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Trade Secret Litigation: Are You Asking the Right Questions?

By Jack Russo, Member, Russo & Hale LLP

Trade secrets represent the “bread and butter” of software, e-business and other technology companies’ intellectual property. Under the Uniform Trade Secrets Act, a trade secret is information (such as a method, program, technique, etc.) that gives a company an advantage by that information’s secrecy. Companies must protect these trade secrets from the inside out, controlling what information is brought in by employees and what information leaves the company through business relationships, through employee termination, or otherwise.

It is an ongoing policing process, and often the most difficult aspect is defining a company’s trade secrets and educating a company and its employees as to what constitutes its trade secrets. Here, we address what executives and their board of directors must know about trade secret litigation even before retaining counsel.

There are different considerations in a trade secret case than in a patent case, but the fundamental questions remain the same: What must a potential plaintiff in a trade secret case review with counsel before filing suit or sending a demand? What must potential defendants review with their counsel after receipt of a suit or demand? What other considerations should counsel for all parties take into account? We review here the importance of key checklist items.

The following presents an initial checklist of items that MUST be reviewed in connection with deciding whether and where to bring a trade secret case in litigation and/or how to defend it.

1. Who is the Plaintiff? Who are the decision-makers for the Plaintiff? Is the Plaintiff litigation adverse? Is the Plaintiff litigation-oriented? Is the Plaintiff already in other related litigation in any other court? Has the Plaintiff defined its trade secrets? Does the Plaintiff have a history of disclosing its trade secrets to potential customers? Does the Plaintiff enforce confidentiality?

2. What are the Plaintiff's ultimate goals? There are many potential goals, ranging from affording litigation to setting policy. Is the Plaintiff seeking to protect information that gives it a competitive advantage in the industry? To protect its confidential business information? To demonstrate its policing efforts? To set a precedent? If so, is it seeking to protect this information from a hostile ex-employee? From a competitor? From a former customer or business partner? Does the Plaintiff seek publicity? To obtain damages? To minimize costs?

3. Who are the Defendant(s)? Who are the decision-makers for Defendant(s)? Are the Defendants litigation adverse? Are the Defendants litigation-oriented? Are any of the Defendants in other related litigation in any other court? Is there any insurance coverage? (Insurance coverage can often become the determinative factor on whether the litigation can be resolved early through settlement negotiations or whether there will be a precedent-setting trial (and appeal) because of defense funding for the litigation derived from insurance coverage.) Are individuals named in the suit? Does the company have director/officer insurance coverage? Can the Defendants afford litigation? Is this competitive litigation initiated by the Plaintiff?

4. What are the Defendants’ ultimate goals? The Defendants may have several goals, from protecting its own information and/or preventing a competitor from discovering its information to minimizing liability, damages and costs. How important is the Defendants’ continued use of the claimed trade secret information? Are the Defendants claiming that the information is not trade secret? That it was independently developed by the Defendants? How much can the Defendants afford to invest in litigation? Are some Defendants protected by insurance while others are not? Are there other actual or potential conflicting interests among and between different Defendants?

5. What are the claimed trade secrets? Does the Plaintiff have a detailed understanding of what constitutes its trade secrets? For example, in California a plaintiff must identify its trade secrets under California Code of Civil Procedure §2019(d) (soon to be §2019.210). Are any of the trade secrets asserted in the complaint or in the Identification of Trade Secrets generally known in the industry? What public sources of this information exist? Have the trade secrets been adequately disclosed so that the parties understand the scope of the trade secret claims?

6. Has injunctive relief been sought and/or should it be? In trade secret litigation, it is often typical for a plaintiff to seek a temporary restraining order, followed by a request for a preliminary injunction to bar use of claimed trade secret information. Therefore, a substantial amount of activity may take place in a matter of months after initiation of a suit. Should the Plaintiff seek injunctive relief to preserve evidence (e.g. to prevent a hostile former employee from destroying his or her home computer)? How broad would the scope of a temporary restraining order need to be? Are there financial issues for posting a bond to be considered?

7. Was there any pre-existing relationship between the parties? Was there some business relationship? Might there be some agreement for arbitration or other dispute resolution? Should some agreement for possible dispute resolution be pursued? Is there a business solution where the parties can work together?

8. Federal Courts vs. State Court vs. ADR? What are the pros and cons of using different available systems for adjudication? Can the case be brought in federal court as a pendant claim to other federal claims? Will the Defendants argue that the trade secret information is disclosed by a patent? Patents are in the realm of public knowledge. Is the matter one that can be more promptly and more effectively handled via alternative dispute resolution? Are the parties willing to engage in early mediation? Will the parties agree to private arbitration? Would arbitration be lest costly?

9. What are the potential venues? This question relates to the parties, their location(s), and the location of the trade secret misappropriation. Where could a suit be filed? Is there a venue “risk”? Where could a declaratory relief suit be filed? For example, a potential defendant located in another state may file in its own state court for a judgment that it did not misappropriate trade secrets, thereby gaining a “home court advantage.” Should the Defendants file preemptively in their local courts? Can a federal suit be filed? Where should the federal suit be filed? What are the Local Rules in the different courts? Does the court require an Identification of Trade Secrets? Has the state adopted the Uniform Trade Secrets Act or does it rely on the common law? What are the different timelines in those different courts? How would those Local Rules and timelines aid a Plaintiff or aid one or more Defendants?


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