Legal analytics powerhouse Lex Machina recently released its 2020 Trade Secret Litigation Report, which highlights federal litigation trends in the last decade, as well as the last year specifically. While it’s very much an open question whether these trends will continue in light of the COVID-19 pandemic (more on that in our next post), the report identifies some interesting data. In addition to some of the highlights contained in the official report, a deep dive of Lex Machina’s case repository reveals even more granular trends, demonstrating the wealth of information that can be gleaned and theories that can be tested from the data compiled from the more than 1.7 million federal cases in Lex Machina’s database. In fact, we have to admit that many of our own assumptions were turned upside down upon digging into the voluminous data available on the Lex Machina website! Expect to see a guest post from Lex Machina soon explaining how this data is sourced and what subscribers can do with it.
Some of the key findings in the report and/or associated data:
- The report identified the leading firms in trade secrets cases, with most having robust employment law practices. We’re proud to announce that Seyfarth is near the top of the list of firms filing the most federal trade secret suits (both in 2019 and over the course of the last decade).
- Following the enactment of the Defend Trade Secrets Act in May 2016, which provides jurisdiction in federal court, we predictably saw an increase in federal trade secret litigation filings—in fact, a significant 30% jump between 2015 and 2017. Those filings have more or less held steady since 2017. Last year, nearly three quarters of all federal trade secrets filings included a DTSA claim—not surprising, and in fact one might wonder why that figure isn’t even higher. An even greater percentage of these filings also included a breach of contract claim—again, not groundbreaking, given that most employees with access to trade secrets are subject to non-disclosure and other restrictive covenant agreements.
- What is surprising, however, is the trend in Computer Fraud and Abuse Act claims after the DTSA’s May 11, 2016, effective date. Given that the DTSA now provides an independent basis for federal jurisdiction of misappropriation claims, we had expected to see a decrease in CFAA claims, particularly given the circuit split in interpreting these claims and the uncertainty as to whether “garden variety” employee misappropriation is a CFAA violation (a question which will be decided by the Supreme Court next term).
- But a closer review of Lex Machina’s data suggests the number of CFAA suits actually increased substantially since the passage of the DTSA. While the database does not yet have a separate CFAA tag and thus the numbers are only an approximation, a keyword search for “CFAA” or “Computer Fraud and Abuse” suggests that between 2010 and the beginning of 2016, an average of 298 CFAA cases were filed each year (note that these are only cases that have an overlap with Lex Machina’s practice areas). In contrast, between 2017 and end of 2019, that average jumped to 382 CFAA cases per year. In fact, every full year since the enactment of the DTSA has seen more CFAA filings than any of the full years prior to the DTSA’s effective date. It may be that with the increase in federal trade secrets filings generally following the passage of the DTSA, plaintiffs in those circuits where the CFAA is interpreted broadly see no downside to including such a claim alongside the leading DTSA claim (and see a potential upside of an alternative theory of recovery).
- The report also revealed that some of the most frequent trade secrets plaintiffs are insurance companies and those in the financial services industry. While trade secret cases from the high-tech industry are often more high-profile, perhaps employees in tech are more familiar with their confidentiality obligations and the critical nature of the company’s proprietary trade secrets, or their employers have implemented greater safeguards against misappropriation. On the other hand, employees in the insurance and financial services industries assemble large books of business, often on the backs of their employers, and so it is perhaps expected that firms in these two industries frequently pursue their former employees who leave for seemingly greener pastures—particularly as a trade secret misappropriation claim under the DTSA provides an easier entrée into federal court (even versus a Computer Fraud and Abuse Act claim) where a garden-variety breach of restrictive covenants agreement wouldn’t, absent diversity jurisdiction.
- One interesting trend is that trade secrets litigation took longer in 2019 alone to reach key events than in the decade as a whole: in 2019, the median time for a case to reach summary judgment, trial, and termination generally was longer than the median for all federal trade secrets cases filed between 2010 and 2019. While this may be a reflection on the increased caseload of federal judges overall, it’s nonetheless somewhat surprising given that parties to these types cases often wish to proceed expeditiously in light of the interests at stake.
- Judging by the figures for the last decade, courts are more likely than not to grant a trade secrets plaintiff’s request for injunctive relief on the merits*—but it is by no means a slam dunk. During that time frame, judges granted 68% of TRO requests on the merits, and 55% of preliminary injunction requests on the merits. Given the short duration of a TRO under Fed. R. Civ. P. 65(b), compared to a preliminary injunction that may extend for months or even years while a case winds its way through court proceedings, the delta between those figures makes sense, as judges are presumably more willing to allow plaintiffs protection for a limited 2 week period.
- But requests for permanent injunctive relief were granted a whopping 80% of the time, when they were decided on the merits. Why such a big jump? It is exceedingly rare for these types of suits to be resolved at summary judgment or trial (just 6% of all terminations in trade secrets cases between 2010 and 2019 were the result of summary judgment rulings or trial verdicts, and only 4% of such cases terminated in 2019 alone). In fact, a large majority of misappropriation cases resolve by settlement shortly after a TRO or PI hearing. Indeed, while many civil suits settle, there are even fewer trade secrets claims that make it all the way to trial. Presumably, if a party is willing to invest the significant fees and time in such litigation through trial, it has a stronger likelihood of prevailing and can stand to be bullish in settlement negotiations. Additionally, a deeper dive of Lex Machina’s data reveals that in many cases in which permanent injunctions were granted, the plaintiffs did not move for a TRO or preliminary injunction: there were 117 permanent injunctions granted on the merits in trade secrets cases terminating in the last decade, but in those cases, there were only 32 preliminary injunctions decided on the merits (25, or 78%, were successful), and only 23 TRO motions decided on the merits (19, or 83%, were granted).
- (*Note that the foregoing figures don’t take into account injunctions entered as a result of consent judgments between the parties.)
- In addition to having the upper hand in seeking an injunction, plaintiffs also fare better in trade secrets cases that are tried to a jury verdict or bench decision. In fact, plaintiffs prevailed nearly 80% of the time in cases that resolved in this way in 2010-2019, and in 2019 alone, that number was even higher—over 85% of trial verdicts were in favor of plaintiff. We suspect that this high rate of success may be the result of a fuller discovery record (as opposed to expedited—or no—discovery at the TRO/preliminary injunction stage), use of experts, and/or plaintiffs simply having more time to develop their case and demonstrate harm caused by defendants’ conduct, which some judges might deem speculative at the early stages of a case.
- What is truly fascinating, however, is that of the 229 plaintiffs who prevailed at trial between 2010 and 2019, a relatively small percentage had sought preliminary relief—only 24 sought TROs that were ultimately decided on the merits (of which 17, or nearly 71%, were successful), and just 44 sought preliminary injunctions that were decided on the merits (of which exactly half were successful). We had expected to see much higher percentages of plaintiffs seeking preliminary injunctive relief (although these numbers of course disregard cases in which the parties either settled after an injunction hearing or otherwise terminated prior to trial).
- Defendants have a slight advantage at summary judgment, on the other hand. Where a case was terminated at that stage, defendants prevailed over 55% of the time during the 2010-2019 time frame, and over 60% of the time in cases terminated in 2019 alone. Given the ease of raising a disputed material fact to preclude summary judgment (such as, for example, whether the plaintiff took reasonable measures to protect its information so as to confer trade secret protection under the DTSA or state counterpart), it’s understandable that defendants have a slight edge at this stage.
- Unsurprisingly, it was incredibly rare for plaintiffs to prevail at the judgment on the pleadings stage. For cases that terminated at that juncture, plaintiffs lost 95% of the time between 2010-2019, and of the 21 cases that terminated by judgment on the pleadings in 2019 alone, plaintiffs lost in every single one.
- Overall, while plaintiffs may prevail on some claims asserted in trade secrets suits, the last decade’s data reveals that it’s still very much a tossup as to whether they will succeed in proving misappropriation itself, especially under the DTSA. Plaintiffs were able to prove misappropriation in about 47% of state misappropriation claims in the last decade, but less than 42% of DTSA claims in that same timeframe. This is perhaps an argument in favor of including state-specific misappropriation claims in addition to DTSA claims, given the larger body of caselaw for those claims.
- Moreover, when compared with plaintiffs’ overall success rate in all federal cases for the same time period, the analytics reveal that trade secret cases are harder to win, and not by a statistically insignificant margin either: for the full decade, across all federal filings, the plaintiff prevailed nearly 55% of the time when the case was decided on the merits by a judge or jury, a significant increase over the 42% of DTSA plaintiffs obtaining a misappropriation finding (note that this is not a perfect apples to apples comparison; a DTSA plaintiff may obtain a finding of misappropriation but lose the case for some other reason, and conversely, the plaintiff may fail to prove misappropriation under the DTSA but prevail on another related claim, such as a breach of a non-disclosure agreement). The numbers are similar for 2019 alone—plaintiffs for all federal cases that terminated in 2019 (when ignoring settlements) prevailed an average of 53% of the time, whereas DTSA plaintiffs secured a finding of misappropriation under that statute a mere 41% of the time (same caveat here as to the imperfect comparison).
- What might account for this discrepancy? There are likely many potential factors. For example, it may be that litigators and judges alike are still learning to grapple with the scope of the DTSA, which is relatively new. Or it may simply be that proving that information is actually a trade secret under the DTSA (including that it derives independent economic value from not being readily ascertainable to others, and that the owner took reasonable measures to protect its secrecy), and that a defendant misappropriated that information, is much less straightforward to prove than, say, a breach of contract. In any event, while the outcomes may vary from jurisdiction to jurisdiction, the Lex Machina data reveals that the odds of prevailing in a trade secret case without settlement are substantially lower than the average success rate across all case types.
The data compiled by the report also include statistics as to judges that hear a disproportionate number of trade secrets cases, information about damages awards, and other helpful analytics. The report, which can be requested on Lex Machina’s website, is an interesting read for trade secrets practitioners. And the site offers myriad ways to slice and dice the case data—as we mentioned above, stay tuned for an upcoming piece from a Lex Machina guest blogger describing how the data is obtained and the various ways to use it.
However, as mentioned above, the COVID-19 pandemic may have changed the trajectory of litigation at least in the short term (both generally, and as it relates to trade secret and restrictive covenant litigation specifically). Check back here soon for our next piece that explores what we might be able to anticipate in trade secret litigation going forward.