Trade Secret Litigation
Trade secret litigation involves theft, infringement, violations, and lawsuits concerning trade secrets. A trade secret is a form of intellectual property that is afforded protection at both the federal and state levels. Federal trade secret laws include the Uniform Trade Secrets Act (UTSA) and the Defend Trade Secrets Act (DTSA) which was enacted in 2016.
While the DTSA statute uses complex language and lists a variety of covered forms of intellectual property – including devices, patterns, designs, prototypes and computer programs – the definition of a trade secret typically comes down to three issues:
- A business secret unknown to competitors.
- The secret gives its owner a competitive advantage in the marketplace.
- Reasonable efforts are made to prevent discovery of the secret.
In many cases, a trade secret can be something that could otherwise be registered as a patent. If this were done, however, it would immediately face the limitations of patent protection. Most notably, it would fall into the public domain after 20 years. Unpatentable property can also be considered a trade secret. This could include customer lists, supplier lists, financial data and more. For more information regarding a patent vs. trade secret, see our trade secret page.
Generally, trade secret protection is meant to fight against misappropriation. The Uniform Trade Secret Act offers a definition of misappropriation. It essentially breaks down to using or disclosing a trade secret when it is known or should have been known that it was obtained through improper means.
The Defend Trade Secrets Act
While versions of the Uniform Trade Secrets Act have been adopted by most states, it was the Defend Trade Secrets Act that gave expanded federal protections. It did this by providing a federal cause of action for the first time in U.S. history.
Under the DTSA, trade secret owners may seek state or federal remedies in federal court. Although the DTSA is similar to the UTSA, there are several notable differences including:
- Property can be seized in order to prevent further dissemination or propagation of trade secrets.
- Monetary remedies include royalties and increased damages when misappropriation was “willful and malicious.”
- S. companies and citizens can be held liable for foreign misappropriation they were involved in.
- Since state and federal actions can be heard, there are procedural advantages.
Rather than trumping state laws, the Defend Trade Secrets Act merely allows for an additional cause of action. Under California trade secret law, for instance, disclosing, using and even acquiring trade secrets improperly can result in fines of up to $5,000. Intellectual property owners can receive reasonable royalties, real damages, injunctions, attorneys’ fees and even punitive damages. Thanks to the DTSA, these remedies can be sought in the same federal case.
Trade Secret Cease and Desist Letter
Trade secret litigation isn’t necessary in every case. In fact, many instances simply require the sending of a trade secret cease and desist letter. Like other cease and desist demands, this will let the alleged infringing party know that you’re taking your intellectual property rights seriously. Statistics show that only three percent of legal disputes end up in court, and this is a testament to how successful cease and desist letters can be.
It is important that your letter contain appropriate information. Failure to include any of these points could result in a defendant continuing its infringement:
- Names and contact information of trade secret owner and alleged violator.
- Demand to immediately cease any activities related to misappropriation.
- Demand that these activities never be resumed.
- Specific trade secrets that have been misappropriated.
- Means of misappropriation.
- The circumstances that surround the alleged misappropriation.
- Further legal actions that may result from failure to comply.
- Time limit for expected response.
If an infringer continues the misappropriation despite the demand to stop, courts may view their acts as willful which can lead to a larger damage award.
Of course, there may be times when you’re on the receiving end of a trade secret cease and desist letter. The most important thing in this situation is to not panic. We strongly advise that you have an intellectual property lawyer review your situation and respond to the letter. Even if a letter is overly vague, you should always have an attorney respond. Failure to do so may convey weakness from your side, and this could result in the sender pursuing litigation. Here are a few things to consider before responding:
- What is the sender claiming you misappropriated?
- Did you have access to the alleged misappropriated material?
- Did the material in question provide a competitive advantage to the sender?
- Was this information actually secret and kept confidential?
- Did you violate a non-disclosure agreement or otherwise act inappropriately?
All these considerations will come into play when you respond to the trade secret cease and desist letter. Your goal is to explain yourself in such a way that the sender decides not to pursue litigation. Remember that companies don’t like competition, so if you’ve joined a rival corporation or started your own venture, these letters may be used as a fishing expedition or scare tactic to stop you from competing. Pushing back with the assistance of an aggressive intellectual property attorney often ends these attempts.
Unfortunately, cease and desist letters – or responses to them – are not always the end of the story. If the two parties disagree over the facts presented or real damages have already been sustained, trade secret litigation may be the only viable course of action.
Before filing a lawsuit, though, it’s important to understand that trade secret protection doesn’t provide complete protection. If information is independently discovered – including through reverse engineering – or if the secret isn’t maintained, use of said information may not violate trade secret law.
In the event of a valid trade secret lawsuit, a plaintiff can expect a few outcomes upon victory:
- Injunctive relief: This is the most common form of relief. Courts can order a party to cease their misappropriating activities immediately.
- Damages: Courts can order the payment of royalties or real monetary damages (includes money lost by plaintiff and anything earned by defendant). Damages can be doubled if willful and malicious intent is proven.
- Attorneys’ fees: These fees are typically awarded if misappropriation was willful and malicious. If the defendant wins, they may receive compensation if the court believes the claimant acted egregiously.
Statistics have shown that 75 percent of employees steal from their employer at least once. Although patent, copyright and trademark litigation are more prevalent, there’s been no shortage of trade secret litigation over the years. In fact, there were about 900 cases filed yearly between 2009 and 2017, with the high point being 1,134 cases in 2017.
Fortunately, many companies respond appropriately to trade secret theft. PepsiCo, for instance, contacted Coca-Cola when two former employees tried to sell their secret formula. It’s also the case that not all companies are this honest. In fact, the Justice Department recently brought a case against electronics giant Huawei for offering incentives for trade secret theft.
The overwhelming bulk of trade secret cases that land in court are decided in favor of the plaintiff. A full 837 of the cases between 2009 and 2018 had the complainant emerge victorious by either default judgment or consent of the defendant. Of the cases that were decided at trial, nearly 72 percent saw the plaintiff successful. While trade secret litigation may statistically favor plaintiffs, though, it doesn’t necessarily mean that those accused of violations shouldn’t fight back.
Trade Secret Affirmative Defenses
Affirmative defenses are often used in court when a defendant can provide evidence negating liability. This is even the case if all claims from the complaint are proven true. There are a variety of trade secret affirmative defenses, but the following are some of the most common seen in federal court.
Statute of Limitations
Depending on the state, the statute of limitations for trade secret misappropriation claims is between three and five years. The clock on the statute of limitations begins the moment the claimant knows of misappropriation or should have reasonably known.
For a claim of trade secret misappropriation to be successful, it must be proven that the information in question isn’t generally known. If a defendant can prove that this material is readily ascertainable through legitimate methods, they likely won’t be held responsible. This could include information that’s published in journals or even observed through public observation.
Failure to State a Claim
If the complaint fails to properly plead a valid cause of action, a defendant can attack the pleading by filing a Motion to Dismiss due to a failure to state a claim.
The legal principle of estoppel dictates that a party cannot make claims that their previous claims or actions contradict.
If you have any questions related to trade secret litigation, please contact us contact us today for a consultation.