2023 confirmed that, in some ways, trade secret litigation remains the Wild West for litigants. Large verdicts and unsettled law have made this a popular venue for plaintiffs. 2023 did little to disrupt the status quo. The trial courts struggled to apply consistent standards in interpreting eligibility for trade secret protection, the requisite level of specificity required for identification of the asserted trade secrets, the pleading standard and appropriate damages. Meanwhile, the circuits remained split on key issues such as damages. And the Supreme Court declined to weigh in on a key issue for trade secret damages that has been the basis for several recent mega-verdicts: the “avoided costs” measure of damages.
2023 Clarifications Regarding What Is (and Isn’t) Eligible for Trade Secret Protection
A review of opinions and rulings in 2023 suggests that litigants and courts are increasingly borrowing concepts from patent law in addressing what qualifies for trade secret protection and how damages should be calculated. In several rulings and opinions, the courts focused on the patent law concept of obviousness, confirming that while an obvious combination of publicly known features is not protectable, the combination may be protectable if it is not obvious or readily ascertainable through reasonable means. Relatedly, the First Circuit issued an opinion confirming that compilations of publicly available information can be trade secret where the data, but not the compilation, is publicly available and the company took steps to protect the confidentiality of the compilation.
The level of secrecy required for trade secret protection was also frequently litigated. In one notable opinion, the trial judge ruled that the fact that an alleged trade secret could be reverse engineered does not render it “readily ascertainable” and thus unprotectable as a trade secret. At least one court took particular interest in the vulnerability of a plaintiff’s system to professional hackers. That court focused on the relative ease with which professional hackers could gain access to the plaintiff’s trade secrets online — suggesting reasonable measures to protect one’s trade secrets should consider proactive anti-hacking measures.
The Fourth Circuit emphasized the importance of secrecy when itopined that trade secret information needs to be commercially valuable because it is secret, not just commercially valuable. The trial court had earlier granted summary judgment against the plaintiff in part based on the plaintiff’s failure to establish that the value of its trade secrets was derived from being kept secret, despite evidence of commercial value. This case is a note of caution to trade secret plaintiffs that the value of a trade secret must be derived from its secrecy.
Another note of warning emerged from 2023: Trade secret holders should be cautious about their disclosures in public filings and in disclosures to government entities that may receive public record requests or Freedom of Information Act requests. One federal district court found that public disclosure of trade secrets within an amended complaint extinguished the plaintiff’s Defend Trade Secrets Act claim. Another found that alleged trade secret maps were unprotectable, in part because they are distributed to public entities for use during emergencies and because the plaintiff applied for copyright protection over the map (thus placing it in the public domain). Even more interesting was an order issued by a Southern District of Florida court that could present real challenges to trade secret holders if it goes viral. In that case, the court denied a plaintiff’s request for a temporary restraining order, explaining that a company’s DTSA claim was unlikely to succeed on the merits because the trade secrets identified by the plaintiff had been provided to government agencies and thus were readily ascertainable through public record requests or FOIA requests.
2023 Brought Continued Clarity to the Pleading Standard for DTSA Claims.
Recognizing the risks of public disclosure for trade secret litigants, research suggests that the majority of courts examining the pleading standard in 2023 allowed relatively bare pleadings of claims brought under the federal DTSA, accepting that further definition can be explored through discovery. Some courts clarified that the pleadings standard is one of notice, not of detail. This is even more so where the parties entered into a nondisclosure agreement pursuant to which the alleged trade secrets were disclosed, as several courts concluded that defendants should be able to determine what trade secrets are at issue from their past business dealings with plaintiffs.
However, some courts continue to require litigants to provide a heightened level of specificity at the pleading stage. Broad references to files, technical information stored in data slots, test videos, statistical data and the like — without more “factual enhancement” — led to the dismissal of at least one claim for misappropriation of trade secrets. Another court found that a complaint’s allegations that defendants used, misappropriated and disseminated a plaintiff’s trade secrets, without more detail as to how it was used, was too conclusory to state a claim.
The Requirement of Specificity in Trade Secret Disclosures Continues to Gain Popularity with the Courts
While it is clear that most courts allow plaintiffs to be vague in describing their trade secrets in a publicly filed complaint, the courts continue to expect much more in the context of confidential discovery. In some notable 2023 cases, the courts often rejected reliance on lists of categories or vague references to thousands of pages of documents. Instead, most courts expected a higher level of specificity, including production of source code and specific algorithms, identification of the specific datasets and definition that illuminates the difference between the asserted trade secrets and information generally known or disclosed in patents or texts. Building on efforts over recent years to require litigants to provide early and specific disclosures of their trade secrets, research suggests that many courts prevented the plaintiff from conducting discovery into the defendant’s confidential information until after the specific disclosure of the asserted trade secrets was complete. At least two courts, however, required the defendant to move for a protective order to obtain that relief.
Trade Secret Damages Law Remains Unsettled as the Supreme Court Declined an Opportunity to Provide Clarity
While patent law on damages is exceptionally well defined, trade secret damages remain fairly “cowboy” — even with some judicial attempts to clarify the issues in 2023.
In the past few years, plaintiffs have increasingly sought unjust enrichment damages based on avoided development costs as a component of damages for unjust enrichment. Both the DTSA and the Uniform Trade Secrets Act adopted in most states allow for damages for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss. Under this theory of unjust enrichment, parties found liable for trade secret misappropriation may be liable for costs they “avoided” by misappropriating the trade secret instead of independently developing it. Some of the largest verdicts in the past two years, have been based, at least in part, on this “avoided costs” measure of damages. But the circuit courts remain split on the application and availability of the avoided costs measure of damages in trade secret litigation.
The Seventh and Third Circuits have allowed the avoided costs approach even where there is no commercial benefit to a defendant. But the Second Circuit attacked this approach in 2023 when it vacated a significant damages award based on the theory of avoided costs. The Circuit Court found that the plaintiff was adequately compensated by a smaller lost profits award and that awarding avoided cost damages would give the plaintiff a windfall. The Court acknowledged the conflict between its decision and the Seventh Circuit’s approach, which allows avoided costs damages under the DTSA even where the plaintiff had suffered no economic harm. The Second Circuit nevertheless vacated the damages award and remanded for further consideration of a royalty award. Adding further confusion to the mix, the Second Circuit noted that its decision leaves open the possibility that avoided costs may be appropriate in other factual scenarios, leaving one to wonder where the Second Circuit would draw the line.
Those hoping for some clarity from the Supreme Court in 2023 were disappointed. In late November, the Supreme Court declined to take a case addressing the issue of avoided costs damages in trade secret litigation. The Court declined to address the circuit split when it denied the petition for a writ of certiorari, leaving in place the Seventh Circuit’s ruling affirming an award that included avoided costs. It similarly denied a petition for a writ of certiorari of a case from the Second Circuit on the avoided costs issue.
The confusion surrounding trade secret damages was not limited to the avoided costs doctrine. 2023 saw the trial courts also seeking guidance on the use of the reasonable royalty measure of damages. One court in the Southern District of Texas certified the plaintiff’s appeal of an order regarding reasonable royalty damages under the DTSA, noting that clarification of the relevant inquiry for determining reasonable royalty damages under the DTSA is appropriate. The court noted that while the Fifth Circuit has clarified how the willing buyer-willing seller test should be applied to measure reasonable royalty damages, it has also opined that every case requires a flexible and imaginative approach. The court noted that no circuit has addressed the “willing” portion of the “willing buyer” inquiry for reasonable royalty damages in trade secret cases.
There was some instructive guidance from the lower courts on the issue of apportioning damages in trade secret cases. A Southern District of Texas court warned that a plaintiff’s all-or-nothing approach to damages, rather than apportioning damages to the value of each trade secret, was a gamble that assumed the jury would conclude that either all or none of the trade secrets were misappropriated. The approach failed to consider the possibility that the jury might determine that only some trade secrets had been misappropriated, rendering it difficult or impossible to calculate damages only attributable to the misappropriated trade secrets. However, the court opined that such a gamble does not render an expert’s approach unreliable or inadmissible.
Another trial court raised concern regarding the lack of apportionment after a significant jury verdict awarded an avoided costs measure of damages for misappropriation of a bundle of four trade secrets. The trial court reversed the jury award, complaining of the plaintiff expert’s “all or nothing” approach to damages. The judge explained that no evidence was presented on how to calculate damages for each trade secret individually since the plaintiff had bundled them in its “all or nothing” approach, thus rendering the jury’s damages award speculative.
Federal Judicial Center Publishes Trade Secret Management Judicial Guide
While trade secret law continues to evolve in both state and federal courts, the recent publication of the Trade Secret Case Management Judicial Guide may eventually erode some of the uncertainty we continued to see from the courts in 2023. This comprehensive guide, produced by a number of private practitioners and law professors, is similar in nature to the Patent Case Management Judicial Guide. Meanwhile, the Sedona Conference Commentaries continue to develop authoritative guidance, including three commentaries published in 2023 regarding the governance and management of trade secret definition, cross-border discovery, and damages in trade secret litigation.
To sum it up, the biggest news of 2023 in trade secret litigation was qualitative as the pace of trade secret litigation remained on par with recent years, jury verdicts remained fairly constant, no single court dominated the conversation, and no dramatic changes to the applicable law were made. Trade secret litigation indeed remains the “wild west” of IP litigation.
Aimee Fagan is based in Dallas and serves as a co-leader of Sidley’s intellectual property litigation practice.