There is a subtle but important shift that is taking place in the way that many trade secret cases are being litigated and going to trial. In the not-too-distant past, the vast majority of trade secret owners focused primarily on getting an injunction–generally in the form of a TRO or preliminary injunction–against a former employee. However, some trade secret owners are increasingly pursuing a different path–namely, a claim for damages–usually against a large partner, vendor, customer or competitor with substantially deeper pockets. Because these claims for damages are generally determined by a jury, unlike an injunction which is decided by a judge, this development presents a potentially seismic shift in how some trade secret cases are litigated. As I explain below, several of these cases have resulted in substantial verdicts in recent months and they more closely resemble the path taken in many patent damages cases. This post analyzes this development, offers some theories on why these changes are now taking place, and provides some thoughts on what clients and lawyers long accustomed to seeking injunctions need to do to adapt to these changes.
Employee misappropriation and restrictive covenants. It has long been conventional wisdom that a trade secret owner’s workforce poses the greatest threat to its trade secrets. This is based on empirical evidence (see David Almeling’s seminal research for the Gonzaga Law Journal finding that 85% of federal trade secret cases arose from the employment relationship or relationships where the parties knew each other well) and the collective and practical experience of commentators and thought leaders in this area (see the Sedona Working Group on Trade Secrets’ recent Commentary on the Employment Life Cycle.)
In these trade secret cases brought against employees, employers also frequently asserted a companion claim for the enforcement of 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. Rather, the employer’s relationships with customers, employees and vendors were often an even more important focus. Acting immediately to protect those relationships from further disruption by a trusted former employee could frequently restore the relationships and resolve the 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 information that might have been at risk could be unnecessary. Familiarity with restrictive covenant case law and the ruses used by departing employees to evade them (such as soliciting key customers to move to a new business before telling the soon-to-be former employer the salesperson was resigning) enabled experienced lawyers to obtain an efficient early victory for their clients often without needing to delve into the details of technical information which the departing employee may have used or retained.
Simply put, injunctions–most frequently a TRO or preliminary injunction–were the most efficient vehicle for achieving these goals of preventing further damage, stabilizing those relationships and bringing the dispute to a quick conclusion.
Sometimes damages were essential. That is not to say that there have not long been damages cases arising out of the misappropriation of trade secrets. There have been. Some have been mammoth—in the hundreds of millions of dollars or even more (see DuPont v. Kolon for example).
Some of the biggest verdict cases arose in situations 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 meant that the horse had left the barn and it was too late to secure a meaningful injunction. Some involved situations in which at the outset of the case plaintiff had reason to believe that misappropriation was likely occurring but lacked hard evidence that it was underway. The threat of a damages claim might serve as a “Sword of Damocles” discouraging further violations but also as a safety net to protect the trade secret owner when damages occurred. Others involved international disputes in which the course of the litigation was protracted. But at the end of the day, virtually all included a former employee somewhere in the link that had disclosed or used information of a previous employer.
A growing reassessment of the need to establish evidence of irreparable harm. To obtain an injunction, whether at a preliminary stage or after trial, the trade secret owner must establish that absent relief, it will suffer “irreparable harm” and that money damages will not make it whole. 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, which as all litigators know, is the critical element for any injunction and is, by definition, present when a money damages remedy is either unavailable or inadequate. Trade secret owners seeking injunctive relief have often 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.” This 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 it was the centerpiece of so many injunction briefs that it was almost a cliche.
Yet that mantra has undergone increasing scrutiny by the courts and the Second Circuit has clarified its earlier language that it noted 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 at all? Will it be used absent intervention? And if it is, can the value of that use be readily calculated? A host of decisions throughout the country have begun demanding evidence of that ongoing risk to the trade secret absent relief and demanding facts, not simply mantras. See, e.g., the detailed discussion in the Sedona Working Group on Trade Secret’s Recent Commentary on Equitable Relief, The Sedona Commentary J. Vol 23, Commentary on Equitable Relief in Trade Secret Cases Section V. B (2022).
Misappropriation of trade secrets was and is still frequently found to give rise to harm that cannot be readily quantified or repaired—“irreparable” harm—and to preliminary and post-trial injunctive relief. But as the authorities discussed in the Sedona Commentary on Equitable Relief demonstrate, injunctive relief is no longer automatic.
To recap, suing an employee for money damages rarely made economic sense, since an award might not be collectible and render any money judgment worthless. A new employer, the deep pocket, might be able to establish that it had no reason to know of the misappropriation, and that it therefore was not liable for damages. In many cases, it may have been better to rely on a quick injunction than throw away money at a long and costly damages battle that would not bear any fruit. But that paradigm may now be changing.
“Show me the money!!!!!!” Let’s fast forward to the past 6 months to see how things have changed. 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. Pegasystems was found to have obtained access to the details of Appian’s computer code through compromising Appian’s consultant and by falsifying 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 information the jury found to be trade secrets that third party CODA disclosed to Goodyear concerning a new approach to manufacturing self-inflating in the hope of forging a long-term marketing relationship. 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.
These types of awards are no longer anomalies or outliers. One need only look back to verdicts in 2020 and 2021. Motorola persuaded a jury to award it $745 million in its dispute with Hytera in February 2020 (this was scaled back by the district court to $554 million and another $65 million as ongoing royalty damages in lieu of an injunction). Later that year, Trizetto secured an $845 million verdict against Syntel Inc. courtesy of a New York jury (that amount was scaled back, to $570 million, by the district court to reduce exemplary damages). In 2021, a Wisconsin jury returned a $140 million damages award on behalf of Epic Systems Corp. against Tata Consultancy Services, an amount that was doubled to include punitive damages. For further support, look at Stout’s 2020 trade secrets report and Lex Machina’s report in 2021 that describe these and other large trade secret verdicts.
Stay Tuned: So what forces are causing this shift for some trade secret cases from injunctions to jury trials? And what does it mean for trade secret owners and their lawyers? Stay tuned for Part II of this post that discusses these and other development which will be out shortly.