Be careful how wide a net you cast if you’re pursuing a trade secret misappropriation claim because the dynamic you create could inadvertently help defendants, intellectual property specialists said in a Fish & Richardson webcast.
Going after a former employee that you suspect took trade secrets to a new employer or to start a new business is one thing; going after the company the person joined, or started, or some additional party is another matter. Because now you’re bringing into the fight a defendant that could have deeper pockets and be better prepared to mount a defense, said Katherine Prescott, a Fish & Richardson principal.
“What kind of dynamic are you going to be creating between that group of defendants?” said Prescott. “Including certain defendants may increase the legal resources that are available to the defendants, because they might form a joint defense agreement and have more money to spend on counsel to build up their defense.”
On the other hand, going after multiple parties can give you an opportunity to flip one and use that defendant’s evidence against the others.
In one case, Prescott said, the plaintiff named in their claim several former employees who left to start their own company using misappropriated information. But one of the former employees was mainly along for the ride. That person “folded very early and gave great evidence against the others,” she said. “So it was helpful to create that dynamic by naming individuals in addition to the new company.”
Before you decide who to sue, be clear on what you’re trying to accomplish, she said.
If you’re trying to keep a product from a competitor off the market, going after a former employee that you suspect gave the new employer your trade secrets won’t be enough; you’ll have to go after the company, too.
“Just naming your former employee isn’t going to cut it,” she said.
On the other hand, if you just want to send a message to your employees that you take your trade secrets seriously, going after the former employee will likely do the trick.
“You want to evaluate which defendants you actually want to name in a complaint,” she said.
Identifying your trade secret
The statute of limitations to file a complaint under the federal Defend Trade Secrets Act (DTSA) is generally three years, a length of time that can seem short if you don’t act right away.
As simple as it sounds, first you need to be clear you actually have a trade secret to protect. If you haven’t taken steps to keep the information secret, such as putting it behind a firewall and limiting access to it and requiring employees to sign a non-disclosure agreement, among other things, you might not meet the standard for pursuing a claim.
It’s equally important to be able to show the secret information creates value that it otherwise wouldn’t have if it were public.
“In other words, you need to investigate how you can prove that the very fact your information is secret gives it value,” said Esha Bandyopadhyay, a Fish principal. “What were you able to do with that trade secret information that others couldn’t have done without access?”
It can make sense in some contexts to pursue your complaint under state law rather than the DTSA, or in addition to the federal law, because the statute of limitations in many states is longer, in some cases six years.
“If there’s a statute of limitations issue, then that could dispose of your entire case and that would be an unfortunate waste of resources,” Bandyopadhyay said.
If you’re worried about your trade secret being made public, it can make sense to stop the competitor in its tracks by seeking preliminary relief, but the hurdle is high, said Prescott. You have to show you’ll face irreparable harm and that you have a good case on the merits. If you can show those two things, pursuing preliminary relief can put you in a good offensive position because it forces the defendant to mount a quick response.
“It places the defendant on their heels,” she said.
If you start by filing a temporary restraining order (TRO), that can force the defendant to respond within as little as a month.
“Defendants have a lot of urgent and immediate work to take on to address that,” she said.
Even without the TRO, seeking a preliminary injunction can proceed to an evidentiary hearing on the motion within three months.
Depending on the nature of the trade secret and how you think it was taken, it can make sense to layer on additional claims. Not only does that increase the complexity for the defendant, but it can increase the amount of punitive damages you can get if you succeed. What’s more, from a legal standpoint, it’s far easier to show a contractual breach than the misappropriation claim, Prescott said.
Breach of contract is by far the most common claim added to trade secret misappropriation, so if the employee signed an NDA, that’s an obvious place to start.
“More than 80% of trade secret cases include breach of contract,” Prescott said.
Depending on the state, you might also have breach of a non-compete agreement, although with the Federal Trade Commission saying it wants to ban these agreements, including existing agreements, that might not be something you can go after in the near future.
You might also have a claim for breach of a non-solicitation agreement if the former employee or competitor is going after your customer base.
Or, if you believe your trade secret has been reverse engineered to create a competitive product, you could have a claim under a breach of the end-user license agreement (EULA).
If the defendant appears to have improperly interfered with your customers or prospective customers, you could also have a tortious interference claim.
And if the defendant is a former officer or director of your company, you could also have a breach of fiduciary duty claim.
“In addition to the contractual duties that employees owe, senor individuals may owe heightened fiduciary duties, like a duty of loyalty, and that may create a cause of action surrounding their activity in setting up a competitive business,” Prescott said.
“The more claims you’re adding to your complaint, the more you’re increasing the complexity,” she said. “And with some of these claims, their real benefit is you’re exposing defendants to more punitive damages than a trade secret claim.”
Typically, punitive damages in trade secret claims are capped at twice compensatory damages, but in many states punitive caps on other torts or on fraud, among other types of claims, either aren’t capped or are capped at a higher multiplier.