Trade Secret Litigation Is Poised To Take Off Amid Downturn

By Patrick Dempsey
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Law360 (July 30, 2020, 1:56 PM EDT) --
Patrick Dempsey
Patrick Dempsey
It's a strange fact of contemporary life that we're all in the prediction business now. We watch the COVID-19 case counts rising and falling and calibrate our predictions accordingly — predictions about our ability to return to the office, to send our children to school, to pay our bills, to keep our jobs. In optimistic moments, we might peg a date for delayed vacations, football games or a simple night out at a restaurant.

It's an odd way to live, and I say that as someone who worked in the prediction business even before the pandemic. The job of litigation financiers, on some level, is to assess the likelihood of future events — namely, the result of legal disputes. Thankfully, their subject matter is rarely as grim as the prognostications we're making in the pandemic.

But just as COVID-19 has affected all other aspects of life in the U.S., it has affected the legal system. And due in large part to its effects, I've rarely been as confident in a prediction as the one I'm making here: We're about to see an explosion in trade secret claims.

Trade secrets are a specific form of intellectual property, which becomes a prized corporate asset in a recession. For that reason, another form of intellectual property — patents — has become the subject of increased litigation following economic downturns.

After the Great Recession, cash-strapped companies turned their patents into money by selling or licensing them to nonpracticing entities, which in turn filed lawsuits. High-volume plaintiffs, to use a neutral term, filed about 300 cases a year in the decade preceding 2009.[1] By 2011 they filed 900; in 2012, they filed more than 2,000.[2]

We are seeing signs of the same phenomenon today. In the first half of 2020, new patent lawsuits were up 16% over the last half of 2019.[3] Certainly there are other factors at play in that rise. Observers attribute it in part to the U.S. Patent and Trademark Office's using a generous standard in issuing patents, as well as the availability of third-party funding.[4].

But in a change from last year, the top five patent litigation plaintiffs in 2020 to date are all nonpracticing entities.[5] That suggests companies are running the recession playbook to use patent portfolios as a source of funding.

There's reason to believe, however, that the rise in patent filings may be muted this time around and that a rise in trade secret lawsuits may be pronounced. Three reasons, actually: the state of the law, changes to the workplace directly related to the pandemic, and the urgency of trade secret claims.

State of the Law

For several years, two complementary forces in the law have been pushing companies to protect their intellectual property through trade secret actions.

The first is a series of decisions at the U.S. Supreme Court that have caused some companies to favor the protections of trade secret law over patent law. In a triad of cases culminating with Alice Corp. v. CLS Bank International, the Supreme Court narrowed the universe of subject matter capable of being patented.

In the eternal quest to draw the line between abstract ideas and laws of nature. which can't be patented, and inventive concepts, which can, the 2014 decision in Alice went against the patent holder — as did the 2013 decision in Association for Molecular Pathology v. Myriad Genetics and the 2012 decision in Mayo Collaborative Services v. Prometheus Laboratories.

The trilogy of cases did more than create negative law for patent holders — they also created confusion. Since Alice, the USPTO has issued guidelines trying to clarify what can and can't be patented, but uncertainty remains.[6]

To avoid that uncertainty, some companies are forgoing the patent process and deciding, instead, to protect their innovations as trade secrets. One major difference between the two strategies is that a patent makes an innovation public, while trade secrets must be kept confidential.

The trade secret strategy, then, does not work well for companies with innovations that can be reverse-engineered or otherwise copied.[7] In other situations, though, the choice to protect a company's innovations as trade secrets instead of patents has gained substantial appeal in recent years.

Meanwhile, as uncertainty grew over patentability, trade secret law has become more robust, as well as favorable to plaintiffs. In 2016, then-President Barack Obama signed the Defend Trade Secrets Act, which for the first time created a private right of action in federal court for trade secret misappropriation.[8]

The benefits to plaintiffs are substantial. They no longer need diversity jurisdiction to get into federal court.[9] The DTSA's defines "trade secret" more broadly than the Uniform Trade Secrets Act, which had long served as a model for state laws.[10]

And some whopping jury awards haven't hurt, either. Earlier this year, in the U.S. District Court for the Northern District of Illinois matter, Motorola Solutions Inc. v. Hytera Communications Corp., Motorola notched a $764 million win in a DTSA case, which, for good measure, clarified that plaintiffs can use the DTSA for trade secret theft that occurs outside the U.S., as long as it has a nexus to some domestic activity.[11]

Given this background, it may not be surprising that trade secret litigation is already on the rise. From 2010-2015, the six years before the DTSA, federal trade secret filings averaged about 1,100 per year; from 2017-2019, they averaged 1,400 per year.[12]

Present Working Conditions

The true accelerant behind an increase in trade secret cases, if it comes to pass, will be the pandemic's effect on the workplace. Again, two forces are at work here — mass layoffs and the sudden shift to mandatory work-from-home policies. Unlike the legal developments described above, which make trade secret legal claims more likely, these developments make the violations themselves more likely.

We know from unfortunate experience that mass layoffs create a fertile groundwork for trade secret litigation. At any period when many people are losing jobs, some will be desperate enough to use their former employer's confidential information for selfish purposes—to start their own venture, to give themselves a leg up with a competitor, or even to sell any marketable secrets.

A Winston & Strawn LLP report confirms that "certain types of trade secret cases appear to have increased due in part to the notable employee turnover that occurred as a result of the Great Recession." Over the 2007-2009 period of that recession, 37 million new unemployment claims were filed.[13] In the pandemic, more than 40 million new unemployment claims were filed by May.[14]

It's scary to think, but layoffs may not even present the greatest risk of trade secret violations. There is also the fact that a large percentage of workers transitioned quickly from working in an office to working from home. Even without any nefarious intent by employees, this transition has greatly increased the chance of trade secret misappropriation.[15] Consider, for example, the fact that employees are now routinely:

  • Using unsecure videoconferencing systems for work;

  • Printing and downloading sensitive work material that can be accessed by their housemates;

  • Sending a greater volume of work material electronically, and perhaps without encrypting it;

  • Holding conversations about sensitive work topics within earshot of others, including family members; and

  • Saving sensitive documents locally.

In these ways and more, security processes used by businesses have been rendered irrelevant in the pandemic, leaving their secrets vulnerable.

The Urgency Factor

If and when trade secret misappropriation happens, victimized companies do not have the luxury of holding off their lawsuits until a more convenient time. For many companies, a threat to their trade secrets is a threat to the company itself, given the outsized value of the trade secrets to the enterprise as a whole.

Further, any delay in bringing the case could actively harm the possibility of winning it. Trade secret cases require near-instant investigation to preserve forensic evidence of, for instance, copying or distributing of electronic files.[16]

Also, in trade secret matters, it is often impossible to put the proverbial genie back in the bottle. As a result, parties routinely seek temporary restraining orders and preliminary injunctions to contain the permanent damage from trade secret theft. Such motions require immediate action. There is also the fact that, according to Strout Risius Ross LLC, in cases decided by court rulings, plaintiffs have an eye-opening 69% success rate.[17]

Of course, nothing's a sure thing. Despite large verdicts like that in the Motorola case, in some trade secret actions injunctive relief may be more appropriate than money damages. That could complicate the process of securing litigation financing. In addition, the closure of courtrooms in the pandemic could negatively affect the ability to bring time-sensitive actions like trade secrets claims.

But if I were in the prediction business — and today, we all are — I would put my money on trade secret litigation rising.



Patrick Dempsey is U.S. chief investment officer at Therium Capital Management.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://www.iptechblog.com/2020/05/patent-litigation-filings-on-the-increase-with-the-covid-19-pandemic/.

[2] Id.

[3] https://www.law.com/nationallawjournal/2020/07/01/patent-litigation-is-on-the-rebound-led-by-wd-texas-filings/.

[4] Id.

[5] Id.

[6] https://www.winston.com/images/content/2/0/v2/203824/trends-in-trade-secret-litigation-report-2020.pdf at 18.

[7] Id at 16.

[8] https://www.americanbar.org/groups/business_law/publications/blt/2016/09/03_cohen/.

[9] Id.

[10] https://www.winston.com/images/content/2/0/v2/203824/trends-in-trade-secret-litigation-report-2020.pdf at 12.

[11] https://www.iptechblog.com/2020/02/the-defend-trade-secrets-act-dtsa-can-apply-to-acts-of-misappropriation-occurring-entirely-outside-the-united-states/.

[12] https://www.winston.com/images/content/2/0/v2/203824/trends-in-trade-secret-litigation-report-2020.pdf.

[13] https://www.mintz.com/insights-center/viewpoints/2231/2020-04-17-steps-your-company-should-consider-now-protect-value.

[14] https://www.nytimes.com/2020/05/28/business/economy/coronavirus-unemployment-claims.html.

[15] https://www.faegredrinker.com/en/insights/publications/2020/5/five-trade-secret-protection-risks-companies-should-consider-during-the-pandemic.

[16] Id.

[17] https://www.law360.com/articles/983195/why-trade-secret-litigation-is-on-the-rise.

For a reprint of this article, please contact reprints@law360.com.

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