A subtle but important shift is taking place in the way many trade secret cases are being litigated and tried. In the not-too-distant past, the vast majority of trade secret owners focused primarily on securing an injunction against a former employee. Now some trade secret owners are increasingly pursuing claims for damages, usually against a large partner, vendor, customer, or competitor with substantially deeper pockets. Because damages claims are generally determined by a jury, this development presents a potentially seismic shift in how trade secret cases are litigated. As explained below, several of these cases have resulted in substantial verdicts and more closely resemble the path taken in patent damages cases than the path taken in traditional trade secret cases. This article analyzes this development, offers some theories on why these changes are taking place, and provides thoughts on how clients and lawyers can effectively adapt.
It has long been conventional wisdom that a trade secret owner’s workforce poses the greatest threat to its trade secrets. This is based in part on empirical evidence (see David S. Almeling et al., “A Statistical Analysis of Trade Secret Litigation in Federal Courts,” 46 Gonz. L. Rev. 57 (2010) (finding that 85 percent of federal trade secret cases arose from the employment relationship or relationships where the parties knew each other well)). It is also based on the collective and practical experience of commentators and thought leaders in this area. In trade secret cases brought against employees, employers also frequently asserted a companion claim to enforce a restrictive covenant, such as a noncompete or non-solicitation agreement. As a result, lawyers and law firms who traditionally represented employers and were well versed in labor and employment litigation tended to dominate this space.
In many restrictive covenant cases, information—the focus of most trade secret cases—was only one of an aggrieved former employer’s guiding concerns, and the employer’s relationships with customers, employees, and vendors were equal, if not greater, considerations. Acting immediately to protect those relationships from further disruption could frequently restore the relationships and resolve a dispute before significant damage occurred. If the departing employee was ordered to exit the field for a period of time, focusing on the details of particular secrets could be unnecessary. Familiarity with restrictive covenant case law and the ruses used by departing employees to evade them (such as a salesperson soliciting key customers to move to a new business before telling the soon-to-be former employer that he or she was resigning) enabled experienced lawyers to obtain an efficient early victory for their clients often without needing to delve into the details of misappropriated technical information. Injunctions—most frequently a temporary restraining order or preliminary injunction—proved to be the most efficient vehicle for achieving a trade secret owner’s goals of preventing further damage, stabilizing business relationships, and bringing a dispute with a former employee to a quick conclusion.
While injunctive relief was more frequently sought, there have long been damages cases arising out of the misappropriation of trade secrets. Some have been mammoth—in the hundreds of millions of dollars or even more. One example is DuPont v. Kolon Industries, involving not only the U.S. Attorney’s Office for the Eastern District of Virginia’s indictment of Kolon and a number of top executives for allegedly engaging in a multi-year campaign to steal trade secrets related to DuPont’s Kevlar para-aramid fiber and Teijin Limited’s Twaron para-aramid fiber but also a civil action resulting in damages of $225 million.
Some of the biggest verdict cases arose where the trade secret owner found out well after the fact that the trade secrets had been misappropriated and were already incorporated into a commercially available product, which could make injunctive relief less meaningful. Some involved situations in which the plaintiff had reason to believe that misappropriation was occurring but initially lacked hard evidence. Others involved international disputes in which the course of the litigation was protracted. But at the end of the day, virtually all included, somewhere in the link, a former employee who had disclosed or used information of a previous employer. Given the potential for a large jury verdict, a skilled attorney could use a claim for damages as a sword of Damocles to discourage violations and as a safety net in the event of misappropriation. But caution should be used—a suit for money damages against a former employee could backfire. The employee might not be collectible, and a deeper pocket, such as a new employer, might be able to argue that it had no reason to know of the misappropriation and therefore cannot be liable.
It has long been an article of faith in the trade secret community that the loss of a trade secret was very difficult, if not impossible, to monetize. This view fit squarely into the concept of irreparable injury, the critical element for an injunction and, by definition, present when monetary relief is either unavailable or inadequate. Trade secret owners seeking injunctive relief have long argued that the need for an injunction is obvious once the owner shows a likelihood of success in establishing that it possesses a trade secret and that the trade secret is at risk of further use or disclosure. After all, “[a] trade secret once lost is, of course, lost forever.” That seminal statement by the U.S. Court of Appeals for the Second Circuit, in FMC Corp. v. Taiwan Tainan Giant Industrial Co., became the trade secret owner’s mantra and was the centerpiece of so many injunction briefs that it was almost a cliché.
Yet, that mantra has undergone increasing scrutiny by the courts, and the Second Circuit has clarified that its language had been misconstrued. Yes, if a trade secret is lost, it is lost forever. But in a particular case, is the trade secret really at risk of loss? Will it be used absent intervention? And if it is used, can the value of that use be readily calculated? A host of decisions throughout the country have begun demanding evidence of some ongoing risk to the trade secret absent relief, suggesting that injunctive relief should not be seen as automatic.
Although injunctions may be more commonly used, especially where a claim for damages does not make economic sense, that paradigm may now be changing.
Three cases in the last year show how the trade secrets landscape is shifting. On May 9, 2022, software company Appian Corp. persuaded a Fairfax County, Virginia, jury to award it $2 billion for the theft of its trade secrets by its competitor Pegasystems Inc. The jury found that Pegasystems had obtained access to the details of Appian’s computer code by compromising a consultant and had falsified the identities of its own management team members to obtain access to portions of a commercially licensed program. On September 19, 2022, Goodyear Tire & Rubber Company was hit with a $65 million verdict by an Akron, Ohio, jury for the misappropriation of trade secrets that CODA Development SRO had disclosed to Goodyear in the hope of forging a long-term marketing relationship. See CODA Dev. v. Goodyear Tire & Rubber Co., No. 5:15-cv-1572 (N.D. Ohio 2021). And, on October 25, 2022, a Detroit jury awarded software company Versata $105 million for the theft of its trade secrets and breach of a software licensing agreement by Ford Motor Company.
There are several theories for why attorneys advising trade secret owners are considering damages cases more frequently. First, perhaps the most significant development may be the perception that recent U.S. Supreme Court decisions have eroded the protection previously afforded by patents, particularly in the software industry. See Alice Corp. Pty. v. CLS Bank Int’l, 573 U.S. 208 (2014), and Mayo Collaborative Servs. v. Prometheus Labs., 566 U.S. 66 (2012). The Alice decision’s impact on the protection available for software patents has been singled out as a reason for greater reliance on trade secret law. Indeed, it bears mentioning that two of the verdicts described above (Appian v. Pegasystems and Versata v. Ford Motor) involved disputes over the misappropriation of software trade secrets.
The Alice decision may have ripple effects for other new technologies, leading to trade secret protection becoming the preferred form of protection for those technologies. Consider artificial intelligence (AI). As recent publications have predicted, the importance of trade secret protection for AI will likely grow because many AI-related inventions are implemented through software processes running on computers. Other legal developments may contribute to this trend toward trade secret protection for AI. Trade secret protection may be the only available option for AI-generated inventions where AI is the sole inventor (see Thaler v. Hirshfeld, 558 F. Supp. 3d 238 (E.D. Va. 2021), which held that an AI machine cannot qualify as an inventor under the Patent Act). To the extent that trade secret protection displaces patent protection in some emerging technologies, trade secret litigation will continue to boom.
Second, the America Invents Act appears to have caused significant upheaval in how patent cases are litigated, leading to unexpected consequences for trade secret litigation. Most notably, the enactment of the law led to the increasing importance of the Patent Trial and Appeal Board as a primary forum for patent challenges. The growth of litigation before this specialized administrative tribunal in Washington, D.C., appears to have affected traditional patent infringement actions litigated in federal courts around the country. Many patent litigators with formidable jury trial experience appear to have turned their attention to litigation involving technical trade secrets. These lawyers know how to work up a large damages case (think of Georgia Pacific’s royalty measure) and are skilled at taking a very complex technology and set of facts and reducing them to an understandable package that can be processed by jurors unfamiliar with the underlying substantive intellectual property.
Third, the enactment of the Defend Trade Secrets Act in May 2016 provided a federal forum to patent and trade secret lawyers experienced with jury trials. Because of the patent statute and other federal statutes, these lawyers are comfortable managing their litigation in federal court, so the act’s enactment may have accelerated this development. This stands in contrast to trade litigation before 2016, a significant amount of which was in state courts because of the absence of a federal question.
Fourth, one of the fulcrums of past trade secret litigation—the covenant not to compete and the non-solicitation agreement—has begun to erode. Legislators (state and federal) and regulators (the Federal Trade Commission and state attorneys general) have redoubled their efforts to limit or ban the use of restrictive covenants by employers. In this environment, courts have become more exacting in their review of the proofs needed for an injunction. This legislative and regulatory pressure, combined with increasing judicial ambivalence, have reduced the availability and potential effectiveness of some early injunctions.
Fifth, the emergence of litigation funding may be fueling some of these cases. In the past, small companies could not financially stand toe-to-toe with larger adversaries and match them in a costly damages case. But now that some smaller companies can get help financing more costly litigation, they can better survive the long haul of a damages case and get their case to a jury.
Sixth, the rise of computer forensics may be contributing to a rise in damages cases. Until relatively recently, employers typically relied on information they were able to develop from their own documents and from reports by their own customers. But the increased availability of sophisticated computer forensic tools can enable a trade secret owner to learn of previously undetected damage and a risk that misappropriated secrets will continue to be used. “Mouse droppings” can reveal that an employee passed information to a new organization or to other salespeople who are not subject to restrictive covenants and who are using the information even after the original employee’s acts are enjoined.
Finally, trade secret cases are tailor-made for juries. They present modern-day allegories of right and wrong, stealing and betrayal, battles between David and Goliath. And because juries are famously unpredictable, trade secret cases inject even greater uncertainty and risk into a trial because these disputes arise from claims of intentional misconduct. This means there is a greater risk of a runaway verdict, punitive damages, or an award of attorney fees—multipliers that add value to any litigation. And because trade secret cases frequently present factual questions, they may survive a motion for summary judgment and put pressure on a defendant to settle for fear of the uncertainty of a jury trial.
This increase in jury trials seems likely here to stay. Important developing technologies may rely on trade secret protection, which means disputes over those technologies will more likely end up in federal court and litigated under the Defend Trade Secrets Act. With potentially more cases, higher stakes, and larger defendants, money damages will be an attractive option to trade secret owners.
Trade secret owners and their lawyers who are steeped in the tradition of securing injunctions will need to adapt for these cases. While an injunction will still be an important remedy for many trade secret owners (particularly in cases focused on a departing employee), they will have to be prepared for this trend toward damages that is taking hold in more and more cases.
