For decades, companies have turned to federal courts to protect valuable business assets, such as trade secrets. Legal action has expanded over the years and recent trends have set the foundation for a continuing surge in federal trade secret litigation. From the makeup of certain famous fragrances and manufacturing processes to computer algorithms and customer lists, trade secrets often play a vital role in successful business operations, but exposure of these important assets to an unwanted party can be detrimental to a company, whether it be a small startup or a Fortune 500 company.
With the digitization of intellectual property and ongoing competition across industries—among other macro trends—companies are at elevated risk of trade secret theft. In addition, shifts in patent law, which have generally weakened that form of protection, may influence how companies protect these assets and pursue remedies. Given these conditions, businesses are increasingly engaging in legal proceedings specific to trade secrets.
Stout’s study of trade secret decisions
Following the enactment of the Defend Trade Secrets Act (“DTSA”) in 2016, Stout began an independent analysis of federal trade secret cases decided over the 29-year period from 1990 through the summer of 2019, studying the historical impact of these matters. Our initial searches found that over 10,000 cases with trade secret claims were filed during the period.
Using Lexis Advance’s Jury Verdicts and Settlements database, Stout identified 639 verdicts and settlements for cases including trade secret claims. For each of the 639 matters, we reviewed corresponding dockets in order to eliminate duplicate cases and those cases that did not truly relate to trade secret claims or counterclaims, resulting in 257 unique trade secret cases in the final study.
In our study of these 257 cases, we identified and tracked over 45 different characteristics across multiple informational categories of the lawsuit. These include items such as jurisdictional information, background of the parties, the nature of the trade secret(s) at issue, and related causes of action or counterclaims. Our research also captured information pertaining to the use of experts, settlements and judgments, damages and other awards, and post-trial results. In our full report, our research and results have been summarized to highlight notable observations and augment our ongoing monitoring of the trends in trade secret litigation.
Sample of findings
One informative element of this study is the nature of the trade secrets themselves. Unlike patent litigation, federal trade secret laws cover any type of information that constitutes a trade secret to a particular business, so long as it meets the requirements of independently derived value and reasonable efforts to maintain secrecy. For the purposes of our study, we focused on six classifications of trade secrets: business relationships, designs, method/process, products, financial information, and marketing information.
In 46% of the cases studied, multiple types of trade secrets were included as part of the allegedly misappropriated information. Business relationships represented the largest type of trade secret at issue, occurring in 37% of all cases studied. Following business relationships were trade secrets pertaining to designs at 35% and methods/processes at 34%. Often, the categories of financial information and business relationships overlap, resulting in matters in which customer lists, proprietary pricing, and other marketing and financial records are at issue in some combination.
Certain industries have experienced a higher degree of litigation pertaining to trade secrets than others. Our findings show that 26% of trade secret cases reviewed involved companies in the industrials sector. Other notable industries with high percentages of the overall caseload included the information technology, consumer discretionary, and healthcare sectors. The information technology, consumer discretionary, and healthcare sectors also experienced steep increases in the number of cases since 2000.
Our review of case filings found that plaintiffs often favored certain jurisdictions, with the Eastern District of Texas and the Northern District of Illinois being the most active district courts for trade secret decisions. Federal district courts in Texas alone were responsible for nearly 20% of trade secret case decisions. California, Illinois, Colorado, Florida, and Massachusetts rounded out the top 50%, each with between 6% and 9% of total cases.
A striking data point was the proportion of rulings in favor of plaintiffs. Of the cases that ultimately resulted in a verdict, plaintiffs received a favorable ruling 68% of the time, while defendants/counterclaimants received a favorable ruling in only 24% of cases, with split decisions occurring in the other 8%.
Damages in cases involving trade secrets totaled approximately $3 billion, with the five largest awards each being over $100 million. When reviewing the damage awards by state, a clear trend emerged between the number of cases adjudicated in a particular district or circuit and the average size of the awards. The study found that, with some exceptions, the districts with increased trade secret activity tended to have more moderate awards than those districts with less activity.
Recent patent cases may lead to more trade secret litigation
Recent decisions in the patent space have invalidated the patentability of certain types of subject matter as a means to protect corporate assets. These cases include Mayo Collaborative Services v. Prometheus Laboratories, Inc. (“Mayo”);The Association for Molecular Pathology v. Myriad Genetics (“Myriad”); and Alice Corporation Pty Ltd. v. CLS Bank International (“Alice”).
Mayo, Myriad, and Alice illustrate an evolution of patent law that may lead to a shift wherein companies opt to protect what were once patent-eligible materials via trade secret protection. Additionally, given the high invalidation rate of patents on Section 101 grounds, interested stakeholders have justifiable concerns regarding the future value of patents involving software and life sciences and the potential fallout of US investment in these important industries. Of course, trade secrets may not be the answer in all cases. If the subject matter is easy to reverse engineer, trade secrets could have little value. However, where secrecy can be maintained, trade secrets may be a useful and viable alternative.
Developing strategies for ensuring that software and processes remain protectable as trade secrets offers an alternative path to safeguarding innovations, which in turn may drive additional trade secret litigation as protection shifts from patents to trade secrets.
Summary of conclusions
Trade secret litigation has been on the rise for a number of years and will likely continue this upward trajectory. Three factors are particularly evident when considering this increase in activity:
(1) Litigation activity will continue to expand due to the DTSA. The DTSA not only provides business owners the opportunity to leverage stronger, more consistent rules of procedure, protections, and enhanced remedies, but the ability to seek remedies in federal court, state court, or both;
(2) Based on recent decisions in patent litigation, we expect more companies will opt to protect certain business assets through established trade secret practices as opposed to patenting; and
(3) Expanding workforce mobility, as well as technological advances and the digitization of information, are expected to continue to drive the increased trade secret-related litigation associated with labor and employment matters.
As a result of these factors, attorneys and industry experts alike must be increasingly mindful of the nuances impacting where a trade secret case is filed, the damage remedies available in that venue, and emerging precedents available to practitioners for determining damages.
This article originally appeared in the Spring/Summer 2020 issue of the Stout Journal.