It was well known in the intellectual property world that federal trade secrets litigation was on the rise. But this year, practitioners found out how much that increase was.
LexMachina in July reported that trade secret misappropriation claims filed in federal court spiked 30 percent in 2017 from the previous year, with 1,134 filings.
The culprit was a new federal law, the Defend Trade Secrets Act of 2016, which gave litigants a way to take their trade secret misappropriation claim directly to federal court. Previously, trade secret protection had been left to the states, 48 of which, including Colorado, enacted their own version of the Uniform Trade Secrets Act.
As the DTSA went into effect in May 2016, many attorneys in intellectual property, employment law and business litigation predicted a rush to federal courts for trade secret filings, and those predictions have borne out. But the question remains as to whether that trend will continue and how the DTSA, as well as changing technology, got companies thinking differently about trade secret protection.
Trade secret cases tend to fall into two main categories. One is the more traditional dispute between companies that involves claims of technology theft, notably those recently involving companies like Apple or Uber. These types of allegations can also bubble up from joint ventures that fall apart between companies.
Then there are the far more numerous employment-based claims involving covenants not-to-compete and breach-of-contract allegations. Using the DTSA, many litigants have been able to tack a federal trade secret claim onto what would otherwise be a wholly state-based employment or breach-of-contract case, and get it in front of a federal judge.
“Judges hate it,” said Mike Greco, regional managing partner of Fisher Phillips’ Denver office who is a member of the firm’s employee defection and trade secrets practice group. Greco said he’s had a federal judge remark to him that he was only hearing the case Greco brought because it had a DTSA claim.
“Don’t I just need to decide this one federal question and then I can knock you off my docket?” Greco recalls the judge asking him.
More federal courts are growing hostile to the increasing number of trade secrets cases, Greco said. He expects the federal trade secret filings to level off if only because of the pushback litigants are getting from judges.
Even if trade secret litigants start pulling back from federal venues, the state-vs.-federal-court decision will still be a complicated one, as it was when the DTSA first came to be.
“The biggest new question everyone was struggling with was state or federal court venue,” said Case Collard, an intellectual property attorney and partner at Dorsey & Whitney’s Denver office. Larger company clients, he said, tend to be more comfortable with federal court, as they often perceive federal judges as more familiar with technological issues, and clients are wary of what they view to be the “looser” procedures of state courts.
But Collard tries to counsel clients against filing trade secret cases in federal court when it’s solely for those reasons. In his experience, Colorado judges have generally been adept in hearing tech-heavy trade secret cases, too, he added. Another potential advantage in state court, at least as far as Collard and other attorneys he’s talked to are concerned, is that they have been more open to granting injunctive relief — an especially important tool for plaintiffs in trade secret cases — than their federal counterparts.
Outside of the courts, another consequence of the DTSA was that trade secret protection gained prominence in the business world, with companies doing more to protect their proprietary information and innovations that way. Collard and Greco each noted that as Supreme Court decisions in recent years made patents for software inventions less reliable, trade secret protection gained priority as an alternative approach to protecting their technology.
“Companies are becoming more and more sophisticated in terms of protecting their trade secrets and becoming more proactive about that,” Greco said.
Greco said companies are choosing to market their innovations in a way that favors trade secret protection over patent protection. One example is in autonomous vehicles, to which Fisher Phillips dedicated a practice group that Greco founded. When companies bring AVs to market, it will mostly be as a service — such as using the vehicles in a fleet — and not as products that consumers can actually buy, he said. By limiting AVs to internal company use, at least in the short term, it will be harder for people outside the company to get their hands on the vehicles and try to uncover the trade secret technology through reverse-engineering.
“There is so much that a company can do to enhance its trade secret protection because there is no formula for what a trade secret can or can’t be,” Collard said.
If companies ever take a competitor or former employee to court over misappropriation, they will have written their own destiny to an extent depending on what measures they took to guard the allegedly stolen information. Companies “can really put themselves on strong footing” in litigation if they’ve educated their employees on what the trade secrets are and maintained access logs and other security measures surrounding those secrets, Collard said.
That’s not a new idea, Collard noted, but as business methods and similar innovations have enjoyed less protection from patents in recent years, they’ve required more measures ensure trade secret protection as an alternative line of defense.
— Doug Chartier