment.
The DTSA and UTSA both define misappropriation as the “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means or disclosure or use of a trade secret of another without express or implied consent” (18 USC Section 1839(5); Uniform Trade Secrets Act Section 1(2)).
Improper means “includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means”, but does not include lawful means of acquisition such as reverse engineering or independent discovery (18 USC Section 1839(6); Uniform Trade Secrets Act Section 1(1)).
There is an implied confidential relationship between employers and employees, such that the employee is obligated not to disclose the employer’s confidential information.
Disclosing a trade secret to employees does not typically constitute public disclosure resulting in the termination of the trade secret, given that employees have a fiduciary duty to maintain the secrecy of the trade secret. Even if there is no express contractual term in an employment agreement prohibiting the employee from disclosing the trade secret, the employee still has an implied duty to maintain the secrecy of the trade secret.
If, however, the trade secret is disclosed to employees who do not need knowledge of it in order to perform their jobs, and precautions are not taken to prevent those employees from disclosing the trade secret, then the trade secret protection may be terminated. Thus, it is a beneficial precaution to require an employee, in express contractual terms, not to disclose the employer’s trade secrets.
Entities that participate in a joint venture owe each other a fiduciary duty not to disclose their trade secret during the joint venture. It nevertheless is best practice to create a contract between the owners of the joint venture that requires both joint venture partners to maintain the secrecy of the trade secret both during the joint venture and after its dissolution. Alternatively, a joint venture might involve a company licensing its trade secret to a third-party company. Again, in this scenario, it is best practice for the company with the trade secret to require the third party to sign a contract stating that the third party will not disclose the company’s trade secret, rather than relying on any implied duty of confidentiality.
When a company possesses valuable confidential information, industrial espionage likely is a threat. Companies should take as many security measures as practically feasible to restrict access to trade secrets and confidential information. Even internally, the trade secrets should only be available to a limited number of need-to-know employees, and those employees should frequently be reminded of the confidential nature of the trade secret as well as be required to sign nondisclosure agreements.
If an individual commits an act of industrial espionage, they may be subject to criminal prosecution under the Economic Espionage Act (18 USC Sections 1831-1839). The Economic Espionage Act provides a cause of action against domestic and foreign misappropriation of trade secrets.
The Federal Bureau of Investigation’s Economic Espionage Unit can investigate instances of trade secret theft. There are dedicated units in the US Attorney’s Offices that have the ability to prosecute trade secret espionage.
Common approaches for safeguarding trade secrets include physical, technological, and personnel-related means:
It can be useful for an employer to conduct exit interviews of departing employees. Such interviews often incorporate some or all of the following:
An employee’s general knowledge and skills, including those an employee already possessed or learned from a prior job, do not per se count as trade secrets that the employee is prohibited from using at a subsequent position. When an individual accepts new employment with a competing entity, however, the employee needs to ensure that she only relies on such general knowledge and skill and does not disclose any trade secrets or confidential information to the new employer.
In some situations, it may be difficult to separate the trade secrets from an employee’s general skills, experience and knowledge. To account for those instances, the common law developed an “inevitable disclosure” doctrine. It recognises that there may be scenarios where the duties of the employee’s new position inevitably require the disclosure of the trade secret from the employee’s former employment. In such a situation, the previous employer may seek an injunction to prevent the employee from working with a subsequent employer at all (or in a directly competitive role) for a specified time (eg, one year).
However, even if such a risk of inevitable disclosure exists, many courts will deny injunctive relief on this basis alone, absent actual proof of misappropriation, preferring a policy of free employee mobility at the early stage of any litigation. These same courts nevertheless often entertain a cause of action for trade secret misappropriation - and even grant permanent injunctions - on a fully developed factual record proving elements of the claim.
When hiring a new employee, there are a number of steps that an employer can take to minimise the risk of a trade secret claim, including the following:
There are no procedural prerequisites or requirements for filing a trade secret misappropriation lawsuit, although a lawsuit may be preceded by a cease-and-desist letter or a period of prior communication between the parties. Whether in anticipation of litigation or not, a trade secret owner may find it useful to send notices to former employees that go on to work for the trade secret owner’s competitors, reminding the former employee of their confidentiality obligations.
The trade secret owner may likewise benefit from sending a notice to the former employee’s new employer, to put the new employer on notice that the former employee had access to the trade secret owner’s confidential information and remains under an obligation to maintain its secrecy.
A complaint alleging trade secret misappropriation under the DTSA, like any pleading in federal court, requires the submitting attorney to conduct a reasonable inquiry before filing, and courts may impose sanctions if the pleading is found to have been presented for an improper purpose, such as harassing the defendant, or if the factual contentions are unlikely to have evidentiary support after a reasonable opportunity for further investigation or discovery; see FRCP 11(b). Most state courts impose similar obligations.
According to both the DTSA and the UTSA, a misappropriation claim must be brought within three years after the misappropriation was discovered or should reasonably have been discovered. The particular facts that can put a trade secret owner on notice of a trade secret misappropriation claim vary but, generally, a trade secret owner should diligently investigate any objectively reasonable suspicions that its trade secrets have been disclosed improperly or used without consent. Another factor to consider when bringing DTSA claims is the timeline of misappropriation and use of the trade secrets at issue.
Although there is uncertainty in this area, some courts have found that pre-enactment misappropriation may still be redressed by the DTSA if there are instances of use of the trade secrets occurring after enactment. For example, the DTSA likely is still available if the theft of a trade secret occurs prior to 11 May 2016, but the use or disclosure of the misappropriated trade secret occurs after the effective date of the DTSA. If all of the activity constituting trade secret misappropriation occurred prior to 11 May 2016, however, the trade secret plaintiff may be limited to bringing claims under the UTSA.
An owner of a trade secret may file a complaint under either the DTSA or state trade secret laws (most of which conform to the UTSA) in federal or state court. The DTSA’s jurisdictional element requires the asserted trade secret to be related to a product or service used or intended for use in interstate or foreign commerce.
The DTSA and most forms of the UTSA permit three theories of misappropriation: unconsented use, acquisition, or disclosure of a trade secret by a party who used improper means to acquire the trade secret or who knows or has reason to know that the trade secret was acquired by improper means. New York law more narrowly requires that the defendant use the trade secret for a claim to be established.
Another option is to bring a claim of trade secret misappropriation in the US International Trade Commission (ITC) if products embodying a misappropriated trade secret are imported into the United States. While the ITC cannot award damages for trade secret misappropriation, it does have the authority to exclude imported goods produced through the exploitation of misappropriated trade secrets as an “unfair method of competition” or “unfair acts” in violation of the Tariff Act (19 USC Section 1337).
ITC investigations often proceed much faster than district court litigations, and trade secret owners should consider whether the benefit of securing a speedy remedy is offset by the constrained timeline in which to develop the evidence needed to support a finding of misappropriation.
A trade secret claim may be initiated in federal court under the DTSA if the court is capable of exercising personal jurisdiction over the defendant in the chosen forum, and if venue is proper. State-law claims may be appended to a DTSA claim, or brought on their own in federal court if there is complete diversity of citizenship between parties (that is, if no plaintiff shares the citizenship of any defendant and vice versa) and the plaintiff alleges an amount in controversy of more than USD75,000. State-law claims may also be brought in the state in which the claims arose.
The choice of forum (either the state court or federal courts within the forum state) available to a plaintiff will depend on factors including where the defendant lives, is incorporated, or has significant business operations, and where the alleged acts of misappropriation occurred. A trade secret owner faced with acts of misappropriation by a foreign corporation may need to either sue a local subsidiary of the foreign corporation or be prepared to show that the foreign corporation has sufficient minimum contacts with the chosen forum state, such as transacting business within the state or competing with the trade secret owner in that state.
Prospective trade secret claimants should also analyse relevant contracts to be aware of any agreements related to specific jurisdictional requirements or admissions or the applicability of any arbitration clauses.
In federal courts, the pleading standards for trade secret misappropriation claims are governed by the traditional notice pleading requirements of the Federal Rules of Civil Procedure: the plaintiff need only set forth sufficient facts to state a claim for relief that is plausible on its face. There is no heightened particularity standard as is required for fraud or mistake claims.
Thus, a trade secret plaintiff will likely be able to survive a motion to dismiss in federal court so long as it alleges sufficient facts to plausibly demonstrate that the information misappropriated constitutes a protectable trade secret, the information derives value from being secret, and the owner took reasonable measures to keep it secret.
Some state court civil procedure codes - most notably, California’s - impose a heightened particularity standard that requires the plaintiff to identify the asserted trade secret with reasonable particularity before proceeding to discovery. Most courts have found that such procedural barriers apply solely in state court, and so, for example, a California trade secret claim brought in federal court would not be subject to any heightened pleading standards.
Although pleading requirements and the timing and manner of discovery for federal trade secret claims under the DTSA are largely uniform across jurisdictions due to the Federal Rules of Civil Procedure, bringing claims in state court may expose a plaintiff to unique strategic challenges in terms of articulating the trade secrets that it believes have been misappropriated.
In jurisdictions such as California where the plaintiff must identify the misappropriated trade secrets with reasonable particularity before the commencement of discovery, a defendant may argue that the plaintiff’s identification is insufficiently particular such that the defendant cannot defend against the allegations of trade secret misappropriation and the court will be unable to determine the appropriate scope of discovery.
In such circumstances, a defendant may be able to extract increasingly specific disclosures that narrow the scope of the trade secrets asserted, all while staying discovery into the trade secret claims as well as other causes of action based on the same factual allegations. Whereas in some jurisdictions a plaintiff may be able to proceed well into discovery with a trade secret identification that is more general, California courts will generally require a narrative description that provides the defendant sufficient detail to investigate how, if at all, the alleged trade secret differs from information that is publicly known or well-known within the relevant industry. The degree of particularity required is highly context-specific and California courts have discretion to require a more exacting level of particularity for more complex technologies.
Parties should therefore be prepared to submit sufficient evidence and, in some cases, declarations by expert witnesses to support their contentions as to the sufficiency of the description of the claimed trade secrets.
Although California’s reasonable particularity requirement is not meant to function as a mini-trial on the merits, a plaintiff who is unable to adequately describe the trade secrets at issue would doubtless encounter difficulties at the summary judgement stage, and therefore the process of obtaining the court’s approval to proceed with discovery can provide a useful stress-test of the plaintiff’s misappropriation theories.
In federal court, once litigation has commenced, the parties can obtain discovery from each other pursuant to the Federal Rules of Civil Procedure. Each state also has its own rules governing discovery. Discovery methods in both state and federal courts typically include:
In trade secret litigation where misappropriation of competitively sensitive documents or source code is at issue, the trade secret owner may wish to seek forensic inspection of devices in the possession of the alleged misappropriator or its employees.
Plaintiffs will need to strike a careful balance between under- and over-disclosure regarding the claimed trade secrets. For example, a plaintiff must provide sufficient detail in its complaint to survive a motion to dismiss (see 5.5 Initial Pleading Standards), but must also avoid disclosing trade secret information in a publicly filed complaint or other pleading. Prior to exchanging any sensitive business, technical, or financial information, the parties should stipulate to a protective order that limits disclosure of such information to the attorneys of record for each party as well as certain designated persons (such as senior in-house counsel or expert witnesses).
More stringent requirements may be sought for particularly sensitive material, such as software source code or technical schematics. In all circumstances, the trade secret owner should be careful to properly designate the material it deems a trade secret, and any descriptions thereof, under the appropriate degree of confidentiality provided by the stipulated protective order. Litigants should pay careful attention to jurisdiction and judge-specific rules for filing materials under seal or with redactions.
Defendants accused of trade secret misappropriation have several strategies available to them, depending on the facts of the case. One particularly strong defence is independent development: if the defendant can show that in developing the relevant product or service, it relied entirely on its own information or publicly available information, the plaintiff will not be able to establish that any use of its trade secrets occurred. An advantage of this defence is that the plaintiff’s definition of its own trade secrets is largely immaterial to developing the defence, giving the defendant greater control over the themes and evidence it chooses to present at trial.
In relation, defendants should investigate whether information claimed as part of the plaintiff’s trade secret is already in the public domain, as such information is by definition not protectable as a trade secret. Another possible defence is to show that the plaintiff did not take proper precautions to maintain the confidentiality of the information alleged to be a trade secret. For example, if the information was shared without requiring entry into a non-disclosure agreement, or if the information was widely dispersed without adequate technological controls to keep it secure, the information may not be entitled to trade secret protection.
Parties may bring dispositive motions at several stages of the litigation, including prior to trial and, in some cases, prior to engaging in discovery. Defendants may wish to bring a motion to dismiss at the outset of the litigation if the plaintiff has not met the initial pleading standards (see 5.5 Initial Pleading Standards). If the defect in the plaintiff’s complaint is simply that the trade secrets have not been identified with the requisite degree of particularity, courts often permit the plaintiff to amend its complaint or provide a confidential statement identifying its trade secrets in greater detail.
After discovery has concluded, parties often move for summary judgment on claims or issues for which there are no material facts in dispute and the movant would be entitled to judgment as a matter of law. Motion practice at this stage has the effect of simplifying the issues for trial, if not avoiding trial altogether. If the case proceeds to trial, a party may seek judgment as a matter of law after the opposing party has presented its case at trial if the opposing party has failed to introduce evidence supporting a reasonable conclusion in its favour.
Litigation costs arise at every stage of the case, from the filing of a complaint to discovery to trial. Litigation costs will vary depending on the types and complexity of the trade secrets at issue, the amount and types of discovery required, the number of witnesses to depose or to prepare for depositions, the number of expert witnesses involved, and many other factors.
Costs tend to be higher in trade secret cases than in other intellectual property cases. For example, a recent survey by the American Intellectual Property Law Association discovered that the median cost of trade secret cases with USD10 million to USD25 million at risk is USD4.1 million, compared to USD3.5 million for similarly valuable pharmaceutical cases.
For trade secret cases with over USD25 million at risk, median litigation costs have risen to USD7.5 million. A trade secret plaintiff (or potential plaintiff) with compelling facts may wish to consider available sources of third-party contingent litigation financing.
The litigation finance industry has seen substantial growth in recent years, although this approach is not without some controversy. A party considering third-party contingent litigation financing should also stay apprised of the fast-moving legal landscape regarding discovery and disclosure of third-party financing arrangements.
Although trade secret plaintiffs seeking damages are generally entitled to a jury trial, they should consider the likely composition of the jury pool and the pros and cons of jury trials before demanding a jury trial. Trade secret cases involving exceptionally complex technologies within narrow industries pose the risk of confusing a jury, so plaintiffs should take into account the range of educational backgrounds and industry affiliations of potential jurors.
In cases involving alleged misappropriation by a former employee, jurors may be more sympathetic to typical defensive themes such as the employee’s right to take their expertise to a new job without fear of reprisal. Nevertheless, due to the comparatively higher damages awarded by juries, jury trials will often be preferable to bench trials for most trade secret plaintiffs.
After the close of discovery and the resolution of any dispositive motions, the case will proceed to trial on any remaining claims or issues. Depending on the jurisdiction and individual practices of the court or judge, trial may be scheduled near the outset of the litigation at a case management conference, or may be scheduled on relatively short notice after it is clear to the judge that the case is “trial-ready.”
As in any other civil litigation, the party with the burden of proof is given the opportunity to present its case, which may consist of an opening statement, testimony of fact and expert witnesses, and a closing argument. The opposing party will generally have the opportunity to cross-examine each witness after they provide direct testimony. After the party with the burden of proof rests, the opposing party presents its case, consisting largely of the same elements. The case is then submitted to the jury to render a verdict, or to the judge for an opinion and order in a bench trial.
Trial length can vary considerably. While courts tend to allot a minimum of three to five days for trade secret trials, an exceptionally complex trial involving numerous fact and expert witnesses or novel technologies could stretch to three months or more.
Expert testimony is often important in trade secret misappropriation cases as a means of explaining complex issues to the finder of fact, especially where the trade secrets at issue are technical in nature. Experts may be used for a variety of purposes, including to support or rebut the contentions that a party possesses protectable trade secrets and takes reasonable steps to protect them, and that the defendant misappropriated and used the trade secrets in its own products or services.
Computer forensic experts may also provide valuable opinions and testimony related to access and misappropriation of trade secrets and computer systems and networks. As in other types of litigation, economic and financial experts to support damages remedies may be useful to estimate or forecast liability for the misappropriation of the trade secret(s) under any number of potential damages theories.
To obtain a preliminary injunction, a trade secret plaintiff generally must establish that:
To show irreparable harm, a plaintiff will need to demonstrate that monetary damages would be inadequate, which is more likely where the trade secret owner previously had market exclusivity and therefore the misappropriation results in reduced market share, lost customers, lost business opportunities, and/or price erosion.
Whereas lost sales alone may be insufficient to establish irreparable harm if such losses can readily be calculated, damage to the trade secret owner’s goodwill, reputation, or other intangible factors, and any other harms that result in a decrease in revenue available for employee attraction and retention, or for research and development activities on which the business relies for continued profitability, may be relevant to establishing the inadequacy of monetary damages.
In some jurisdictions, a party moving for a preliminary injunction must also show that there is a risk of further dissemination of its trade secrets beyond the misappropriation already complained of. In addition, an unreasonable delay in bringing a trade secret misappropriation claim or the motion for a preliminary injunction will weigh against granting the injunction.
Damages available to a trade secret plaintiff will vary depending on the federal and state claims asserted and the theories of recovery. Under the DTSA, damages for trade secret misappropriation can be calculated in at least three ways:
Damages under the UTSA similarly include actual loss in addition to unjust enrichment not taken into account in computing actual loss, but a reasonable royalty is only available under exceptional circumstances.
In some situations, lost profits may be shown by directly establishing that certain sales expected by the plaintiff were lost to the defendant as a result of trade secret misappropriation. More commonly, however, a plaintiff will argue that the defendant’s entire revenue from sales of products or services based on the misappropriated trade secret constitutes the damages base, at which point the burden shifts to the defendant to demonstrate which costs should be deducted to arrive at the net profit.
In addition, a plaintiff may need to consider pursuing other damages theories, such as the expenses plaintiff incurred in developing its trade secrets, the reduction in market share and/or erosion in price attributable to the defendant’s entry into the market, disgorgement of the defendant’s profits, or the value of the defendant’s avoided research and development costs.
In cases where the defendant has not yet released (or has only recently begun selling) a product or service based on the misappropriated trade secret, expert analysis and testimony may be invaluable in forecasting future lost profits or unjust enrichment. As an example, a technical expert may be able to offer an opinion concerning the length of the “head start” a trade secret misappropriator obtained as a result of using the plaintiff’s trade secret, which a damages expert can take into account when forecasting damages. Defendants should prepare their expert witnesses to offer opinions rebutting the damages calculations offered by the plaintiff.
If other measures of damages are inadequate, the plaintiff may seek a reasonable royalty. This measure is generally seen as a theory of last resort and can result in lower recovery than other measures. As in patent cases, courts have applied the “Georgia-Pacific” factors in order to reach a reasonable estimate of a royalty rate to which the parties would agree in a hypothetical negotiation.
Punitive damages may be available under the DTSA and for most state law claims if the defendant’s conduct was gross, wilful, or malicious. There are certain exceptions involving whistle-blower immunity for which punitive damages against a current or former employee may be unavailable.
Under the DTSA, a court may issue an injunction that places some limits on an employee’s subsequent employment in order to protect the plaintiff’s trade secrets, but the scope of the injunction may not be so broad as to prevent an employee from entering into any employment relationship or conflict with applicable state laws prohibiting restraints on the lawful practice of a profession. Moreover, the trade secret owner must base its request for a permanent injunction on evidence of threatened misappropriation and not merely on the information that the employee knows.
As a result, a trade secret owner may have limited recourse to injunctions in states such as California or Louisiana that disfavour non-competition agreements or that have rejected the inevitable disclosure doctrine. In practice, courts have issued injunctions restricting former employees in possession of sales-and marketing-related trade secrets from soliciting former clients or bidding on certain contracts.
Where the misappropriated trade secret has been used to develop a competing product or service, the trade secret owner should consider seeking a permanent injunction requiring the misappropriator to cease offering or recall the product or service. In order to succeed, the trade secret owner likely will need to show irreparable injury by putting forward evidence that other remedies, such as monetary damages, would be inadequate to compensate for the misappropriation. A finding of irreparably injury can be supported by harms that are impossible or difficult to quantify, such as a loss of goodwill.
The DTSA provides access to a new ex parte civil seizure provision, which allows a court to order seizure of property in order to prevent the further dissemination of the trade secrets at issue. The movant must demonstrate that extraordinary circumstances justify the seizure, which requires showing, in addition to the elements that ordinarily justify a preliminary injunction or TRO, that an injunction or other equitable relief would be inadequate to ensure compliance, and if the enjoined party were provided notice it would destroy or render inaccessible the property to be seized.
As part of the merits of the application, the movant must succeed in showing that the information sought to be protected is a trade secret and that the potential subject of the seizure order misappropriated or conspired to misappropriate the trade secret. Although the demanding burden for an ex parte civil seizure under the DTSA suggests this will be an infrequently used tool, the scope of property that may be seized is potentially quite broad as compared to civil seizures in other intellectual property enforcement regimes, which are generally limited to the infringing or counterfeit goods themselves.
If the movant succeeds in obtaining an ex parte civil seizure order, the court should hold a hearing within seven days after the order issues. The burden remains on the movant to prove the facts necessary to support the seizure, and should the movant fail to meet its burden, the order will be dissolved or modified.
Under the DTSA and most state trade secret laws, reasonable attorney’s fees may be awarded to the prevailing party on a showing of wilful and malicious misappropriation by the defendant or a bad-faith claim of misappropriation by the plaintiff.
Under the DTSA and most state trade secret laws, costs may be awarded to the prevailing party on a showing of wilful and malicious misappropriation by the defendant or a bad-faith claim of misappropriation by the plaintiff.
A federal district court decision (including final judgments and orders on dispositive motions) may be appealed as of right to the circuit court of appeals in the circuit in which the case was initially decided. Appeals from final ITC actions may be taken only to the US Court of Appeals for the Federal Circuit. If the ITC issues an exclusion order, an appeal cannot be filed until after a 60-day review period during which the United States President may veto the exclusion order. If the ITC does not issue an exclusion order, any adversely affected party may immediately file a notice of appeal.
It is not unusual for the federal appellate process to take anywhere from several months to several years. The process involves substantive briefing by both parties, which itself can take several months. Circuit court appeals often involve oral arguments before a panel of appellate judges. Circuit courts have discretion in scheduling the oral argument date for an appeal. Once the briefing and oral argument have been completed, the court has discretion in the timing of issuing a decision.
A party that is dissatisfied with the panel’s decision may seek a rehearing of the proceeding en banc, that is, a rehearing before all (or a substantial number) of the judges of the circuit court. En banc hearings are typically reserved for novel questions of law or issues of exceptional importance, and are more likely to be granted if the panel decision conflicts with those of other panels or circuits.
A decision of a regional circuit court of appeals or of the Federal Circuit may be appealed by filing a petition for certiorari with the United States Supreme Court. The Supreme Court has broad discretion to hear appeals, and generally grants fewer than one hundred out of the several thousands it receives annually.
The civil court systems in each of the states consist of trial courts, intermediate courts of appeal, and a highest court of appeal, often, but not always, called the state supreme court. As with the federal judicial system, the intermediate court of appeal’s decision may be appealed to the highest court of the state, which has discretion to hear the case. Even if a case begins in state court, an out-of-state defendant may be able to “remove” the case to federal court at the outset if federal jurisdictional requirements are met.
Issues on appeal are limited to those properly raised in the district court proceedings – claims, defences, and/or arguments may be deemed “waived” and the appeals court will ordinarily refuse to consider them. A court of appeals defers to the district court’s factual findings unless they are clearly erroneous, which only requires the district court’s account of the evidence to be plausible in light of the record. Conclusions of law are reviewed de novo, which means the appellate court reviews the issues with no deference to the district court’s legal analysis. This also enables a court of appeals to uphold or overturn a district court’s ruling on alternative legal grounds that were not considered by the district court.
Civil trade secret misappropriation claims often involve conduct that overlaps not only with the federal Economic Espionage Act but also state and federal statutes related to criminal mail and wire fraud, digital theft, or unauthorised access to protected computers. Trade secret owners should consider whether to reach out to the Department of Justice or state investigative agencies in cases of suspected or known misappropriation, especially since the trade secret owner is likely to have conducted a thorough investigation and will have access to unique information regarding its own trade secrets that would not be apparent to government authorities initiating their own investigation.
Involvement of state or federal authorities may offer the benefit of bringing additional resources to bear, although there may be some loss of control over the investigation and the timeline of the case. For a defendant in a civil trade secret misappropriation action, it is important to evaluate the likelihood that a parallel criminal case could be initiated, which may affect the strategy for responding to discovery requests and could increase the potential for self-incrimination during depositions.
The parties may settle their civil dispute at any time. Depending on the jurisdiction and the judge’s individual practices, a court may require the parties to engage in one or more settlement conferences or other alternative dispute resolution (ADR) procedures prior to trial, or may offer voluntary procedures for accessing ADR resources. The parties may also voluntarily choose to engage in mediation, a non-binding ADR process whereby the parties and their attorneys meet with a neutral third party who is trained to facilitate settlement discussions.
A mediator typically helps the parties reach their own voluntary settlement by assessing the strengths of the parties’ positions and identifying potential areas of agreement or disagreement. Even if the parties are not likely to reach a complete settlement, the ADR process may assist by “stress-testing” a party’s case and identifying any potential areas of weakness before proceeding to trial.
ADR can sometimes offer advantages over traditional litigation. For example, parties frequently resolve disputes more quickly through ADR than they would in court, which can also save costs. The parties are largely in control of the ADR schedule and therefore have more flexibility to tailor the process to their unique needs. Many types of ADR are confidential, which can be appealing to parties who do not want the details of their dispute made public through court records.
The most common forms of ADR used in trade secret disputes are mediation and arbitration. Whereas mediation is non-binding, in arbitration a neutral third-party known as an “arbitrator” will typically issue a written decision resolving the case on the merits. Parties may agree to arbitrate after a conflict arises, although occasionally the parties will have agreed in a prior contract (such as a licensing, subcontracting, or joint venture agreement) to resolve future disputes through arbitration.
If, however, the parties have not entered into any contract containing an arbitration clause, courts are unlikely to mandate arbitration between litigants on the basis of arbitration clauses found in contracts with a party’s employees, even if those employees may have been involved in acts of misappropriation.
In an arbitration proceeding, the parties present evidence and arguments supporting their positions to the arbitrator(s). The applicable procedural and evidentiary rules are usually determined by the parties’ arbitration agreement. Arbitration is generally less rigid than litigation but more formal than mediation. Depending on the type of arbitration, the arbitrator’s decision can be either binding or non-binding.
In non-binding arbitration, the parties are usually bound by the decision unless one of them rejects it and requests a trial. In binding arbitration, the parties agree that the arbitrator’s decision will be the final resolution of the case, and the parties will generally not have the opportunity to appeal the merits of the dispute.
Trade Secret Litigation Continues to Rise
Trade secrets are often core to a business’ financial viability, if not its success, and rank among a company’s most valuable assets. Well-known examples include the formula for Coca-Cola, Google’s search algorithm, and McDonalds’ secret sauce recipe. Each of these examples does not enjoy patent, copyright or trade mark protection. Rather, each is a protected trade secret. A trade secret enjoys significant advantages over the other forms of IP protections in that disclosure is not required and the “secret” can be protected forever. While many of the big IP litigation battles historically involved patent challenges, that is no longer the case today. Companies such as Facebook, Uber and Motorola (to name a few) are involved in costly trade secret litigation.
Claims alleging a misappropriation of trade secrets have exacerbated in recent years. While historically such claims were brought in state courts, since the 2016 passage of the federal Defend Trade Secrets Act (DTSA) which created a federal cause of action for trade secret theft, claims are now routinely brought in the federal courts. Indeed, in 2019 alone, approximately 1,400 new cases alleging trade secret misappropriation were filed in federal court. On the recovery side, successful plaintiffs in federal trade secret cases were awarded an average of approximately USD1.1 million, and the aggregate recovery in those trade secret cases exceeded USD45 million total for their trade secret claims. Combined with reported state court cases, the total is in nine figures.
So what trends are likely to define trade secret litigation in 2020? What follows are a few takeaways.
The kinds of trade secret continue to expand
The definition of a trade secret can be quite broad. Simply put, a trade secret is defined as information used in a company’s business that is not known or readily accessible by competitors, that is protected from disclosure through reasonable efforts to maintain its secrecy, and that provides either a competitive advantage in the marketplace or has commercial value. Many trade secret claims revolve around computer codes, algorithms and customer lists. However, recent cases span the gamut from proprietary information about fertiliser, pesticides and cannabis processing, recipes for popcorn, methods for bleaching hair and repairing hair damage, and the process of adding aromas as a perceived taste-enhancer to beverage bottles. The bottom line is that any type of information that meets the criteria of a trade secret can be protected.
Statutes of limitation will continue to be important
The federal statute provides for a three-year statute of limitation for a trade secret claim. Various states allow four or even five years within which a claim must be brought. However, the crucial inquiry relates to when the statute of limitation begins to run.
The law says that a claim arises when the injured party has actual notice of the potential misappropriation of its trade secret or when that party should have discovered the misappropriation through the exercise of reasonable diligence. Put another way, when would a reasonable person investigate whether his or her trade secrets had been stolen?
A recent appellate court holding established that the statute of limitations may begin to run when a company warns a former employee that the disclosing of its trade secrets to a new employer would constitute a crime. Other courts have noted that in the context of a failed business transaction, inquiry notice exists when one party fails to return the other’s confidential information according to the terms of a non-disclosure agreement that the parties signed. In another case, a jury recently held that a billion-dollar claim alleging that the rideshare company was founded based on stolen trade secrets was not time-barred because the plaintiff, despite investigating its claims years earlier, was unaware that those involved in the alleged theft were associated with Uber. In many cases, the question of when a statute of limitation begins to run will continue to be a major source of dispute in 2020.
The question as to when the trade secret theft occurred is important for other reasons as well. For example, one change brought by the 2016 federal legislation was that trade secret misappropriation can constitute a predicate act under the RICO statute. To qualify, a plaintiff must show that the trade secret theft occurred after 11 May 2016 – the date that the DTSA was enacted.
Where exactly did the theft occur?
DTSA was enacted as a part of the response to the theft of trade secrets by Chinese companies and other foreign actors. Recently the Chinese government strengthened its efforts to protect trade secrets through its amended anti-unfair competition law. While it remains to be seen how Chinese courts will interpret the revised statute, two components of the law may lead to an increase in the claims brought in China. First, the amended statute expands the scope of potential defendants, broadens the types of acts that can constitute a misappropriation and lowers the burden of proof for a plaintiff. Additionally, the new rules allow for increased damages and the recovery of punitive damages may spur additional claims in China.
However, in the USA, courts have recently held that a civil action under DTSA can arise from wrongful conduct occurring completely outside the USA. The only catch is that the wrongful activities have some nexus with activities that took place within the USA.
In a recent case, a Chinese manufacturer was found liable for using confidential documents to develop digital radios that were virtually identical to those produced by a US-based company and sold in the USA as well as elsewhere throughout the world. The court held that while the theft of information occurred entirely in China, the sales in the USA constituted an “act in furtherance” of the trade secret misappropriation leading to the application of the DTSA. The result? A jury verdict of USD760 million. The lesson? A precedent allowing new claims to be brought in the USA for acts of trade secret misappropriation occurring elsewhere. Where the theft occurs continues to matter.
Steps taken to maintain confidentiality of information can have implications for trade secret litigation years down the road
The DTSA and various state statutes require that a trade secret owner take “reasonable measures” to protect its trade secret information. What constitutes “reasonable measures” is not defined, and the actions that a company takes to protect its trade secret information up front can impact the likelihood of a successful trade secret claim years later.
Coca-Cola is widely known for the efforts it undertakes to maintain secrecy of its formula for its popular soft drink, but this is not the benchmark for what is required.
Numerous courts have dismissed trade secret claims based on the failure of the plaintiff to enact “reasonable measures” to protect its trade secrets. In some of these cases, the party seeking trade secret protection had not adequately marked the information as confidential. Other indicia of reasonable measures may include storing the information in a password-protected, limited-access server, having employees sign written acknowledgements of their obligation to keep sensitive business information confidential, and telling employees that the information was confidential.
In today’s world where companies use cloud applications allowing employees to work more flexibly, the inquiry becomes more difficult. The ease with which data can be transferred in a cloud-centric world significantly changes a company’s ability to maintain the secrecy of its information. For example, when an employee downloads information from the cloud to a personal device outside of the company’s control, the company may lose track of its data and not be able to maintain the secrecy or confidentiality that it thought that it had.
Whether or not a company has undertaken “reasonable measures” to protect its confidential information is necessarily a fact-based inquiry; in all likelihood, this will continue to be a hotly litigated issue in trade secret litigation in 2020.
Trade secret claims involve large potential damages
In addition to increases in the number of cases being filed, the recoveries in trade secret claims for successful plaintiffs continue to be significant. This is often true whether the recovery results from settlement or comes in the form of a verdict after a full-blown trial. Reported decisions in state and federal courts evidence damage awards in the eight and nine figure range. Sometimes these include punitive damages, while at other times they do not.
For example, in Delaware, a judge reduced a jury’s award from USD91.3 million to approximately USD50 million in a case arising out of a failed acquisition where the allegation was that the potential acquirer stole proprietary technology owned by the to-be-acquired company after the proposed deal fell apart. Other reported damage awards include a USD30 million judgment related to trade secrets used for the design of data rooms.
Litigants in trade secret cases have flexibility in fashioning their damage theories. This is exemplified by a recent appellate court decision affirming an arbitration award containing “head start” damages. These damages represented the benefit to the defendant for the development and operational head start that it received through the misuse of the information. The “head start” damages were a means to quantify the benefit of the increase in value in the defendant’s business resulting from its being several years ahead of where it would have been but for the wrongful conduct. These damages were distinct from the saved development costs which provided an additional benefit to the defendant.
Regardless of the theory of damages, the bottom line is that – assuming a litigant can prove misappropriation occurred – recoveries for plaintiffs in trade secret cases continue to be large. For companies, taking precautions to ensure that new employees do not bring with them trade secrets owned by their former employer can prevent costly litigation down the road.
Other trends to watch
A couple of other trends are worth watching. A common defence raised in trade secret cases is "unclean hands". In asserting this defence, a defendant seeks to shift the inquiry away from the alleged misappropriation toward the complaining party’s conduct in order to invalidate a claim. For example, employees often access their social media accounts from work computers or other devices. Employers routinely monitor such access but, depending on how employers monitor this information and what they do with it, the facts can give rise to an unclean hands affirmative defence. Recent case law affirmed that to provide a viable defence, there needs to be a degree of relatedness between the employer’s conduct and the trade secret claim being pursued by the employer. The lesson from this is that, in investigating potential trade secret misappropriation, a company needs to consider the implications of its actions on its potential lawsuit.
At the state level, there is a growing legislative focus on non-compete agreements. A number of states are restricting by statute the enforceability of employee non-compete agreements and non-solicitation agreements. Likewise, legislation was proposed in the U.S. Senate that would significantly curtail the use of such agreements. As a result, trade secret claims are likely to increase as employee mobility remains high as companies attempt to protect their assets.
Trade secrets remain essential to the competitive success and financial viability of many businesses. Claims alleging trade secret misappropriation are likely to continue to rise. Companies would be well suited to examine their policies and procedures regarding their confidential information and the protections in place to maintain that information in confidence. Looking at these issues on the front end can lead to increased success on the back end if a claim needs to be pursued.