29 October 20195 minute read

Trade secret litigation: trade secrets protection programs may make or break your case

Navigating trade secrets litigation is tricky business.  While the concepts are straightforward – is there a trade secret? was it stolen? what are the damages associated with that theft? – each of those questions brings with it a minefield of inquiry that shapes whether a trade secret claim will be successful.  The Uniform Trade Secrets Act defines what a trade secret is, but does not provide a list.  Whether something meets the legal definition hinges on the value of the trade secret to your company and how it is protected.  Accordingly, what may be a trade secret to one company may not be a trade secret to another.

Add to the mix that trade secret cases often include related claims – claims for breach of contract, breach of an employment agreement against a departing employee, unfair business practices, and/or violation of a non-competition provision – and things can get really complicated.  Some jurisdictions have enacted statutory barriers.  California, for example, has enacted a statute that non-competition provisions and contractual restraints on trade are void, at least as it relates to individuals. Cal. Bus. & Prof. Code § 16600.1

Each claim presented to a jury has its own unique set of elements and carries with it a different burden of proof.  Some claims can be harder to prove than others.  For example, a departing employee who takes information from a prior employer may not be liable for trade secrets misappropriation (if establishing trade secret protection proves difficult) but may be liable for breach of an employee agreement that requires the employee to leave all company property behind upon departure.

In this scenario, including a breach of contract claim in a trade secrets case could be viewed as the equivalent of pleading a "lesser included offense" in a criminal case.  However, while seemingly complementary, the more claims and the more complicated the case, the harder it is to predict what a jury will do. In this regard, two closely watched trade secret cases that went to trial this summer are worth noting. Both resulted in no damages being awarded for trade secret misappropriation.

In the first case, Huawei Technologies and Futurewei Technologies v. CNEX Labs and Yiren Ronnie Huang, Case No. 4:17-cv-893, USDC (EDTX), Huawei and Futurewei filed suit against its former employee (Huang) and his new corporate enterprise (CNEX).  Huawei alleged that when Huang left Futurewei (a Huawei subsidiary), he misappropriated trade secrets and other company information relating to solid state storage devices.  In a complaint that included over 20 claims, Huawei also asserted that the defendants poached 14 employees and filed numerous patent applications based on Huawei's confidential information.  CNEX, in turn, filed counterclaims alleging that Huawei misappropriated CNEX's trade secrets.

After a complicated three-week trial, the jury returned a verdict on June 26, 2019 in which it found that CNEX/Huang did not misappropriate Huawei's trade secrets but that Huang had breached his employment agreement by filing patent applications on behalf of CNEX in violation of a patent application disclosure provision in his employment agreement (an arguable "lesser included offense").  The jury, however, found that Huawei had not established harm from that breach; it therefore did not award damages.  With respect to CNEX's trade secret counterclaim, the jury found that Huawei had misappropriated trade secrets, but also refused to award damages because CNEX did not prove that Huawei had been unjustly enriched by the misappropriation.  Accordingly, while both sides at least partially prevailed on their respective claims, neither party was awarded damages.

In a second trade secrets trial, there was a similar result.  In Six Dimensions, Inc. v. Perficient Inc., Case No. 4:17-cv-2680, USDC (SDTX), Six Dimensions filed suit against a former employee and Perficient alleging misappropriation of trade secrets, breach of employment agreement, and employee poaching, and sought $50 million in damages.  Six Dimensions, a digital marketing firm, claimed trade secret protection in training materials, employment evaluations and employee lists, customer pricing and project information, and the like.

While the jury found that Six Dimensions established trade secret protection with respect to some of its materials (training manuals, customer information), it found that those trade secrets were not misappropriated.  The jury separately found some of the alleged trade secrets (eg, employee information) did not rise to the level of trade secrets under the law, demonstrating that this jury took seriously its charge to look at each trade secret independently.  However, Six Dimensions was not left empty handed.  The jury awarded $287,000 in damages based on a former employee's breach of employment agreement in soliciting Six Dimensions employees after she joined Perficient.  But that is a far cry from the $50 million sought.

Trade secret litigation is complicated and expensive.  As demonstrated by these recent jury verdicts, it is a difficult task to convince a jury that a trade secret exists, that it has been stolen, that the misappropriation caused harm, and that the harm can be quantified in damages.  To avoid this cost and uncertainty, take a moment now to evaluate your incoming and departing employee policies and your intellectual property protection program.  Having strong policies in place on the front end will reduce the risk of your trade secrets being misappropriated.  And, if they are, these policies will help you establish your claim and quantify damages should you need to enforce your trade secret rights.

1 The question of whether Section 16600 applies to business-to-business non-competition provisions is subject to debate and, pursuant to recent certified questions from the Ninth Circuit Court of Appeals, may be resolved shortly by the California Supreme Court.