We have previously written about the effects of COVID-19 on the way we currently work, as well as how businesses need to adapt to protect their trade secrets, customer goodwill, and other interests. In ordinary times, emergency injunctive relief is often the first resort for a business after discovering its trade secrets were stolen or customer relationships are at risk. In the current environment, seeking emergency injunctive relief may not be possible or practicable until courts return to business as usual. Another ancillary effect of COVID-19 is the expected wave of bankruptcy filings. This poses the question: What do you do when a wrongdoer is insolvent or about to file for bankruptcy protection?
Who to sue?
If in doubt about the financial solvency of a wrongdoer, promptly filing litigation and seeking injunctive relief immediately in the preferred jurisdiction is critically important. To the extent that a victim of trade secret misappropriation has any potential solvency concerns about the wrongdoer, consider seeking relief against both the wrongdoer and, if the wrongdoer is an individual (i.e., a former employee), any competing business employing the wrongdoer. By seeking relief against both parties, the bankruptcy automatic stay is less likely to bring the entire trade secrets enforcement litigation to a halt as the automatic stay only applies to parties in bankruptcy. There is also a higher likelihood that at least one defendant will be solvent and able to satisfy any damages award. A trade secret plaintiff should also be mindful that a bankruptcy filing by a debtor-wrongdoer will constitute a basis for removal of any pending litigation to federal court, and potentially the bankruptcy court.
The effect of the automatic stay on trade secrets litigation
After a bankruptcy case is commenced, the bankruptcy petition automatically triggers an automatic stay of nearly all pre-bankruptcy litigation, enforcement, or collection activities. Violation of the automatic stay can subject a party to claims for punitive damages and attorneys’ fees. The effect of the automatic stay may be used to persuade a court that emergency injunctive relief is necessary to protect a plaintiff’s rights before a bankruptcy petition is filed.
Most bankruptcy courts recognize that a pre-bankruptcy injunction will continue in full force and effect so as to enjoin wrongful conduct during and after the bankruptcy proceedings. Thus, acting quickly can preserve critical protections of the trade secret owner’s rights. And, to the extent justified by the facts and circumstances, a plaintiff can seek to modify the automatic stay to permit completion of pre-bankruptcy litigation including injunctive relief and damage awards.
In the event a wrongdoer beats a trade secret owner to the punch and files a bankruptcy petition before injunctive relief can be obtained, all is not lost. A majority of bankruptcy courts recognize a plaintiff’s right to pursue narrowly tailored injunctive relief in bankruptcy court to stop wrongful post-bankruptcy conduct.
Analyzing the scope of the automatic stay in trade secret cases is a complex and nuanced task requiring the assistance of an experienced bankruptcy professional and trade secret specialist. Thus, we recommend acting quickly to consult with specialists if your trade secrets are at issue.
Additional remedies against a wrongdoer in bankruptcy
While some relief will be unavailable or limited against a bankruptcy debtor, remedies still exist. Regardless of whether pre-bankruptcy claims have been reduced to judgment, a trade secret plaintiff must consider whether to file a proof of claim with the bankruptcy court in order to receive any payment on damages claims. Often, the answer to this question is a simple yes. However, complex issues of jurisdiction can arise that may alter this analysis. In addition, a misappropriation of trade secrets that is shown to be willful and malicious may constitute a basis to exclude any money damage award from discharge in bankruptcy. This would permit the plaintiff to pursue full collection from the debtor-wrongdoer after the bankruptcy case is closed. A trade secret plaintiff should also analyze the enforceability of any statutory or contractual entitlements to attorney’s fees in bankruptcy and any non-compete agreements.
While the financial condition and assets of the alleged wrongdoer should often be a consideration before commencing any litigation, such considerations are of particular importance now. Consistent with our prior posts, businesses who believe their trade secrets and other interests are at risk should take action immediately to investigate the scope of potential wrongdoing, evaluate considerations for seeking emergency relief—including the financial condition and assets of the wrongdoer(s)—and take appropriate and swift action as appropriate under the specific circumstances.