Message from Mars: The Drawbacks of Trade Secret Arbitration

Fenwick & West LLP

Fenwick & West LLP

On July 6, 2021, a federal court ordered that Mars, Inc.’s trade secret lawsuit against its former executive must be resolved in arbitration. Mars v. Szarzynski is a cautionary example of broad judicial interpretation of arbitration provisions and illustrates why arbitrating trade secret claims can be undesirable.

In this case, Mars accused its former executive, Jacek Szarzynski, of violating the Defend Trade Secrets Act by providing thousands of confidential documents to his future employer. The defendant brought a motion to dismiss, arguing that his employment agreement required all such claims to be brought in arbitration. Even though Szarzynski’s contract was with Mars Belgium, a subsidiary of Mars, Inc., the court found that Mars, Inc. was a third-party beneficiary to the agreement—and thus bound by its terms—because it consciously participated in and accepted the benefits of the agreement. The court also rejected Mars’ arguments that subsequent incentive agreements with Szarzynski demonstrated the parties’ intent to avoid arbitration. These agreements did not govern his day-to-day employment at Mars and only provided Mars the right to seek judicial intervention in certain circumstances—not including misappropriation of trade secrets.

Although many employment agreements include arbitration provisions to quickly and cost-effectively resolve claims brought by former employees, employers may be at a disadvantage when bringing an action for trade secret misappropriation subject to these provisions:

  1. Some arbitration agreements are governed by unfavorable choice of law clauses. For example, the employment agreement in Mars was governed by the law of Belgium, which operates on a civil law system (as opposed to common law). Foreign laws and states with less robust trade secret precedent may add an extra layer of uncertainty to arbitration.
  2. Binding arbitration is often final, providing no opportunity to appeal an unfavorable outcome. As in Mars, thousands of confidential documents, if not more, are often at stake in trade secret cases, and an unfavorable outcome may result in lasting damage to a company’s IP portfolio.
  3. Arbitration often provides less fulsome fact development than a formal trial, especially when parties opt for a desk arbitration. Yet fact development is crucial in trade secret cases given the complex issues involved. For example, if the defendant in Mars provided expert testimony that the documents provided did not contain trade secrets, Mars would be unable to cross examine this expert in a desk arbitration.

In light of the Mars decision, companies seeking to protect their trade secrets may wish to revise their employment agreements—including any subsidiary’s employment agreements—to exempt trade secret claims from arbitration. Companies that nonetheless find the privacy and economy of arbitration desirable may instead wish to modify these agreements by taking three steps: 1) designating a well-developed jurisdiction for trade secret claims, 2) building in an appeal process, and 3) requiring a full arbitration hearing on any such claims.

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.

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