Part I of this post explored the increasing number of trade secret cases being presented to juries for damages, rather than to a judge for an injunction. This development appears to have accelerated in the past 6 months, as juries awarded $2 billion in a verdict for Appian Corp., a $65 million verdict against Goodyear Tire & Rubber Company, and a $105 million verdict against Ford Motor Company. Part II (below) describes the many forces that I believe are contributing to this shift, as well as the impact this development will have on trade secret owners, small companies, large companies and lawyers whose practices focus on trade secret cases.
So why the shift? I have multiple theories for this development. Some of these trends have been noted by other commentators, others are anecdotal, or based on my own observations.
Perhaps the most significant development may be the perception that recent decisions by the U.S. Supreme Court 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, 134 S. Ct. 2347, 189 L. Ed. 2d 296 (2014) and Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66 (2012). Multiple commentators have noted that these changes have caused “the shrinking universe of subject matter eligible for patent protection,” and led to IP owners to instead focus on using trade secret protection for their intellectual property. The Alice decision’s impact on patent protection for software patents has been singled out in particular as a reason for potentially relying on trade secret rather than patent protection. Indeed, it bears mentioning that three of the verdicts that I described in my last post (Appian v. Pegasystems, Syntel Sterling and Versata v. Ford Motor) involved disputes over the misappropriation of software trade secrets.
The Alice decision may also have future 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 a recent article by Quinn Emanuel’s Jordan Jaffe, Jared Newton, Patrick Curran and Anil Makhijani predicts, the importance of trade secret protection for AI will likely grow due to the fact that many AI-related inventions are implemented through software processes running on computer hardware. And other legal developments may contribute to this trend towards trade secret protection for AI. As Erik Weibust and Dean Pelletier have observed, 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 artificial intelligence machine cannot qualify as an inventor under the Patent Act).
In sum, 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 (AIA) appears to have caused significant upheaval in the manner in which patent cases were litigated, leading to unexpected consequences for trade secret litigation. Most notably, the AIA’s enactment led to the increasing importance of the Patent Trial and Appeal Board (PTAB) as a primary forum for patent challenges; the growth of litigation before this specialized administrative tribunal in Washington, D.C. appears to have impacted traditional patent infringement actions litigated in federal courts around the country. Many patent litigators with formidable experience in jury trial litigation appear to have turned their attention to litigation involving technical trade secrets. These lawyers (1) know how to work up a large damages case (think of Georgia Pacific‘s royalty measure), and (2) 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 completely unfamiliar with the underlying substantive IP.
Third, the relatively recent enactment of the Defend Trade Secrets Act (DTSA) in May 2016 provided a federal forum to these and other lawyers comfortable with jury trials. Because of the patent statute and other federal statutes, these lawyers are comfortable managing their litigation in federal court, so the DTSA’s enactment may have accelerated this development. This stands in contrast to trade litigation prior to 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. As readers of this blog already know, legislators (state and federal) and regulators (FTC and state attorney generals) have redoubled their efforts to limit or ban the use of restrictive covenants by employers. In this toxic environment for noncompetes, courts have become more exacting in their expectations for the level of proof needed for an injunction. This legislation and regulatory pressure and increasing judicial ambivalence has reduced the availability and potential effectiveness of some early injunctions, many of which I noted in my last post have been traditionally associated with restrictive covenants.
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. Consequently, an injunction that could resolve the dispute in a matter of weeks was the best litigation path for that trade secret owner. 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 internally from their own documents and from reports by their own customers. Moving papers often included evidence that an employee had been seen talking with restricted customers after departing or, occasionally, evidence from customers that the employee had called on them for his/her new employer. If a departing employee was sloppy, the employer might be able to offer evidence that the employee had emailed or downloaded files at departure, but it was not always clear what happened to those files afterward. Such a showing might well be sufficient to win a finding that the restrictive covenant had been breached and an order prohibiting further solicitation of specific customers. If the employer detected the violation early enough, future customers would likely not be at risk and depending on the terms of the injunction, the solicited customers might promptly return.
But the increased availability of sophisticated computer forensic tools can enable a trade secret owner to learn more. New tools may reveal both previously undetected damage stemming from the use of trade secrets and a risk that the secrets will continue to be used. “Mouse droppings” can reveal that the 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.
For all these reasons, a business may now be thinking about not only stopping further violations but also about obtaining money for what has already occurred and the substantial expense that it has incurred investigating and litigating the dispute. And if an early injunction is not granted, the business may be thinking about damages through trial, and potentially even beyond, to remedy an improperly seized market advantage.
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 attorneys’ 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 larger defendant to settle for fear of the uncertainty of a jury trial.
Why does this matter and what does it mean? 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 DTSA. 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 towards damages that is taking hold in more and more cases.
For trade secret owners? This is obviously good news for employers and trade secret owners because they have more options now. They can still pursue an injunction against an employee (who may not be collectible) or against another third party, but they have the additional option of pursuing a competitor, vendor or partner whom they believe has taken their trade secrets for damages. And smaller companies benefit the most because they may now have an ally–a litigation funding entity–who can help them finance a damages trial that they might not otherwise have been able to afford.
For larger companies who may find themselves accused of taking advantage of a vendor or potential acquisition? This is not a welcome development. They will need to be extra careful in how they exit their vendor and partnership relationships. They will probably need to develop off-boarding standards for the wind down of their relationships with those vendors or licensing partners, similar to what they have for exit interviews with departing employees. This will mean more work and stress for in-house lawyers, many of whom are already over-extended.
For lawyers skilled in injunctions? These lawyers need to either develop these jury trial skills or hire colleagues who can try a case to a jury. Jury trials are completely different creatures; they require infinitely more preparation, attention to refining presentation, and emphasis on themes than a case tried to a judge.
Take the admissibility of evidence. In a bench trial or preliminary injunction hearing, judges may be willing to take a more relaxed view of the rules of evidence (I wish I had a dime for every time a judge has said “I will let it in for what it is worth”). This is because the judge believes they know what is important and that they won’t be distracted or prejudiced by potentially inflammatory elements of otherwise inadmissible evidence. But with a jury, judges are far more vigilant about admissibility concerns because a jury may be unduly influenced by evidence of past bad acts or give too much weight to certain forms of hearsay. Consequently, if you are going before a jury, plan on budgeting significantly more time anticipating and preparing for potential objections, as well as considering multiple motions in limine to exclude improper evidence.
And this is not the only significant procedural difference between the two types of trials. Getting ready for a jury trial also means spending extra time drafting and preparing jury instructions, jury interrogatories and special verdicts. It also means giving thought to how to best weave those documents into your case (especially your closing argument).
Vetting, engaging and hiring a damages expert will be critical, and another major expense for both plaintiff and defendant. And given the stakes in a large jury case, a party may decide that it should engage liability experts to address issues such as whether the plaintiff used reasonable methods under the circumstances or whether the information at issue was readily ascertainable, was publicly available, or was known within the industry.
And depending on the amount of damages at issue, a jury trial also may mean hiring a jury consultant and perhaps even performing a mock trial. As lawyers, we all have a tendency to fall in love with our own case, to develop tunnel vision, or become an echo chamber with our client; we also may not fully grasp that our arguments may prove inconsequential to 12 people from different walks of life. To me, this is the greatest challenge of preparing for any trial: making your case not only understandable but compelling to the trier of fact. This challenge is even greater when you are presenting your case to a group of people not familiar with the governing law or the fact patterns important to these cases. This challenge necessarily elevates the importance of voir dire and your opening statement. And again, these challenges also mean greater attention to presentation and themes, which have greater resonance with a jury than a judge.
Now let’s talk about the additional expense. As a result of all these additional line items, when I do a budget for a case going to a jury, it is not uncommon for me to estimate that a jury trial will be 30% to 40% more expensive than a bench trial. A two-to-three-week jury trial is a very different undertaking than a one-to-day preliminary injunction hearing focused on balancing the equities and fashioning a reasonable injunction.
Trade secret disputes with employees that may require an injunction will always be an important part of trade secret enforcement. But cases against larger adversaries over important technical trade secrets are now becoming an equally important part of trade secret enforcement. For lawyers with jury experience and the ability to break down and explain a complex case in understandable terms, this may be a new golden age in trade secret law.