Q&A: Trade secret disputes
June 2024 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
June 2024 Issue
FW discusses trade secret disputes with Kurt Kappes, Galit Kierkut and Ewen Mitchell at Greenberg Traurig, and Robert Sikellis at Novartis.
FW: Could you provide an overview of key trends in trade secret disputes over the past 12 months? To what extent have you seen a rise in such cases?
Kierkut: A key trend is the more frequent use of the Defend Trade Secrets Act (DTSA) in departing employee cases. I expect this trend to continue given the recent enactment of the Federal Trade Commission (FTC) rule attempting to ban non-competes, which is set to go into effect later this summer. While we expect legal challenges to the rule, many companies are gearing up to restructure their employment agreements to comply with both the FTC rule and state narrowing of non-competes. So, I expect that use of the DTSA in departing employee litigation will continue to rise and restrictive covenant attorneys who are used to practising in state court and fighting over whether there is sufficient confidential information or customer relationships to protect, warranting enforcement of a non-compete, are now going to need to become expert in DTSA litigation.
Mitchell: Among the key trade secret disputes trends in recent months has been the focus on ensuring agreements define confidential information tightly and clearly. A definition which covered “including but not limited to any information that would reasonably be regarded as confidential” was described as “hopelessly wide” in the 2024 case of Derma Med Limited v Ally. It has also become increasingly common for speedy trials to be ordered in trade secret dispute cases, since often the period of restriction will have expired totally or substantially before trial unless an order for expedition is made. So, regardless of whether injunctive relief is ordered, it will be rare for an application for speedy trial to be refused. In addition, although not linked specifically to trade secrets cases, but generally in relation to restraint of trade cases, there is a feeling that such clauses are becoming more and more subject to forensic analysis in court and are therefore increasingly fragile as a means of protecting a company’s business.
Sikellis: Data shows there was a surge in federal court trade secret case filings following the passage of the DTSA in 2016. For example, while there were 1100 federal court trade secret filings in 2013, this increased substantially, to nearly 1400 in 2017. The DTSA created a federal statutory claim for relief, allowing owners of trade secrets the option to sue for misappropriation under federal law, in addition to state law. Like state laws that address trade secret misappropriation, the DTSA provides for several remedies including injunctive relief and damages. Another notable trend was a slight dip in federal trade secret case filings during the coronavirus (COVID-19) pandemic, to 1236 in 2021 and 1129 in 2022. In 2023, 1231 cases were filed, so the number of cases that are being filed post-pandemic is again increasing.
Kappes: One key trend is that the size of the verdicts is increasing. In 2022, a Virginia jury awarded a $2bn dollar award for an unlawful campaign of corporate espionage by a Massachusetts-based software company against its rival, a Virginia-based software company. And, in 2020, an Illinois jury awarded Motorola Solutions, Inc. $764m in damages for misappropriation of its trade secrets by a foreign competitor who hired three of Motorola’s engineers and used Motorola’s trade secrets to replicate the company’s digital radio technology. Similarly, in 2020, a Manhattan jury awarded an $855m-dollar verdict to a software company whose trade secrets were misappropriated by a subcontractor after the relationship between the two companies went south. Relevant to the case’s outcome was the fact that a forensic examination of the subcontractor’s devices revealed that it had been actively collecting the software company’s trade secrets for its own future work.
“Trade secret disputes will continue their rapid growth in the coming years as a result of advances in technology and an increasing ability to share large swathes of data very easily.”
FW: How has the implementation of the EU Trade Secrets Directive affected the protection of trade secrets within the EU?
Mitchell: Prior to the introduction of the European Union’s (EU’s) Trade Secrets Directive, the relevant national laws of the 27, then 28, member states were hugely varied in their scope, strength, effect and legal basis. The Directive was intended to impose a minimum level of protection, with much delegated to the national law. However it included, for the first time, a universal definition of a trade secret and infringing acts including the important concept of a ‘trade secret infringing product’ which cannot be sold in the EU, even though the misuse of the trade secret concerned occurred elsewhere. It also required member states to make available specific remedies to trade secrets holders. It is undeniable that implementation of the Directive has significantly improved the position of trade secrets holders, particularly in member states where little effective protection previously existed.
FW: To what extent are laws harmonised across the EU? Is the position in the UK different following Brexit?
Mitchell: The UK implemented the Trade Secrets Directive in 2018 before Brexit and it remains part of UK law. Previously, the UK gave substantial protection to those claiming misuse of commercial confidential information under the law of breach of confidence, as well as protection for private information under the law of misuse of private information. As such, implementation of the Directive had a minimal effect in the UK, but the new EU definition of a trade secret – in particular the need to take reasonable steps to protect the information – has changed the scope of information protected. Future decisions of EU courts on interpretation of the Trade Secrets Directive will not directly bind courts in the UK, so it remains to be seen whether there will be divergence between future EU decisions and those of the UK courts interpreting the new UK law.
“The more that restrictive covenants are viewed in a harsh light by the courts, the harder it becomes to protect trade secrets.”
FW: How does the shifting area of enforcement of non-competes impact trade secret policy and protections?
Mitchell: In recent times, the UK government has proposed far-reaching reforms of the law on restraint of trade. As yet, this has not come to fruition, but it remains a possibility. Alternative options that were considered during the consultation process included limiting restraints to a maximum of three months or requiring payment if a restraint on competition is to be enforced, as is the case in some European countries. The risk that non-competes may not survive in their current form has led to an increased focus on non-disclosure agreements (NDAs). These are easier to enforce as they rely on a contractual obligation and their existence serves as contemporaneous evidence that the information provided to the recipient was being provided in circumstances imparting an obligation of confidence. The more that restrictive covenants are viewed in a harsh light by the courts, the harder it becomes to protect trade secrets.
Sikellis: The shifting area of enforcement of non-competes has a direct impact on trade secret policy and protections. Non-compete agreements are often used by companies to protect their trade secrets by restricting employees from working for competitors or starting competing businesses after leaving their employment. While the enforcement of non-competes has been the subject of increased scrutiny and regulation in many jurisdictions for some time, it seems that, now more than ever, the use of non-compete agreements hangs in the balance. Specifically, the FTC recently issued a new rule that would ban future, and void current, non-compete agreements between employers and employees other than senior executives. This rule is already the subject of multiple federal court challenges, arguing that the FTC exceeded its authority in issuing the rule and seeking to enjoin its enforcement. Notwithstanding the uncertainty swirling around the FTC’s new rule, jurisdictions that were already moving away from enforcing non-competes can expect to see an increased reliance on their state’s version of the Uniform Trade Secrets Act, the DTSA and other similar laws.
Kappes: California is a case in point of how this shift from non-competes to trade secret policy and protections is easily discerned. California has had a longstanding public policy favouring open competition and employee mobility since the 1800s prohibiting non-competes, subject to certain statutory exceptions. Even when there was a time when there was a line of federal cases recognising limited restraints – this split between federal and state case law that was resolved in the 2008 case of Edwards v. Arthur Andersen – the state cases were uniformly hostile to a non-statutory exception completely created by federal courts. As part of this shift, California has long since had to look elsewhere to protect this information, so it came to rely heavily on trade secret policy and protections. Many California-based companies, or those with substantial California operations, usually have developed practices and protocols.
Kierkut: Aside from the FTC rule that will soon be in effect if the courts do not block it, several states have also recently enacted or strengthened laws, including Massachusetts, Colorado, Illinois and California, or are considering new laws, such as New York and New Jersey, significantly restricting the use of non-compete agreements. At the moment, employers can certainly continue complying with the construct that has been approved by the courts, a narrowly drawn agreement tailored to protect customer relationships and confidential information that is not unduly restrictive on employees. However, a company’s non-competes may be deemed unenforceable overnight leaving employers with little protection of their most important assets – their customer relationships and their confidential information. Trade secret protections are therefore the employer’s best tool to protect confidential information if a key employee departs to a competitor and the non-compete becomes unenforceable under federal or state law.
FW: What difficulties face a claimant in establishing what constitutes a trade secret? What defences are commonly asserted against trade secret misappropriation claims?
Sikellis: There are many challenges that face a claimant establishing a trade secret, including identifying what constitutes a trade secret. For example, while the DTSA broadly encompasses all forms and types of financial, business, scientific, technical, economic or engineering information as potential trade secrets, claimants must prove that they take adequate steps to keep this information secret, that the information is not generally known or readily ascertainable, and that the information derives economic value. Many trade secrets are not tangible, thus making it hard to identify and protect them. There is also the information itself, and how priority should be established. Other hurdles may include difficulty in not having clear procedures in the company policies for identifying and protecting trade secrets, as well as training employees on the importance of maintaining confidentiality.
Kierkut: Establishing that the information to be protected is in fact a trade secret tends to be the biggest hurdle. Companies are often inconsistent in how they treat confidential information and do not conduct training internally even if a written trade secret plan is in place – which many companies do not even have. Furthermore, companies often permit employees to leave without taking recommended steps, or do so inconsistently, and that undermines the argument that the information they are seeking to protect was in fact a trade secret. Even if companies do all the right things in terms of protecting trade secrets from potential business partners stealing them, such as the use of NDAs, many companies tend to be more lax on the employee side and this can be fatal to their trade secret claims.
Kappes: Litigation is a formidable challenge. The first attack typically comes at the pleading stage, where motions to dismiss are routinely filed for failing to allege the trade secret with ‘reasonable particularity’, a standard that varies depending on the subject matter of the trade secret to the personal, subjective views of the judge about just how exacting the description must be. Satisfying the ‘reasonable particularity’ standard often requires a delicate balance between providing enough information to survive a motion to dismiss while also avoiding providing more information about the trade secret that discloses it. And critical discovery must also await that determination. Thus, the hurdles such cases present can be quite high. Until those are overcome, a plaintiff can expect an expensive, drawn-out affair where a war of attrition sometimes ensues. And electronically stored information presents additional challenges. So much data is created daily that its custodians must be identified and litigation holds deployed.
Mitchell: A trade secrets holder claiming infringement of technical information must demonstrate that the misappropriation used information directly obtained from them, and not independently derived or licensed from a third party. In the case of non-technical information, such as a list of business contacts, it must show that the alleged infringement concerned the misappropriation and misuse of the compilation of often non-confidential information neither independently researched or derived, nor recalled from memory and used otherwise than in breach of contract. These can be high evidential burdens to overcome. The Trade Secrets Directive incorporates the requirement that the information in question “has been subject to reasonable steps under the circumstances to keep it secret”. Thus, the claimant must show that they have taken positive steps to maintain the secrecy of the information. The Directive also contains a potentially broad defence against infringement of any practice “in conformity with honest commercial practices”.
“Establishing that the information to be protected is in fact a trade secret tends to be the biggest hurdle.”
FW: What aspects need to be considered when assessing damages for trade secret misappropriation?
Kappes: In some cases, reasonable royalty is an item to consider. In those instances, it may be appropriate to award damages based on a reasonable royalty for the unauthorised use of the trade secret. This is often used as a measure of damages when it is difficult to quantify the actual economic harm suffered by the claimant. In cases where the misappropriation was wilful or malicious, punitive damages may be awarded to deter future misconduct and punish the defendant for their actions. In those instances, exemplary damages may be awarded of up to twice the actual damages, along with attorney fees. Assessing damages requires evidence to support the claimed losses. This can include financial records, expert testimony and other evidence demonstrating the extent of the harm suffered by the claimant. Trade secret damage experts are indispensable in developing the damages case.
Mitchell: Under the Trade Secrets Directive, damages are only required to be awarded where an infringer knew or ought to have known that his conduct was infringing. Damages are set as appropriate to the actual prejudice suffered as a result of the infringement. All appropriate factors, such as the trade secrets holder’s lost profits, any unfair profits made by the infringer and other factors, such as the moral prejudice caused, can be taken into account. The Directive also provides an alternative in appropriate cases, that damages be, at a minimum, the amount of royalties which would have been due had the infringer requested authorisation to use the trade secret.
Kierkut: One of the issues claimants need to assess is whether their primary goal is to obtain monetary damages or injunctive relief. Often, if seeking injunctive relief, a plaintiff is not yet at the stage where it has been damaged monetarily. So, if the theft is discovered early enough, preventing use of the information tends to be the main goal. This is particularly true when an employee departs for a competitor and the employee either does not have a non-compete or it has been invalidated by statute. Under the DTSA, application can be made for an injunction for both actual or threatened misappropriation, as well as for return of the information. This relief mimics the relief that tends to be sought in cases brought under state law of misappropriation of confidential information in tandem with a potential breach of a non-compete.
Sikellis: There are several aspects that need to be considered in assessing damages for trade secret misappropriation. Trade secret owners can seek monetary damages and injunctive relief to compensate for the theft of their trade secret. For example, one should determine the value of the trade secret that was misappropriated. This can be challenging, as trade secrets, by virtue of being secret, rarely have a readily ascertainable market value. Factors to consider include the uniqueness of the information, the extent to which it provides a competitive advantage, and the cost and effort expended in developing the trade secret. Another factor to consider is economic harm. Specifically, damages should reflect the economic harm suffered by the claimant as a result of the misappropriation. This can include lost profits, the cost of developing or acquiring the trade secret, and any other financial losses directly attributable to the misappropriation.
FW: What steps can companies take to protect and enforce their trade secrets? How should trade secret policies be drafted to take into account employees who potentially have the ability to depart with confidential information and take it to a competitor?
Mitchell: To protect and enforce their trade secrets, companies can take a number of steps. First, ensure that key information is circulated narrowly. Second, mark all sensitive information confidential and ensure only genuinely sensitive information is so marked. Third, use different files or envelopes for hard copy confidential information and keep them locked away when not in use. Fourth, use an electronic watermark with the name of the person having access to a soft copy. Fifth, use appropriate password protection. Sixth, monitor major downloads or downloads onto a USB stick or excessive photocopying. Seventh, prohibit the emailing of information to a personal email address or taking confidential documents off company premises. Eighth, provide training to assist employees to understand how to protect sensitive information. Finally, put in place effective confidentiality agreements coupled with a suite of restrictive covenants to protect confidential information in the event of an employee going to a competitor – these must not be drawn too widely or they risk being unenforceable.
Kierkut: The best way to ensure that trade secrets are protected is for companies with significant confidential information to put into place a trade secret protection plan. That plan must at a minimum ensure that the company has agreements with all employees regarding confidential information and has agreements with third parties to which confidential information is disclosed. The plan should also implement written policies regarding how that information is protected, limit access to confidential information, train employees on those policies, and enforce the policies. When an employee who has been exposed to significant confidential information joins a competitor, the company should also have specific plans in place for how to address that departure, including preservation of equipment, assessing whether employees actually took information with them and potentially conduct forensic examinations by qualified third-party examiners who can ultimately testify if a matter goes to litigation.
Sikellis: The first step is to identify and document trade secrets. Companies should identify what information constitutes their trade secrets and document them accordingly. This can include technical information, customer lists, business strategies and other confidential information that provides a competitive advantage and derives value from the fact that it is not known by others. However, companies should attempt to be judicious in what they identify as their trade secrets, as identifying non-trade secret information could undermine the importance of or minimise the company’s position regarding bona fide trade secrets. Reasonable efforts to protect the trade secret can even require litigation against competitors that unlawfully acquire or use the trade secret. One critical step is educating employees about the importance of trade secret protection, providing training on how to identify and safeguard confidential information, and having a disciplinary structure that holds associates accountable for breaches of confidentiality.
Kappes: A common sense step is to implement legal, physical and digital security measures to help protect trade secrets from unauthorised access or disclosure. Companies should require employees, contractors and business partners to sign confidentiality agreements that prohibit the disclosure or use of trade secrets without authorisation. Some physical and digital security measures can include restricting access to sensitive information, using encryption and secure storage solutions, and implementing cyber security best practices. Other measures should allow inspection at any time of all company devices that may contain company information, as well as the use of forensic tools to monitor the transfer of data from secure company devices to external platforms like Gmail and other such applications. The easy exfiltration of data has become well known, and it can also be easily disseminated. It is helpful to also do exit interviews to list all of the reasons why a departing employee might be going to a competitor.
“A common sense step is to implement legal, physical and digital security measures to help protect trade secrets from unauthorised access or disclosure.”
FW: How do you expect trade secrets disputes to evolve in the years ahead? What specific trends are likely to emerge?
Kappes: With the advent of artificial intelligence (AI), trade secrets will likely be one of the key ways companies that operate in that space will use the front end to protect their proprietary processes, including everything from determining what sources to use in their language models, how their models draw inferences, how information that is shared can be done so in a proprietary mode and how further development of these models can be accomplished using various enhancements. Then there is the information itself. The risk is that information that is inputted into the database becomes publicly available, at least as part of the data set. Think of sharing a certain mRNA formula into ChatGPT, or on other online platforms where the information could be input or maintained and subsequently exfiltrated by a bad actor. And, conversely, and somewhat incongruously, trade secret law could also protect AI-generated results, provided the results are not generally known.
Sikellis: Trade secret disputes will continue their rapid growth in the coming years as a result of advances in technology and an increasing ability to share large swathes of data very easily. Non-competes have come under scrutiny. Patents are expensive to obtain and defend, may not be granted, and are of limited duration. This suggests trade secrets are going to become a more widespread tool to protect intellectual property (IP). At the same time, the number of knowledge workers who work remotely, coupled with the digitalisation and easy portability of such information, the widespread use of portable devices and large turnover is creating an environment that is highly conducive to trade secret disputes. That, coupled with the globalisation of markets, means that trade secret disputes involving international actors and cross-border issues are likely to increase. This could lead to challenges in enforcing trade secret protections across different jurisdictions.
Kierkut: If the current trend to restrict use of non-competes continues, more companies will be focused on trade secret protection outside of the technical and scientific space where more robust protections and litigation currently reside. Companies will have to become more deliberate and careful regarding implementing plans and enforcing them, which ultimately will make it easier to prosecute these claims. I believe we will see a rise in these claims, a change in the industry groups that assert these claims and better equipped plaintiffs, which will lead to higher damages awards. The forensic industry will grow to meet the needs of these companies. The use of AI will further complicate the establishment of trade secret protection as to the extent that companies use publicly available AI in their materials, it will become more difficult to gain protection over those materials.
Mitchell: It seems clear that a number of aspects of modern professional life, including remote working, itinerant and contract working, as well as digitisation of commercial assets, will increase the opportunities and incentives for potential trade secrets infringers, and lead to an increase in such disputes. As will the focus on digital resources, software and the value of non-technical information resources such as customer lists and methods of doing business that have limited protection under the other IP rights. Finally, the availability under the Trade Secrets Directive of causes of action and effective remedies in jurisdictions where none previously existed, has already led to an observable growth in these types of claim.
Kurt Kappes is one of the key leaders of Greenberg Traurig’s trade secret practice group, which has over 100 lawyers in the US and abroad. He regularly counsels and represents mid-size to Fortune 500 clients in litigation over trade secrets, employee mobility, computer fraud, non-competes and unfair competition. He frequently writes and speaks on these subjects, both in the US as well as in the UK, Asia and the Middle East. He can be contacted on +1 (916) 868 0650 or by email: kappesk@gtlaw.com.
Galit Kierkut is a seasoned employment, restrictive covenant, trade secret and commercial litigator and adviser to national and international clients in the pharmaceutical, medical device, financial services, hospitality and healthcare industries, among others. She counsels and trains clients in all employment areas, including reasonable accommodations, trade secrets and anti-harassment. She also acts akin to an outside general counsel to startup and growth-stage international clients, assembling and leading teams of professionals to seamlessly address her clients’ legal needs. She can be contacted on +1 (973) 443 3292 or by email: kierkutg@gtlaw.com.
Ewen Mitchell is an intellectual property and data protection consultant. He advises clients on IP and data protection law, including IP dispute resolution, strategic IP advice, and the IP aspects of international transactions. He frequently advises EU and other businesses on compliance with the EU and UK General Data Protection Regulations (GDPR) including arrangements for international transfers of personal data, and the data protection aspects of corporate transactions. He can be contacted on +44 (0)20 3349 8856 or by email: ewen.mitchell@contract.gtlaw.com.
Robert Sikellis is the global head of litigation and investigations at Novartis. In this capacity, he has overall global responsibility for group relevant litigation, as well as internal and governmental investigations. Prior to joining Novartis in 2019, he worked for Siemens AG where he held several leadership roles in the legal and compliance functions including as chief counsel compliance, where he was responsible for all compliance-related investigations worldwide and all governmental investigations. He can be contacted on +1 (862) 223 0780 or by email: robert.sikellis@novartis.com.
© Financier Worldwide
International dispute resolution
The Advisory Centre for investment disputes: what is it and where are we headed?
Does international arbitration have a fraud problem?
Exchange rate volatility and cost exposure in international arbitration
The question of delegation of arbitrability in business contracts
The FCA proposes to name firms under investigation: transparency as a regulatory tool?
Privilege: key considerations from an Irish perspective