Trade secrets are a crucial but often overlooked aspect of commercial activity. These intellectual properties carry immense economic value and are frequently targeted by corporate espionage and theft. Unfortunately, trade secrets are often insufficiently protected and misunderstood, failing to receive the attention they deserve. As a result, trade secret litigation has emerged as a niche but rapidly growing area of legal practice.
The Foundations of Trade Secrets
Trade secrets encompass a wide range of confidential information that businesses desire to keep hidden from their competitors. These secrets can include customer and supplier data, marketing strategies, new business models, and other valuable information. The definition of a trade secret can vary by jurisdiction.
Trade secret litigation typically takes place in civil courts, but in certain cases, the theft of protected information can be a criminal offense. The Economic Espionage Act of 1996, for example, prosecutes the stealing, copying, and receiving of trade secrets as state and federal crimes. Individuals found guilty of violating this act may face substantial fines and even imprisonment, while corporations can be penalized with even more severe consequences, including significant fines and government seizure of stolen secrets and property.
The Scope and Complexity of Trade Secret Litigation
In terms of fiscal impact, trade secret disputes can have significant financial ramifications. In 2020 alone, federal cases related to trade secret disputes resulted in a staggering $3 billion in damages. Moreover, the majority of these cases, 68% to be precise, ruled in favor of the plaintiffs. The litigation process often proves more intricate and nuanced than anticipated, with almost half of the cases involving multiple types of secrets mentioned in the complaints. Notably, industries such as information technology, healthcare, and consumer discretionary have seen a rise in trade secret litigation.
Understanding the Key Elements of Trade Secrets
To effectively safeguard valuable intellectual property like trade secrets, it is essential to grasp the key elements that define them and how they interact with relevant legislation.
What Constitutes a Trade Secret?
According to the United States Patent and Trademark Office (USPTO), for intellectual property to be classified as a trade secret for litigation purposes, it must meet three criteria:
- The information must possess actual or potential independent economic value by virtue of not being generally known.
- It must have value to individuals who cannot legitimately obtain it.
- Reasonable efforts must be made to maintain the secrecy of the information.
All three elements must be present for trade secret litigation to proceed. Failure to meet any one of these criteria results in the intellectual property being categorized outside the bounds of a protected trade secret.
Governing Laws for Trade Secrets
While the Economic Espionage Act of 1996 stands as a crucial piece of legislation governing trade secrets, it is not the sole law in this domain. The Defend Trade Secrets Act of 2016 also plays a significant role in shaping trade secret litigation.
The Economic Espionage Act criminalizes trade theft in two specific circumstances: when a trade secret is stolen with the intention of benefiting a foreign government, instrumentality, or agent, and when the theft is related to a product or service used in interstate or foreign commerce to the economic benefit of anyone other than the owner.
The Defend Trade Secrets Act of 2016, on the other hand, introduced a private cause of action regarding the misappropriation of trade secrets. It provides intellectual property owners with a consistent and reliable way to protect their secrets in civil settings. This law does not supersede other relevant laws and allows owners to pursue litigation in federal or state venues.
To protect trade secrets, U.S. courts possess various tools at their disposal. They can issue orders to halt misappropriations, shield secrets from public exposure, and, in extreme cases, authorize government seizures of the secrets themselves.
After the conclusion of a trade secret case, potential outcomes can include damages, reimbursement for court costs, permanent injunctions, and reasonable attorney’s fees.
Initiating a Claim: Trade Secret Misappropriation
Attorneys seeking legal action for improperly proliferated intellectual property must consider three critical elements:
- The subject matter in question must fall within the defined category of trade secret protection.
- The holder of the subject matter must demonstrate that reasonable precautions were taken to prevent its disclosure.
- The holder must prove that the information was misappropriated or wrongfully taken.
It is worth noting that trade secrets may be lawfully obtained through reverse engineering, independent discovery, or inadvertent disclosure resulting from the holder’s failure to protect the information adequately. In such cases, allegations of misappropriation cannot proceed. Individuals who can recreate or replicate intellectual property without violating any laws are not subject to legal action.
Breach of a Trade Secret
When a trade secret is improperly acquired, the owner faces important decisions. In many instances, owners will request a court-ordered injunction to prevent further disclosure of their intellectual property during trade secret disputes. Owners may also seek compensation for financial losses incurred due to the alleged breach through legal action.
Each state has its own procedures for resolving trade secret disputes. For example, in Texas, a plaintiff can file for a preliminary injunction under the Uniform Trade Secrets Act. A preliminary injunction will be issued if the plaintiff can demonstrate that the defendant possesses the intellectual property and has the opportunity to use the information.
Remedies for trade secret breaches vary depending on the jurisdiction and whether the secrets were used in interstate or foreign commerce. The Economic Espionage Act is considered when determining appropriate remedies.
The Cost and Duration of Trade Secret Litigation
Trade secret litigation can be a lengthy and costly process. According to a 2019 report from the American Intellectual Property Law Association, the median cost to litigate cases with a financial risk between $10 million and $25 million was approximately $4.1 million. The costs nearly doubled to $7.5 million when the financial risk exceeded $25 million.
In most instances, each party is responsible for their court costs and fees. However, prevailing litigants may be eligible to recover “reasonable attorney’s fees” as a deterrent to bad faith claims or willful and malicious misappropriation. The Defend Trade Secrets Act also allows for the award of attorney’s fees under the same conditions. Recovering attorney’s fees can be more difficult in states that rely solely on common law for trade secret protection, such as New York.
Trade secret litigation is notable not only for its costs but also for the time it takes to resolve. Recent studies have shown that federal lawsuits in this domain have an average duration of 2.7 years, with a peak of 4.5 years in 2014.
A Case Study: The High Stakes of Trade Secrets Litigation
Trade secrets litigation occurs frequently and often involves high stakes. A notable case from Greeneville, Tennessee, involved a Chinese chemist charged with stealing valuable proprietary information from soda manufacturer Coca-Cola. The stolen information related to bisphenol-A-free (BPA-free) beverage can coatings used by the soda giant.
In May, Xiaorong You, the Chinese chemist, was sentenced to 14 years in prison for committing economic espionage, fraud, and trade secret theft. She was also ordered to pay $200,000 in fines and will be subjected to three years of supervised release upon her release from prison. You obtained the trade secrets while working at a soda factory in Atlanta and the Eastman Chemical Company in Kingsport, Tennessee. The proprietary information she wrongfully acquired cost $120 million to develop.
Assistant Attorney General Matthew G. Olsen of the Justice Department’s National Security Division stated that You had intended to use the stolen data to establish her own BPA-free company in China. She received millions of dollars in grant allocations from the Chinese government to aid in setting up the company.
Other Intellectual Property Considerations
Trade secrets are just one form of intellectual property, alongside patents, copyrights, and trademarks. It is important to understand the differences between these various types of intellectual property.
Patents grant individuals government-sanctioned monopolies, providing them with the right to create, sell, and use their inventions. Patent protections typically last for 20 years (15 years in some cases). To be granted a patent, the invention must be new, useful, non-obvious, and fall within the defined boundaries of what is considered “patentable.”
Trademarks consist of words, symbols, phrases, designs, or combinations thereof that identify services or goods. They help consumers recognize the source of a product or service, provide legal protection for brands, and serve as a safeguard against fraud and counterfeiting.
Copyrights protect works created by authors, artists, photographers, musicians, and other creative individuals. They safeguard expressions of creativity but do not extend to ideas, methods, concepts, procedures, systems, principles, or discoveries.
While trade secret protection shares some similarities with patent protections, there are significant differences between the two. Trade secret protection often complements patent protection. Patents require inventors to fully disclose their inventions, granting them the ability to exclude others from using the invention for a specified period. Patents expire, and once they do, the information they contain is no longer protected. In contrast, trade secrets rely on secrecy. Trade secret protection can also safeguard against independent discovery, eliminating the need for strict secrecy.
Simplifying Complex Trade Secret Litigation
Trade secret litigation can be complex, time-consuming, and costly. The process demands expertise in specific subject areas and careful preparation.
However, technology can play a crucial role in streamlining and cost-efficiency. Leveraging tools like Practical Law, for instance, can significantly improve research, expedite discovery, and enable attorneys to construct more compelling arguments. Practical Law offers an all-in-one solution with practicing attorney-editors who provide expert guidance throughout the patent litigation process. Its resources include checklists, model clauses, practice notes, comparative summaries, and an extensive database of precedents related to intellectual property and technology license agreements.
When preparing for trade secret litigation, comprehensive research backed by up-to-date and reliable information is essential. Practical Law ensures that practitioners have the necessary resources to tackle their work confidently and effectively.
Trade secret litigation is a nuanced and intricate field, but with the right tools and knowledge, businesses can protect their valuable intellectual property and navigate the legal landscape successfully. Trust Garrity Traina for all your trade secret litigation needs.