Defendants’ Stratagems and Plaintiffs’ Counters in Trade Secret Litigation

by Adler Pollock & Sheehan P.C.
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Introduction and Executive Summary

Every invention starts out as a trade secret.  Not all stay that way.  Some become patents.  Some get licensed.  Some remain trade secrets and become spectacular commercial successes.  Others get misappropriated. 

Defendants accused of misappropriating trade secrets seek and use clever stratagems to avoid large damages for misappropriation and injunctions putting them out of business.  These stratagems are many, and include the following: the claimed trade secret is not actually a secret; the accused invention was independently derived; the accused invention is not substantially similar to the trade secret; the plaintiff has committed a violation of antitrust laws; no injunction can issue, only an award of damages; any injunction cannot extend beyond a narrow definition of the trade secret; any injunction cannot bar legitimate alternative ways to make the same product; and that the plaintiff cannot prove it lost sales and, therefore, is not entitled to damages.  Plaintiff trade secret holders seeking to maintain and protect their commercial successes need just as clever counters to defendants’ stratagems.

Set forth below are some of defendants’ stratagems and plaintiffs’ counters in trade secret litigation.

  1. Not a Valid Secret

The first element of any claim of trade secret misappropriation is that the claimed holder of the trade secret must possess an actual secret. 

However, there are many stratagems accused defendants attempt to use to counter plaintiffs’ showing that their claimed secret is really secret.  And, in today’s internet-dominated world, where almost every possible fact about everything is within reach of a few key strokes, defendants argue that a trade secret is not really a secret because it is readily ascertainable or easily reverse-engineered. 

Defendants argue that trade secret is readily ascertainable when most or all of the components of the asserted trade secret are known and available for public sale.  This is especially so when every component in the trade secret simply performs a well-known function within well-established parameters.  Defendants also assert that the trade secret is readily ascertainable because there are near examples of it in prior patents, trade journals and professional articles.

Plaintiff holders of claimed trade secrets counter these arguments by showing that, even if there are near examples in the prior art, none ever provided the same result as its invention and that its result is simply somewhat better than before.  There is no strict test for the degree of improvement that must be shown.  Plaintiffs also attempt to show one or more of the following points: that the near examples in the prior art do not clearly suggest plaintiff’s invention, or even that the prior art teaches away from plaintiff’s invention; experts have been skeptical that plaintiff’s invention would be created any time soon; that there have been prior failures to create the invention; that the invention is an unexpected result; or that the invention is a big commercial success surpassing other products.

Defendants also argue that the claimed trade secret is easily reverse-engineered, which typically occurs when the asserted secret is ascertainable from its publicly-available product.  Plaintiffs counter such a defense by showing that the secret is in the process itself used to make the product.  In other words, the product does not disclose the process by which the product was made and, therefore, does not destroy the secrecy of the invented process.

Defendants also frequently argue that there is no trade secret because the plaintiff’s efforts to keep the trade secret actually secret were less than optimal.  Obviously in every case of alleged trade secret misappropriation some strategy to prevent disclosure of the trade secret failed.  Such failures can include: not keeping the trade secret out of public spaces in the workplace; not limiting online access to those with a password; or not using non-disclosure agreements as a legal barrier to disclosure or use.

The law, however, does not require a plaintiff’s efforts to prevent disclosure and maintain secrecy to be perfect and unassailable.  They need only be reasonable.  Thus, in each case where the alleged misappropriator claims imperfect or even just inadequate efforts to protect the trade secret, the plaintiff can respond by showing that it efforts were reasonable under the circumstances.

  1. Independently Derived Process

The second main element of trade secret misappropriation is that a defendant’s accused invention actually uses the plaintiff’s trade secret.  To show this, the plaintiff must show that its trade secret was misappropriated.  Plaintiffs prove this element by direct proof of theft, or indirect and circumstantial proof of access to the trade secret plus substantial similarity of the accused invention.

Defendants, in turn, attempt to show independent derivation of the invention or legitimate reverse-engineering.  Defendants’ best method for showing independent derivation is to provide specific proof that it did in fact develop the process, and to supplement that proof with a showing of additional circumstances in which independent derivation is especially likely.  These additional circumstances, which show the obviousness of the invention and therefore the likelihood that it could be independently derived, include: the accused invention is very close to the prior art; that it was obvious to try to develop the invention; that it was a predictable result; and that the defendant’s development team had skills or education beyond those of ordinary practitioners in the art.

The best method for showing genuine reverse-engineering is known as “clean room design.”[1]  Under the clean room design method, an expert writes a specification for the desired product.  The expert may base this specification on an examination of plaintiff’s product, lawfully acquired, and known to embody the trade secret.  The expert may also use the more difficult method of relying on the specification required by prospective customers known to be purchasing plaintiff’s invention embodying the trade secret.  The expert’s specification is then implemented by a development team with no connection to the original expert.  In implementing the specification, the development team presumably will then have replicated the trade secret.

However, a plaintiff trade secret holder can often respond that its former technician was hired by or consulted with the defendant, and then operated in the background and subtly guided the defendant’s development team away from what the technician knew would be a failed invention not embodying the plaintiff’s trade secret.  Such subtle guidance, still giving rise to misappropriation, can take the form of negative know-how.  This means that the technician guides the defendant’s development team away from known developmental dead-ends, even if the technician does not directly guide the development team to affirmatively recreate the trade secret.

  1. Not Substantially Similar

The third main element of trade secret misappropriation is that the accused invention must be substantially similar to the invention containing or embodying the trade secret.

Defendants’ obvious strategy to defeat this element is to show that their accused invention is different than the trade secret in one or more respects: it has one or more different elements or components; the components or elements perform a different function; or the results reached are different or superior.  Defendants further strategy is to say that they need not show that there are many differences or that any of them are substantial.

Plaintiffs have two good responses here.  First, avoid messy fights about just the degree of difference between the elements and components of defendants’ accused invention and plaintiffs’ trade secret, and instead focus on how the defendants’ invention performs the same or similar functions, in the same or similar way, arriving at the same or similar result.  Second, emphasize that, no matter what modifications or improvements defendants have made to the trade secret, defendants’ accused invention was still derived from plaintiffs’ trade secret – the fruit of the poisoned tree is also poisoned.

  1. Defendant’s Counterclaim of Antitrust Violation for Plaintiff’s Assertion of Invalid Trade Secret

Like a patent, a trade secret confers a permitted monopoly where valid intellectual property rights exist.  Thus, a claimed trade secret holder that does not really hold a valid trade secret, but still uses litigation to exclude competitors from the marketplace, has gained or maintained its monopoly in the supposed trade secret by unfair means.  Such a suit to enforce a monopoly in claimed rights in intellectual property, where those rights do not exist, may constitute “sham” litigation in violation of antitrust laws.

In such instances, defendants have a ready-made and highly-effective stratagem whereby they plausibly can argue that the plaintiff’s “sham” suit against them for misappropriation of a trade secret is nothing more than actionable litigation itself.  It is sham litigation because there is no valid trade secret and the purpose of the suit is to unfairly exclude the defendant from the marketplace so as to maintain plaintiff’s illegal monopoly.  A defendant who can successfully bring a sham litigation counterclaim not only defeats a claim of misappropriation, but is also entitled under powerful antitrust laws to an award of triple damages for its lost sales and its full attorney’s fees.

As discussed already, there are many ways to attack the validity of a claimed trade secret.  Given the stakes often at risk in trade secret litigation, it should come as no surprise that defendants will search far and wide for proof to support their defenses.  Often, this includes canvassing all potential prior art, auditing all competitors’ use of similar technologies, or exhaustively analyzing foreign markets for sales of similar products or the technologies from which they were produced.

To be sure, however, a plaintiff has many arguments to counter an antitrust counterclaim, even if it loses its underlying claim for misappropriation.  These arguments include: the plaintiff’s trade secret claim is not “objectively baseless”; that the plaintiff does not have subjective knowledge that its trade secret is invalid; and that the plaintiff is not otherwise a monopolist in a relevant product and geographic market and, therefore, is not subject to the antitrust laws.

  1. No Pre- or Post-Trial Injunction Available; Only Damages

The longstanding rule across the United States had been that, once the trade secret holder made a showing to a court that it was likely to prevail on the merits of trade secret misappropriation, the court would presume that the key element for an injunction against further use of the trade secret, namely, irreparable harm, had been shown.  The court then would automatically, and without the need for actual proof of irreparable harm, enjoin the defendant’s further use of the trade secret.  Typically such injunctions were sought early in trade secret litigation – within a week or two after filing.  And, if granted, the dispute usually would settle shortly thereafter.

The famous 2006 U.S. Supreme Court decision in eBay v. MercExchange, involving a claim of patent infringement, changed all of that.  In eBay, the patentee established defendant’s infringement at trial and sought, not just damages for past infringement, but also a permanent injunction against future infringement.  Previously, the presumption in patent infringement cases was that once infringement had been shown, irreparable harm was necessarily established and an injunction against further infringement should be granted.  The Supreme Court in eBay, however, essentially held that the traditional general rules for issuing injunctions governed in patent cases.  Thus, the plaintiff had to demonstrate irreparable harm separate and apart from mere infringement.  Subsequent decisions in other courts have held that this same abolition of any presumption in favor of an injunction also applies to trademark, copyright, and trade secret cases.  Some of these later cases, strictly applying the result in eBay, make it extremely difficult to obtain any kind of injunction, even after a clear showing of infringement or misappropriation of intellectual property.  However, other cases still apply the now-questioned presumption and leave the door open wider.

Thus, defendants, relying on eBay can argue, even where there is strong evidence of misappropriation, that there is no presumption whatsoever of irreparable harm.  And they can further argue that some of the traditional grounds giving rise to a finding of irreparable harm now are compensable by an award of damages (e.g., in the amount of lost sales) and, therefore, any harm is not irreparable and no injunction can issue.  Based on eBay, defendants can still make this argument even after there is a verdict at trial conclusively establishing misappropriation.

Plaintiffs often counter this eBay strategy by citing to those court decisions holding that eBay did not completely foreclose a presumption of irreparable harm.  Those decisions are based on two concurring opinions in eBay, separately joined by seven justices, suggesting that a presumption could still survive as a “lesson of … historical practice” that could be applied “when the circumstances of the case bear substantial parallels to litigation the courts have confronted before.”  In other words, the traditional grounds giving rise to a presumption of irreparable harm might still exist.  Plaintiffs also attempt to make the best possible evidentiary showing of the most severe types of irreparable harm.  These include: loss of overall market share, which cannot be recouped; loss of customer goodwill due to loss of a line of its business or even its entire business; and financial inability of the defendant to pay expected damages.

  1. Scope of Injunction Cannot Extend Beyond the Trade Secret Process

Plaintiffs, in the remedy phase of a case, after misappropriation has already been found, often try to enjoin defendants’ later use of more technology than plaintiffs actually created.  Plaintiffs accomplish this by subtly – or even not so subtly – expanding their initial definition of the trade secret.  Where defendants have already been found to have engaged in intentional misappropriation (and misappropriation is often intentional), judges may be open to expanded injunctions barring use of more technology than just the trade secret.  Rationales justifying such expanded injunctions, such as punishing the egregious misappropriator or deterring against future gross misbehavior, may prove very appealing.

Defendants have a serious argument in their favor against such punitive injunctions, even if their prior misappropriation may have been intentional.  Injunctions that extend beyond use of the actual trade secret and to technology already in the public domain essentially establish intellectual property rights where they do not legitimately exist, and may put in place an impermissible monopoly.  In this regard, there is U.S. Supreme Court precedent holding outright that patent law preempts the use of state trade secret law to create trade secret rights in technology that is already in the public domain.

  1. Scope of Injunction Can Only Bar Use of Process, Not Manufacture of Product

Generally injunctions for misappropriation of a trade secret should only extend to use of the process shown to embody the trade secret, but not to the making of the product made from that process.

As a result, defendants often attempt to continue competing against the plaintiff by arguing that an injunction generally cannot bar it from making the product by some other process not derived from or substantially similar to the trade secret process.  An even more effective strategy is to show that this alternative process for making the same or similar product can be purchased from a third-party vendor as part of a public sale, and, therefore, is part of the public domain and cannot be claimed as part of the trade secret.

Plaintiffs’ counter-strategy to obtain a product injunction is to establish that the sole way to make the same or similar product is via the plaintiff’s trade secret.  This is often accomplished by proving that the process and the product are so inextricably intertwined that the product itself is a direct subset of the trade secret process.  As to the defendants’ third-party, vendor approach, plaintiffs seek evidence that the alternative vendor derived its process from information tied to the defendant’s misappropriated process, thereby tainting the alternative vendor’s process as poisoned fruit of the initial misappropriation.

  1. No Damages Because Plaintiff Cannot Show Its Own Lost Sales

It can be very difficult for a plaintiff trade secret holder to show the amount of its lost profits due to misappropriation where there is a multi-competitor market and there are many factors giving rise to failure or success in that marketplace.

Defendant’s best approach in such an instance is to argue that the plaintiff cannot produce any reliable evidence of the amount of its lost sales caused directly from a proved misappropriation.  Defendants can argue that a plaintiff’s lost sales were not caused by defendant’s misappropriation, but by some other competitor simply having a better sales force, a less expensive product, or a better product.

Plaintiff’s counter to avoid this problem is to focus not on its own lost profits, but on a defendant’s gain in profits due to the misappropriation.  The result is that there is no causation problem as there would be in any multi-competitor market.  The measure of a plaintiff’s loss is simply the profit the defendant itself gained, as shown by an accounting, solely from the sale of the product embodying the trade secret.

In summary, defendants’ clever stratagems in trade secret litigation include arguments about whether a secret even exists, whether defendants’ process was independently derived, whether defendants’ process is substantially similar to the trade secret, the availability of powerful antitrust counterclaims, the difficulty of the scope of injunctive relief available, and the problem of proving that defendants’ misappropriation caused plaintiffs’ loss.  Plaintiffs seeking to maintain the commercial value and success of their trade secrets must be just as clever and have at the ready all of the available and best counters.  As with the trade secrets themselves, knowledge is power.

[1]Reverse-engineering a trade secret is probably permitted under patent and trade secret law even where there is a contract associated with the product, the product is mass marketed, and the contract purports to bar reverse-engineering.  On the other hand, such a contract may be effective in barring reverse-engineering among the parties thereto where the technology is protected under copyright law.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Adler Pollock & Sheehan P.C. | Attorney Advertising

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