Trade secret litigation is on the rise, and new case law related to enforceability has broad implications for how companies protect information that they consider to be trade secrets.
The Lex Machina 2020 Trade Secret Litigation Report (request the report here) traced the rising litigation trend to 2016, when the Defend Trade Secrets Act (DTSA) was passed. The law has allowed claimants to file trade secret cases directly in federal court when there is a connection between a trade secret and interstate or foreign commerce. Since then, filings have risen 30%, and growth is expected to continue.
The annual report has garnered wide-spread media coverage, but an interesting finding that should trigger an alarm among companies—especially those in knowledge-based sectors such as life sciences and technology—is that of the cases dismissed over the same period: 156 ended for failure to identify a trade secret and 116 were terminated for failure to maintain secrecy.
If you are charged with protecting your life sciences or technology company's trade secrets, how can you make certain that what you consider your company's "crown jewels" can withstand court scrutiny? Based on recent case law developments, here are a few practical steps you can implement to help ensure your company's trade secrets are enforceable in court.
Unlike other types of intellectual property, such as a patent that must expressly state its claimed subject matter, trade secrets can be amorphous. Theoretically, trade secrets can cover any type of information—data, software code or an idea written down in a lab notebook. Arguably, it could be almost anything, so long as that information is subject to "reasonable measures" to keep it a secret and the information derives independent economic value from being a secret.
The following are recent examples of what courts consider reasonable measures for companies to take in order to pass the trade secret test:
Cutting off access. There are steps you need to take to ensure that you are keeping your company's trade secrets secret. One example is cutting off system access to anything that contains confidential information when employees leave a company. It is surprising how often there is a lag between the time someone leaves a company and when their access to systems containing confidential information stops.
Most would assume that someone who logged into a former employer's systems and grabbed information they should not have would be a trade secrets case loser—especially if caught red-handed. But when you go to court in a trade secrets litigation, the court will also ask whether your company was partially to blame: "Why did you leave the door open?" and "Why were they still able to access your systems?"
Ask for information back. When employees leave a company, employers should conduct exit interviews and remind departing employees of their contractual obligations, including demanding deletion or return of any confidential information if the employment agreement allows.
In a case Fenwick handled, Loxo Oncology v. Array Biopharma, one of the disputed pieces of evidence was whether the former employer had actually demanded the return of confidential information and whether they had conducted appropriate exit interviews. It turned out that some ex-employees had not had exit interviews and the employer had not consistently requested the return of information. Accordingly, even though some employees still possessed alleged trade secret information when the suit was filed, this fact did not necessarily show misappropriation because they had obtained the information in the first place through their usual duties and had just forgotten to delete it upon departing. That type of detail may become critical to a case alleging trade secret misappropriation, as failing to properly demand the return of confidential information or to explain ongoing obligations to ex-employees may be used to show that an employer did not take "reasonable measures."
As a result, if an employee leaves and they still possess company information, courts may not necessarily view it as a trade secret violation. However, if a contract states they must return it, failing to do so may be a breach of that obligation—but only if the company does what is required to get it back under the contract. That may mean needing to ask for it.
Document suspicious activities. Implementing a security system that logs, records and audits employee access to information can assist with demonstrating misappropriation. Being able to indisputably demonstrate when, what and how a former employee logged into and accessed the company's database of "crown jewels" can be important in court. Allegations that a former employee, who gets a job at a key competitor, downloaded critical information before they left can be supported more effectively if you have the systems in place to record those activities.
Put the new employer on notice. Another important step you can take in ensuring that future trade secret theft allegations stand in court is putting the new employer on notice. This is often called the "Shot Across the Bow" letter. You do not actually know that anything has happened, but you have reason to be concerned given the sensitive nature of the information possessed by the employee. The letter should state that you know the employee had access to key information and you and your company are concerned about it in a potentially competitive area. The notice should contain a reminder that the new employer and employee have these obligations and you want assurance that the company is not going to violate them or encourage the employee to violate them.
Do not delay. If you do find evidence that there is reason to be concerned, time is of the essence. Any delay can undermine a claim of irreparable harm, which is key to obtaining a court injunction that can stop an employee from using or disclosing information, or preventing a new employer from using it.
Be Ready to Identify Trade Secrets with "Reasonable Particularity"
If you bring a trade secret claim in court, you have to be ready to identify your trade secrets with particularity, typically with "reasonable particularity." In an effort to avoid burdensome and costly fishing expeditions, some, although not all, states require a party to identify their trade secrets with reasonable particularity before they can obtain discovery from the other side. Courts will put protective orders in place to minimize the risk of public disclosure of that information.
Some companies make the mistake of marking everything as "confidential" and/or they have agreements or company policies that say their trade secrets include anything relating to compensation, job skills, technology, processes, marketing and the company's plans or operation. While doing so may feel like the cautious approach, the danger of treating everything as a "crown jewel" is that you run the risk of facing court skepticism because it is unclear what a trade secret actually is to you.
In Swarmify v. Cloudflare, for example, the U.S. District Court for the Northern District of California, in denying a preliminary injunction, noted that Swarmify's disclosure was wholly inadequate and attempted to "lay wholesale claim to such nebulous, sweeping categories as 'research and information,' 'methods for implementing,' and 'vendors.'" In AlterG v. Boost Treadmills, the Northern District of California dismissed a trade secret claim for "the concept of retrofitting an existing commercial treadmill with an air based unweighting system." And, in Virtual Radiologic Corporation v. Rabern, the U.S. District Court for the District of Minnesota denied an injunction motion based on the defendant's evidence that "virtually every item of information" being categorized by the plaintiff as a trade secret is "either freely available on the Internet or available for purchase."
Companies cannot assume that they can get an injunction just because information that they consider valuable was taken. They have to be ready to articulate and show with evidence that they face "irreparable harm" due to the misappropriation. In most jurisdictions, this means that the harm must be "non-speculative" and "imminent," if not ongoing.
For example, in Loxo, the court denied a preliminary injunction because Array "presented no evidence that Loxo has developed a drug based on Array's trade secrets that is ripe for clinical trials, that such drug will soon be submitted for FDA approval, or that such drug is soon to hit the market. Similarly, Array has not provided any estimates as to when it may suffer irreparable harm."
In Swarmify, that company's only evidence of irreparable harm were two conclusory paragraphs in its principles' declaration and an email from a potential investor commenting on the general competitive nature of the streaming video industry, which was not enough to obtain a preliminary injunction.
In both Loxo and Swarmify, courts required that harm be non-speculative and imminent. Unless you can point to something that is going to happen right away that causes your business harm, you are unlikely to get a preliminary injunction.
Don't Rely Solely on "Inevitable Disclosure"
Companies should not base their misappropriation case solely on the idea that somebody has information in their head and they will inevitably use that information if they go somewhere else. This so-called "inevitable disclosure" doctrine has been rejected completely by many courts, particularly in California.
Under the DTSA, courts may grant injunctions provided the order does not "prevent a person from entering into an employment relationship, and that the conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information that the person knows." Different courts have taken different approaches to this requirement. In California, federal courts have held that the DTSA rejects inevitable disclosure. See UCAR Technology (USA) v. Yan Li. Meanwhile, courts in Illinois and Pennsylvania have permitted inevitable disclosure claims to proceed under the Act. See Packaging Corporation of America v. Croner and Jazz Pharmaceuticals v. Synchrony Group.
Finally, the number one—and the most practical—thing your company can do to ensure that it does not lose its trade secrets rights in court is to preserve evidence. If you have knowledge that there is trade secret theft happening or have suspicions it is occurring, make sure to preserve everything. Preserving pertinent data, whether it supports your case or not, should be embedded in your company policies, processes and procedures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.