Take Heed: Lessons from the Top Trade Secret Cases of 2020

December 20, 2020

IP Watchdog

“On motions to seal, which can consume a great deal of the court’s time and effort, get it right the first time. And by the way, be scrupulously aware of variations in rules among district courts.”

One of the uniquely fascinating aspects of trade secret disputes is that they are laced with unbridled emotions, accusations of treachery, and actors who angrily disagree over basic facts. In other words, they provide a perfect metaphor for the year 2020.

Let’s take a look back at the cases this year that are worthy of comment, either because they involved some unusual set of facts or because they provide useful guidance for behaving better in 2021.

Damages

First, this year brought two massive verdicts in trade secret cases. February’s Chicago jury verdict in Motorola v. Hytera came in at $764 million, of which $418 million was for punitive damages. Then, in October, a jury in the New York case by Cognizant against Syntel awarded $854 million, including $570 million in punitives. Even more remarkable, the same trial counsel represented the plaintiffs in each case. Congratulations, Kirkland & Ellis! See, some people had a very good year in 2020.

A big award in another case got reduced, in Epic v. Tata, 971 F.3d 662 (7th Cir. 2020). The jury had awarded $240 million in compensatory damages and $700 million in punitives. The trial court reduced the damages to $140 million and limited the punitive award to twice that amount under the Uniform Trade Secrets Act (UTSA). On appeal, the 7th Circuit held that constitutional due process required a further reduction in the punitive award to $140 million. Still, the case is another reminder that unethical behavior (here, accessing a competitor’s data by misleading a customer) can lead to enormous awards.

In Ajaxo v. E*Trade, 48 Cal.App.5th 129 (2020), the court confirmed that it was acceptable to use the “Georgia-Pacific factors” from patent law in order to inform the damage analysis in a trade secret case.

DTSA Extraterritoriality

One of the lingering questions since enactment of the Defend Trade Secrets Act (DTSA) in 2016 has been whether the pre-existing provisions of the Economic Espionage Act establishing jurisdiction over foreign misappropriation would apply to civil cases as well. The first decision analyzing this question came in January, in Motorola v. Hytera, 436 F.Supp.3d 1150 (N.D. Ill. 2020), ruling that the statute did apply where at least one act in furtherance of the “offense” occurred in the U.S. That ruling enabled the large verdict referred to earlier; but its continuing impact is potentially much broader, given the international character of many business relationships. And just to sharpen the point, the court in vPersonalize v. Magnetize, 437 F.Supp.3d 860 (W.D. Wash. 2020) ruled that the “act in furtherance” need not have been committed by the defendant.

Loss of Secrecy

To qualify information as a trade secret, the owner must show “reasonable efforts” to keep it confidential. Increasingly, courts are unwilling to excuse what looks like sloppy behavior by the plaintiff. In Amgen v. California Correctional, 47 Cal.App.5th 716 (2020), the court said that merely putting the word “confidential” on an email blast to 170 people wasn’t enough. And in a real sign of our times, the contents of a Zoom meeting among franchise owners lost confidentiality protection because the organizers did not require passwords or keep accurate track of who gained access to the call. Smash Franchise v. Kanda, 2020 Del.Ch. LEXIS 263. On the other hand, in Ultimate Timing v. Simms, 715 F.Supp.3d 1195 (W.D. Wash. 2020), the court found that an email request to treat information as confidential was sufficient.

Ownership

The DTSA defines an owner as one who has rightful possession of a secret, such as through a license. So mere possession is enough to establish standing to sue, even though the plaintiff had developed the information under a “work for hire” contract that gave title to a third party. Advanced Fluid v. Huber, 958 F.3d 168 (3d Cir. 2020). But merely claiming ownership of a patent improperly derived from a trade secret does not invoke a question of “inventorship” under the Patent Act, so removal on that basis to federal court is improper. Intellisoft v. Acer, 955 F.3d 927 (Fed.Cir. 2020).

Misappropriation

Taking someone else’s secret by “improper means” is unlawful. Back in the 1970s, aerial surveillance of a construction site was condemned by a judge as a “schoolboy’s trick.” The same expansive view of unethical business behavior animated the finding in Compulife v. Newman, 959 F.3d 1288 (11th Cir. 2020) that using “bots” to “scrape” information from the plaintiff’s publicly accessible website that was designed to provide data only to individual humans amounted to “improper means.” That said, in the more common circumstance of departing employees, early intervention by lawyers can help their clients avoid liability. In Flatiron v. Carson, 2020 U.S. Dist. LEXIS 48699 (SDNY), counsel advised, and the client adopted, a plan to reduce the risk of misuse of secrets by a former employee. As a result, the court rejected the plaintiff’s claim of “threatened misappropriation.”

Noncompete Agreements

Employee confidentiality agreements are typically viewed as fair and non-controversial. But if the employer gets aggressive and limits post-employment use of publicly available information, the nondisclosure agreement can be analyzed under the rules applicable to noncompete contracts, and declared unenforceable. TLS Mgmt. v. Rodriguez-Toledo, 966 F.3d 46 (1st Cir. 2020). In California, employee noncompete agreements have long been outlawed. But oddly for the first time this year, a California court ruled what should have been obvious, that the prohibition does not apply during the term of employment, when duties of loyalty justify imposing that restriction. Techno Lite v. Emcod, 44 Cal.App.4th 462 (2020). In another case dealing with California’s ban on noncompetes, the court held that strict application of Business & Professions Code § 16600 is applied only to employee agreements, not to contracts between businesses, which are examined under a rule of reasonableness. Ixchel Pharma v. Biogen, 9 Cal.5th 1130 (2020).

Preservation of Evidence

Because trade secret claims often come as a surprise to the defendant, and early procedural moves such as preliminary injunction applications can consume counsel’s attention, it is possible to overlook some of the finer points about litigation holds and other aspects of evidence preservation. But turning off an autodelete function on the defendant company’s email server is not viewed as one of the fine points. In Weride v. Kun Huang, 2020 U.S. Dist. LEXIS 72738 (N.D. Cal.), the resulting destruction of evidence justified terminating sanctions and a fee award. So, pay attention; you have been warned.

Identification of Secrets

As we in the trade secret bar are fond of saying, ours is the only area of intellectual property where the subject matter is not laid out in a government document, and where a dispute may be the first time that anyone is required to articulate what the thing is. But even if a plaintiff as part of its sensible trade secret management program has made a list, you can be sure that it will be challenged in litigation as insufficient to inform the defense. Indeed, identification of trade secrets has become one of the most hotly contested aspects of any claim. There are legitimate competing interests at stake, and one of the positive developments in 2020 was the publication by the Sedona Conference of a Commentary addressing this singularly challenging issue.

While everyone is reading this helpful guide, the cases keep coming. In Jabil v. Essentium, 2020 U.S. Dist. LEXIS 24371 (M.D. Fla.) the court held it sufficient to define secret software by providing file names and paths for 16,000 files. Sometimes litigants use experts to explain that because they can understand the description, the court should approve it. But the expert’s elucidation itself has to be understandable. In Calendar Research v. StubHub, 2020 U.S. Dist. LEXIS 112361 (C.D. Cal.), the court rejected what it characterized as “a circuitous path of unexplained jargon.” By comparison, the judge in Caudill Seed v. Jarrow, 2020 U.S. Dist. LEXIS 94821 (W.D. Ken.) allowed the plaintiff to broadly claim a “knowledge base” derived from years of R&D.

Finally on this subject, I refer to the recent opinion in Inteliclear v. ETC, 978 F.3d 653 (9th Cir. 2020), not because it creates new law on identification, but only because some people think it does, and I respectfully disagree. The case is highly unusual because on the first day of discovery the defendant filed a motion for summary judgment directed at the insufficiency of the trade secret description. In opposition, the plaintiff provided additional information about its claim, but the trial court granted the motion anyway. On appeal, the Ninth Circuit held that the dimension of the plaintiff’s trade secret was an issue of fact that couldn’t be resolved summarily. The only real lesson of this case is never to challenge an initial trade secret description by an early motion for summary judgment; file a request for protective order instead. The case does not, as some have suggested it does, represent some new federal standard regarding identification of trade secrets.

Requests to Seal Documents Filed in Court

Protecting trade secrets in litigation is a concern in many kinds of cases where sensitive information has to be presented and the parties confront the tradition and constitutional requirements regarding public access to courts. Those requirements are not absolute, of course, but proper balancing of interests requires careful observance of court procedures for sealing. In Uniloc v. Apple, 964 F.3d 1351 (Fed. Cir. 2020), the party filing its sealing motion was hardly discriminating; it asked the trial court to seal almost everything in the parties’ briefs, “including citations to case law and quotations from published opinions,” along with a number of exhibits containing publicly available information. When that motion to seal was denied, the litigant came back with a more restrained request, but the court denied it, and the order was affirmed on appeal. The lesson: on motions to seal, which can consume a great deal of the court’s time and effort, get it right the first time. And by the way, be scrupulously aware of variations in rules among district courts. In the Western District of Washington, for example, the sealing rules state that a request to withdraw material in case the motion is denied must be made at the time the motion is filed; asking for return of the material once you get a ruling is too late, and the information will be placed in the public record. Rydman v. Champion, 2020 U.S. Dist. LEXIS 51101 (W.D. Wash.).

My Personal Favorite

It’s been a long, and occasionally very frustrating, year. Having made it through 2020, we can all use a bit of comic relief. Sometimes it shows up in trade secret cases, usually unintentionally. In PB Legacy v. Am. Mariculture, 2020 U.S. Dist. LEXIS 62947 (M.D. Fla.) we learn that trade secret protection extends to . . . shrimp. Who knew?

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