This first appeared in IPWatchdog.com on May 18, 2020.
“Regardless of the differences between the reports, they do highlight that there are many factors, apart from the merits of the case, that may have an impact on the final outcome, including and perhaps most importantly, where a trade secret case is filed.”
On May 11, 2016, President Obama signed into the law the Defend Trade Secrets Act (DTSA) which extended the Economic Espionage Act of 1996 (EEA), which provides a broad basis for civil federal jurisdiction for the theft of trade secret thefts. Thus, trade secret owners can sue in federal court so long as there is a connection between the trade secret and interstate or foreign commerce. However, the DTSA does not preempt states laws and parties can still bring an action under a state’s version of the Uniform Trade Secret Law. Two recent reports highlight a number of significant findings that are relevant to companies looking to protect and defend their trade secrets: In April 2020, finance consulting firm Stout Risius Ross, LLC published its 2020 “Trends in Trade Secret Litigation Report (the SR) and Lex Machina released its 2020 Trade Secret Litigation Report (LMR), in which it summarized data from the past decade and compared it against data from the previous year’s report.
Trade Secret Filings are Up—But Not Overwhelming
At the time of the passage of the DTSA, it was widely expected that that the statute would lead to both an increase in the general number of trade secret cases filed in the United States and in an increase in the number of trade secret related cases filed in federal court. According to the SR “[t]he DTSA is likely to result in increased trade secret litigation filings as business owners leverage stronger, more consistent rules of procedure, protections, and enhanced remedies against unwarranted exposure of their trade secret information.”
Both of the reports support this conclusion, although not without some important qualifications, especially with regard to the LMR. According to this report, trade secret case filings were steady between 2010 and 2016. However, as expected, the filings increased from 469 in 2016 to 897 in 2017. This increase coincides with the May 2016 enactment of the DTSA. Although this increase is substantial, it does not support the concern voiced by opponents of the DTSA that it would cause federal courts to become overwhelmed by a deluge of trade secret cases. Indeed, after this initial short uptick, pleadings with DTSA claims have not increased that much over the past three years; from the aforementioned 897 cases filed in 2017, 979 cases were filed in 2018 and 1,008 cases filed in 2019.
In contrast, according to the SR, “[i]n the five years preceding the DTSA, 2010 through 2015, approximately 1,100 federal trade secret cases were filed per year. From 2017 through 2019, after the enactment of the DTSA, approximately 1,400 cases were filed per year, demonstrating the increase in federal trade litigation.” The basis for this large difference is unclear, but it does highlight the difficulty of conducting surveys such as this. Regardless, there is no doubt that the number of federal trade secret cases increased substantially after the passage of the DTSA, although the amount of the increase is open to debate.
One of the most interesting and informative areas of the LMR concerns the statistics and conclusions regarding injunctive relief. Section 1836(b)(3)(A) of the DTSA provides that, with certain limitations, a court may enter an injunction (i) “to prevent any actual or threatened misappropriation,” (ii) “requiring affirmative actions to be taken to protect the trade secret,” and (iii) “in exceptional circumstances that render an injunction that render an injunction inequitable, that conditions future use of the trade secret upon payment of a reasonable royalty ….”
The LMR found that, over the past decade, more than 1,000 permanent injunctions have been entered by consent judgment as compared to only 147 which were granted on the merits. It also found that in 2019, courts granted temporary restraining orders at a 68% rate, and preliminary injunctions at a 55% rate, as compared to 70% and 60% over the past decade. The LMR cites two reasons for the denial rate for expedited relief: (1) “[m]any claimants were unable to clear the bar for a likelihood of success on the merits because the court is unable to determine if there is a trade secret,” and (2) “many courts have found there is no longer a need for injunctive relief if there is evidence the defendant gave back all materials.”
The first conclusion highlights the importance for plaintiffs to identify the trade secret with the requisite degree of specificity in order for the court to determine that a trade secret actually exists. This means, in general, that the plaintiff must point to concrete secrets, not broad areas of technology, to prevail on trade secrets claim. The failure to do so may result in a court denying the request for injunctive relief for failure to identify the trade secret with the requisite specificity. Second, plaintiffs should argue that even though the defendant has returned “all the materials” regarding the trade secret, this does not mean by itself that the court should not enter an injunction prohibiting defendant from making use of the trade secret. In other words, that the defendant has returned the trade secrets does not necessarily mean that the defendant will not make use of such materials. These are separate and distinct issues, and plaintiffs should make this clear to the court.
Betting on Trade Secrets
Another very important conclusion reached by the SR and the LMR is that trade secret claimants “tended to win” at trial. According to the SR, plaintiffs prevailed at trial 68% of the time, whereas defendants prevailed only 24% of the time. In contrast, according to the LRR, defendants “won more often during summary judgments and judgment on the pleadings.”
The DTSA provides for: (i) actual damages; (ii) unjust enrichment “caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss;” or (iii) “in lieu of damages measured by any other methods, the damages caused by the misappropriation measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.” Thus, successful plaintiffs in DTSA actions will have all three measures of damages (or a combination if no double counting) to choose from: actual losses, unjust enrichment, and reasonable royalties.
According to the LMR, the total amount of 2019 damages in trade secret cases was approximately $105 million, which was based on 15 trade secret cases, and was more than the approximate $72 million in 2018 that was based on 19 cases. The 2019 total included an award of approximately $49,000,000 in Liqwd, Inc.et al. v. L’Oreal USA, et al, which also included damages for breach of contract, and willful damages. The trade secret damages apparently amounted to only $9.5 million. Regardless of whether the entire amount is included in the 2019 damage total, the total amount of 2019 damages is less than in four years of the previous decade. Further, the LMR does not break down the basis for the damage award, for example, whether it was based on actual damages, unjust enrichment or a reasonable royalty.
The SR provides additional details about trade secret damage awards, including for example, that damages based on trade secret misappropriation from 2002 were awarded in 52% of the cases amounting to approximately $3.4 billion, and there were at least five damage awards of more than $100 million. The 10 largest damage awards accounted for $2.3 billion, nearly two-thirds of the total damage awards awarded over the 29-year analysis period considered by the SR. The median award for this period was $2.2 million. The SR also contains a breakdown on the amount and the average size of the damage awards by state.
The DTSA also provides for an award of attorney’s fees to the “prevailing party” if the “claim of a misappropriation is made in bad faith,” or “a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously appropriated.” Unfortunately, neither the LMR, nor the SR provides information on the amount of attorney’s fees, if any, that courts may be awarding under the provision.
Another important area in which the LMR and the SR apparently differ is the amount of time that it takes for trade secret cases to go to trial. The LMR indicates that in 2019 it took approximately 2.4 years on average for a trade secret case to go to trial, whereas, the SR found that, since 2013, the average “has spiked to over four years.” Importantly, the SR also found the length of time to go to trial also varies greatly among the states, ranging from an average of 1.1 years in New Hampshire to 6.8 years in Louisiana, neither of which is a hotbed for trade secret litigation. Regardless, the timing of obtaining a judgment may be extremely important to a plaintiff because, without such a judgment, and in the event that the plaintiff did not obtain an injunction in the interim, a defendant may be using the trade secret, which can cause irreparable injury to the plaint.
The Key Factor: Jurisdiction
Regardless of the differences between the reports, they do highlight that there are many factors, apart from the merits of the case, that may have an impact on the final outcome, including and perhaps most importantly, where a trade secret case is filed. In fact, the jurisdiction in which a trade secret case is filed may not only determine the length of time that a case may proceed to judgment, but also the amount of damages, and the specificity with which plaintiffs must describe the trade secrets at-issue, which can vary greatly from jurisdiction to jurisdiction. Accordingly, it is strongly recommended that a litigant consider all of these factors, and others, before deciding if, when, and where to bring a trade secret case.