Trade Secret Litigation Continues to Soar

With the rapid rise of the technology industry and the increase in worker mobility, the conditions have been ripe for a corresponding growth in trade secret litigation. Recent studies confirm that lawsuits in this area have been trending upward, and will likely continue to multiply given the huge amounts at stake.

The most recent update to the Intellectual Property and the U.S. Economy report estimates the value added by intellectual property intensive industries at $6.6 trillion—up more than 30 percent since 2010. With that kind of valuation, the potential for misappropriation is not far behind.

Setting the Stage

Trade secret theft accounts for approximately 1–3 percent of U.S. gross domestic product, according to CREATE.org and PricewaterhouseCoopers, and is as high as $600 billion, according to the 2017 Update to the IP Commission Report. Technological developments have made misappropriation easier for thieves. Gone are the days when an employee would have to sneak papers out of the office; now, he or she can simply email, upload, or photograph the documents.

Worker mobility has also increased the potential for misappropriation. “Regular job changes have become de rigueur in high-tech industries,” with employees routinely joining competitors of their former employers, observe Douglas R. Nemec, P. Anthony Sammi, and Scott M. Flanz, of Skadden, Arps, Slate, Meagher & Flom, LLP’s intellectual property group in a recent article.

Trade Secret Cases by the Numbers

Federal trade secret cases increased 14 percent year-over-year between 2001 and 2012. Since 1988, federal trade secret litigation has been growing exponentially, with the rate of filing doubling between 1988 and 1985, and doubling again between 1995 and 2004. Trade secret cases more than tripled from 2004 to 2014. Judges in U.S. district and state appellate courts issued rulings in 325 trade secret cases in 2015—roughly three times the number in 2005.

Of those, most involved the information, communications and technology industries, followed by chemicals, consumer products, healthcare and utilities. Business information, including customer lists, technical know-how and software are the most commonly stolen trade secrets.

Along Came an Act

The 2016 enactment of the federal Defend Trade Secrets Act (DTSA) set the stage for even more trade secret litigation. Specifically, the DTSA provides a civil cause of action “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA offers uniform, and broad, definitions for the critical terms “trade secret” and “misappropriation,” thereby allowing a wide range of proprietary information to fall within its purview. Whistleblower protections are available to individuals who disclose trade secrets to report illegal activity.

Violation of the DTSA can result in injunctions “to prevent any actual or threatened misappropriation,” damages based on actual loss and unjust enrichment, or a reasonable royalty rate, exemplary damages, and attorneys’ fees. But perhaps the most draconian measure is that allowing for the civil seizure of assets on ex parte application, which requires demonstrating “clearly [by] specific facts” several conditions, including that “other equitable relief would be inadequate . . . because the party to which the order would be issued would evade, avoid, or otherwise not comply” with the ordered relief. “Given the high evidentiary bar, it is not too surprising there appear to have been only two public orders granting civil seizure under the DTSA since it was enacted,” observes T. Brandon Waddell, a business litigator at Caplan Cobb LLP, in a 2018 article authored for the ABA Section of Litigation’s Business Torts & Unfair Competition Committee.

DTSA in Action

Pre-DTSA, companies were largely stuck in state court, unless diversity jurisdiction or an independent federal claim provided grounds for removal. The DTSA, however, extended federal protection to trade secrets, with the intent of providing uniform decisions under a uniform law.

Since its enactment, trade secret case filings have increased significantly. According to the recently released Trade Secret Litigation Report, filings increased by more than 30 percent in 2017. So far, in 2018, trade secret case filings are on pace to exceed the 1,134 matters filed in 2017. By that same token, through mid-2018, many of the cases filed invoking the DTSA have already concluded, and of those, another half ended within six months of filing. It is still too early, however, to glean any meaning from the DTSA’s impact on damages in trade secret lawsuits.

Under the DTSA, civil trade secret misappropriation cases can now be fought in the same arena as other intellectual property disputes. Judging by the numbers, there are more of those fights now than ever, and companies are taking them to federal court.