A colleague in the Chicago IP bar recently lamented in these pages how hard it has become to counsel individual inventors interested in seeking patent protection for their inventions. A wealth of data backs her up – and leads to some strong predictions for the future of IP and IP litigation, and a number of things that especially in-house counsel should be watching closely.
According to the United States Patent Office, utility patent applications continue to rise – up 39% in the decade between 2005 and 2015 (the last year that data was published), and up about 8% from 2011 when the American Invents Act was passed. But patent litigation is down. Significantly down.
According to data obtained from Lex Machina, patent case filings jumped from 3594 new cases in 2011, when the America Invents Act passed, to 6132 new cases in 2013 – an increase no doubt attributable to the AIA itself, and its requirement to file separate cases against unrelated defendants even when the case involves the same patent(s). But since 2013, patent case filings have declined dramatically. By 2016, new case filings were down to 4528 – a 26% decline in just three years.
Meanwhile, in 2014, PricewaterhouseCoopers estimated the economic losses to trade secret theft at between 1 and 3% of GDP annually. And in 2016, Create.org estimated the increase in trade secrets and other IP theft at 56%.
From the late 1980s, when the United States Court of Appeals for the Federal Circuit was created, through the mid-2000s, legal and business trends made patenting an attractive proposition for tech companies. Rapidly advancing technology, ever-increasing damages awards, ready availability of permanent injunctions against infringers, and tough standards for invalidating patents made patent IP valuable and an attractive investment.
Since the mid-2000s, however, the pendulum has swung back. Technological advancement has slowed in some sectors and in our experience, investment is generally down. The US courts and Congress have chipped away at many protections: injunctions, damages, and plant claims directed at software inventions among others. Companies have become more selective about what they choose to patent. The result has been that, as others also noted or predicted, ever more technical information is being kept as a trade secret, to be exploited by the business but not revealed to the public. Stout Advisory recently published its 2017 Trends in Trade Secret Litigation Report, predicting that “we expect to see more companies opt to protect their business assets through established trade secret practices as opposed to patenting.”
In turn, trade secret litigation is up; and may be a much more important aspect of IP litigation in the future. Again, Stout recently predicted this trend, expecting “[i]ncreased trade secret litigation filings as business owners leverage stronger protections and enhanced remedies …”
These trends spotlight a number of critical threats to many companies, which astute in-house counsel should be watching closely. The threats come from many directions: foreign actors deliberately targeting the company’s operations to steal industrial secrets; foreign governments; third parties who offer their ideas under a confidentiality agreement; joint venture partners, vendors, suppliers, and customers; disgruntled and departing employees; and hactivists, among many others.
What Should Counsel be Thinking About in this New Environment?
First, do you know what your trade secrets are, who has them, where they are kept, and what they are worth? All too often, the company’s focus on its trade secrets happens only at the moment of a breach. A key employee departs for a competitor or customer, a joint venture falls apart amid rancor over who owns particular secrets within the business, or hacker strikes. By then, it may well be too late for effective enforcement. What is the trade secret we want to sue to recover? How was it protected? What is it worth?
Not all trade secrets are as easily identified as the recipe for Kentucky Fried Chicken. They may be obscure, or they may exist only at the subsidiary or even factory level: the specific settings for a piece of industrial machinery that just happens to make a company’s production more efficient or less expensive; the specific shape of an internal component that just happens to maximize output and lower cost, or how to find that shape; the particular metal that works in a particular configuration of a switch or valve. In order to decide what to protect, and how, management and the legal department need to know what these secrets are, how much they are worth, and how they can best be protected from theft.
In many cases, it may be possible to set up a trade secret audit to identify, categorize and often value trade secrets. Inside and outside counsel, working together with key players in the organization (engineers, business people), and experts can answer these questions at a reasonable cost. In many cases, a trade secret audit may have additional benefits – it can lead management to better value the business, and it can lead the company to install better and more targeted protections of the most valuable IP in the company.
There are also important international implications. Trade secrets protection varies markedly around the world, as does the definition of theft. The company may wish to evaluate where its secrets are kept, as well as how they are kept secret.
How are your trade secrets protected? In the United States, the definition of a trade secret generally includes a requirement that the secret’s owner has taken “reasonable steps” to keep it confidential. Thus, the second question in any trade secrets case is: was the alleged trade secret subject to “reasonable measures to keep such information secret?” Many companies have some protections in place: password access to company networks, key cards, non-disclosure agreements. In determining how your secrets are protected, you should ask such questions as: are these measures reasonable? Are they always applied? Do third parties have access to the networks? Do third parties have access to keycard-protected space? Are valuable secrets kept in segmented, need-to-know portions of the network, or are they widely available to everyone on the network? These questions matter, not only because they will be important in litigation if your trade secrets are stolen, but because responding to them with effective protections may well keep your trade secrets from being stolen in the first place.
Are your secrets really yours, or do they belong to your business partners? Among the most disastrous mistakes with trade secrets is believing you own them when you do not. A number of highly-contentious trade secrets disputes have arisen when joint ventures and similar business partnerships were dissolved. Even companies with forward-thinking legal departments who carefully document such deals may find that they inherit new issues with acquisitions of companies where the prior legal department wasn’t as careful or complete. Compounding these issues is the fact that documentation varies globally – and over time. Even in a well-documented deal, upon dissolution of the relationship, it can turn out that the ownership of trade secrets the company thought belonged to it is unclear, or is joint. In a poorly-documented deal, it may be unclear who owns contributed or even jointly-developed trade secrets – or it may never have been considered in the first place. Even where the documentation is clear, the facts may not be, because over time the history of “contributions” can be lost or muddied by time, additional facts, or complexity.
Are your employees putting you at risk of a trade secrets case? Much of the discussion above has centered on protecting your company’s own trade secrets. But what of those secrets owned by your business partners, customers, vendors and competitors? And what happens when an employee betrays your confidential information, or that of your vendors? In some industries, we are aware of chat rooms on the dark web used by engineers and others to trade away secrets and designs anonymously, or to obtain other parties’ trade secrets for the company’s benefit. We are also aware of situations in which a company’s employee has claimed credit internally for ideas or developments actually contributed by a vendor, supplier or business partner. While the company must be vigilant about protecting its own valuable trade secret technology, even the most respectable company must also take steps to protect itself from trade secret entanglements into which its own employees may draw it. Relevant steps including at least training, monitoring, and enforcement.
What are the first things you should be thinking about if the company experiences a trade secrets breach. Ideally, the first thing you should think is: what does my response plan say? We strongly recommend that, well before any problems arise, companies consider, draft, and put in place a high-risk contingency plan that includes clear action steps in the event of a breach, and identifies the team that will handle this high-priority issue. This plan can be drafted after or in conjunction with the trade secrets audit discussed above. The plan should set out the careful preservation of evidence of the trade secret(s) at issue, your ownership of it, evidence of its misappropriation, and your efforts to keep it secret. With or without a plan, should a breach occur, you will need to consider whether you can resolve the situation through negotiation, and, if not, whether preliminary relief (such as the new federal ex parte seizure order, or a preliminary injunction) will be required; whether you will need to conduct an internal investigation into possible corporate or employee misconduct; and whether outside enforcement agencies should be involved.
What can you expect in trade secret litigation? The specifics of trade secret litigation vary widely by venue, and depend on the facts of the case. Cases may be filed in US Federal court, any one of the US state courts, in the International Trade Commission, in foreign or domestic arbitration (if there is a relevant arbitration agreement), or in a foreign court if the alleged misappropriation happened overseas.
Many cases are quite simple, and often involve preliminary injunctions or TROs, especially where the threatened breach or theft involves a departing employee. The focus in many of these cases is upon the recovery and return of laptops, hard drives or USB memory devices, phones, or data.
More complicated, and dangerous, disputes present more far-ranging and intrusive problems. And trade secret cases tend to be hard-fought, sometimes emotional, and to come with deep tradeoffs between the company’s business operations and the litigation strategy itself. Recent news features claims of billion-dollar damages theories, and cases with appearances by over 40 lawyers. Such cases are complex, unpredictable, and dangerous at best.
Although protective orders are common, even expected, the company still must compare the merits of fighting the litigation to the value of the secret business information that will have to be produced to the other sides’ lawyers, and potentially to the court.
A recent report found that “nearly all” trade secret claims were filed with parallel state or federal claims – breach of contract and tortious interference being the most common. In recent years, discovery in patent cases has narrowed; but the scope of relevant discovery in a trade secrets case is often very wide. Trade secret litigation can be the most intrusive form of IP litigation, prying into highly sensitive aspects of both the plaintiff’s and the defendant’s internal business structure, technology, and operations. Some statutes, and even individual judges’ rulings, require that the plaintiff define the purloined trade secret with specificity early in the litigation.
Claims over inevitable disclosure – the allegation that a defendant’s employment in a job for a new employer will inevitably involve the use of trade secrets within her knowledge or possession. An Illinois Federal Court, for example, recently allowed a plaintiff to plead a case under the new Defend Trade Secrets Act using the inevitable disclosure doctrine.
Litigation for an exclusion order in the International Trade Commission comes with still more complexity. Ancillary state law claims are not allowed, but litigants should expect a shortened schedule and broad discovery, along with the requirement to prove both a domestic industry to be protected and the nature of the public interest to be served.
In short, if the projections are correct and trade secret litigation becomes more common, companies should expect more dangerous and expensive litigation, and may well want to take proactive steps to avoid it at all costs.