Conductive Discussions: Trade Secret Theft—Trends, Remedies, and Trolls, Oh My!

Ropes & Gray’s podcast series Conductive Discussions focuses on legal issues of interest to the semiconductor industry. In this episode, IP litigation partners Mark Rowland, Dave Chun and Matt Rizzolo, and associates Jolene Wang and Mike Morales, discuss recent trends in trade secret litigation. The team explores the large jury verdicts awarded in trade secret cases, and the increased popularity of trade secret litigation in the wake of the 2016 enactment of the Defend Trade Secrets Act. The team analyzes typical parties in trade secret misappropriation cases, trade secret trolls, and the International Trade Commission’s recent issuance of remedies in Certain Botulinum Toxin Products, where the misappropriation at issue occurred wholly abroad.

Transcript:

Mark Rowland: Welcome to this episode of Conductive Discussions, a Ropes & Gray podcast series focused on legal issues of interest to the semiconductor industry. My name is Mark Rowland, and I am a partner at Ropes & Gray in our IP litigation practice, based in our Silicon Valley office. I'll be hosting this episode, which will focus on recent trends and trade secret enforcement cases. We'll be hearing from an exciting group of practitioners on this topic. To start with me is Dave Chun, an IP litigation partner in our Silicon Valley office, who has provided his thoughts on trade secret matters in prior episodes. Welcome back, Dave. Also joining us is Matt Rizzolo, a partner in our Washington, D.C. office, who specializes in IP-related proceedings before the U.S. International Trade Commission, or as it's commonly known, the ITC. Matt has also been a speaker before on the Conductive Discussions podcast. Welcome back, Matt. In addition, from New York, we have with us today two speakers, Jolene Wang and Mike Morales, both associates in the Ropes & Gray IP litigation practice. Welcome Jolene and Mike. Mike will start us off with our Silicon Speak report of recent legal news, which today will focus on trade secret cases. Mike?

Thanks, Mark. The common theme of the legal news is that remedies awarded in civil trade secret cases can be very harsh. Even in the criminal context, the DOJ has come down on companies stealing trade secrets.

Criminal prosecutions

Starting in the criminal realm, in October, a California federal judge ordered Taiwan-based United Microelectronics to pay a $60 million fine after it admitted to stealing rival Micron Technology’s trade secrets related to the design of dynamic random-access memory devices (or more commonly referred to as “DRAM”). Prosecutors accused three former employees of Micron of working together to steal trade secrets and bringing them to China to mass-produce the DRAM technology. Another company, Jinhua, is wrapped up in this criminal case and a trial is expected in August 2021. China’s State Council had previously identified this technology as a “national economic priority.” And with tensions rising between the United States and China, I think we can expect the DOJ to continue investigating this kind of theft and prosecuting it to the full extent of the law.

Jury verdicts

Moving into the civil realm, juries seem to have no mercy for trade secret theft as well. In Motorola v. Hytera, a Chicago jury in last February awarded Motorola $764 million in damages, including $418 million for punitive damages. The case involved three engineers that Hytera poached from Motorola who stole and brought with them thousands of Motorola’s confidential documents containing trade secrets and lines of source code to develop a new digital radio. The damages award was recently reduced from $764 million to $543 million, which is still a large jury verdict.

More recently, in October, a Manhattan jury awarded Trizetto Group $854 million, including $570 million for punitive damages for Syntel’s theft of trade secrets related to Trizetto’s software product. This is yet another large jury verdict, and I think we will see trade secret litigation increase with juries having no mercy.

ITC

Even the ITC has weighed in on the trade secret front recently. In Investigation No. 337-TA-1145 (which many people know of as “the Botox case”), in December, the ITC issued a limited exclusion order and a cease and desist order for trade secret misappropriation relating to methods of manufacturing Botox. The two parties primarily battling over the trade secrets were Korea-based entities, and this is the latest example of the ITC addressing trade secret misappropriation that occurred wholly abroad.

With courts (in both the civil and criminal context) and even the ITC coming down harshly on trade secret theft, I think we will continue to see an increasing number of trade secret cases. It’s no surprise – while trade secret cases were relatively steady in the years preceding the 2016 enactment of the Defend Trade Secrets Act, the volume of cases increased substantially over the last few years. Only time will tell, but I will turn it back to Mark and the team to further discuss the trade secret issues.

Large damages awards in recent trade secret cases

Mark Rowland: Thanks, Mike, for that update on the trade secrets in the news. Those are most certainly, large damage awards.

David Chun: Yes, absolutely. In my mind, it's part of a trend over the last 10-15 years or so where patent protections appear to have weakened, while trade secret protections have significantly enhanced. You have things like PTAB practice, §101 motions, making patent validity more challenging and changes to indirect infringement, willful infringement and the like, making infringement cases harder. You even have doctrines like the entire Market Value Rule, limiting damages in patent cases. On the trade secret side, however, the competitor litigations in particular have continued to be big-ticket items.

Jolene Wang: That's right. They really are reaching hundreds of millions of dollars. I mean, trade secrets now can mean big business for companies that hold them.

Increasing trade secret litigation and multiple forums

Mark Rowland: Mike mentioned the increase in the number of trade secret cases being filed. I don't think it's any coincidence that this increase seems to have started around the passing of the Defend Trade Secrets Act in 2016, is that right?

Matt Rizzolo: Right. Historically, trade secret litigation happened in state courts. But now with the DTSA, it's much more common in federal court, and as Mike mentioned, the ITC could also address it. He alluded to now with the ITC weighing in more and more, trade secret misappropriation cases are being filed there as well as in federal courts at an ever-increasing rate, and this really doesn't show any sign of abating anytime soon.

Jolene Wang: And it really comes to no surprise that these biggest awards are coming from the rapidly-growing industries such as IT (information technology), health care and financial services. And so as such, companies continue to claim these sizable trade secret victories. You couple that with more consistent litigation via the DSTA, we can definitely expect even further growth in trade secret litigation.

Typical parties in trade secret misappropriation cases

Mark Rowland: How often are these trade secret cases between competitors? Is that usually the case?

David Chun: Yes, absolutely – particularly for these larger litigations, almost always, in my mind. To me, these generally come up in two main buckets. First, the former-employee-moves-to-competitor scenario (or an employee or maybe even a group of employees move to a competitor), and secondly, a “busted joint venture” situation where NDAs are signed, technology is transferred, but then somehow the deals are broken and the use of the technology going forward becomes the basis for a trade secret misappropriation claim. In each of these, it's understandable why the damages awards are so high. There is a real recognizable injury that the jury can understand. You're not talking about some hypothetical negotiation for a statutory minimum royalty, like in patent cases, in most of these instances.

Jolene Wang: Exactly. The concept of someone stealing something and profiting from it to the detriment of the original rightful owner is something anyone can easily comprehend. Trade secret cases have this individualized and emotional aspect that many patent cases simply lack because it so often involves the close relationship that is ultimately degraded.

Michael Morales: Absolutely. I think this might be another big reason why jurors are returning verdicts with such large damages. To hear about bad blood between an employee and an employer, or ex-business partners, evokes emotion in and of itself. But then to hear that one of them, on top of all that, stole trade secrets for self-interest, just seems diabolical and plays on jurors' emotions to combat the bad guys and do the right thing.

Trade secret trolls

Mark Rowland: All of us work on patent cases, and a major focus in that area for the better part of the last two decades has been the rise of non-practicing entities or patent assertion entities – those who may own IP rights and seek to monetize them, but not actually make products that practice them. Some refer derisively to those outfits as “patent trolls.” I know this comes up sometimes in the copyright realm as well. How about trade secret trolls—someone taking ownership of something and then asserting trade secret rights—is that common?

Matt Rizzolo: Interestingly enough, Dave and I are working on something like that right now.

Mark Rowland: So, just like in patent cases, they can take over the rights and get some damages?

David Chun: Yes, we've been looking into that, and the answer is unclear. When the DTSA was first passed, there was a lot of speculation that you might get an increase in NPE cases in the trade secret realm, but that hasn't really panned out except for in a couple limited cases. If you think about it from an NPE point of view, there are a number of hurdles that don't exist like in a patent case. For example, there's no presumption of validity and there's no statutory remedy, like a minimum reasonable royalty. You really need to show that you have a real and a valuable technology, and that you've been injured or harmed by the misappropriation. It's harder for an NPE, who might have acquired a claim for past misappropriation and, thus, likely got its trade secrets at a discount. Thus, it probably benefited rather than having been injured.

Matt Rizzolo: Yes, Dave, as you pointed out earlier, and this an issue that got a lot of attention while the DTSA was being considered five-six years ago. As is often the case, when you create a new private right of action, there are concerns that some may try to take advantage of that for nefarious purposes. I recall there was even a Law Review article called "Here Come the Trade Secret Trolls" that was published by a couple of law professors. They were theorizing that you would see patent trolls pivot to trade secrets, but as you mentioned, that really hasn't come to fruition. So there were concerns about it happening a lot, but it doesn't seem to have happened.

Jolene Wang: So that's not too surprising. I imagine if it were to be an issue, we probably would have seen it by now, given the long history of trade secret protection at the state level. And again, the universe involved in trade secret cases is much smaller. They're by nature between parties with a close relationship, with some nexus, or are at the very least within the same industry. Trade secrets are not protected like patents, which essentially provide a right against the world.

David Chun: I should also note for everyone that a few of us on this podcast are even currently litigating a case where there is an NPE bringing a trade secret claim at the ITC. It is somewhat unusual, but here we have a situation where both patents and trade secret claims are at issue in the investigation. It's interesting because there are a number of differences that can be significant compared to litigating a trade secret claim in state or federal court.

Mark Rowland: Matt, can you break that down a little bit? I think a lot of folks are familiar with the ITC – it is as a place where you can bring patent infringement claims, but maybe not so much on the trade secret front. How does the ITC differ?

Matt Rizzolo: Sure. The ITC has long recognized trade secret misappropriation as an “unfair act” that it can address under its powers authorized by Section 337. A complainant needs to show three elements: first, that there’s been misappropriation of a trade secret; second, that products that benefit from that misappropriation have been imported into the United States; and third, that the importation of those products has substantially injured or destroyed a “domestic industry” – so, investments made in the United States that relate to competing products. (Unlike in patent cases, the complainant doesn’t need to show that the so-called domestic industry products actually practice the trade secrets at issue – they only need to show that those products compete with the domestic industry products.) If the complainant can prove all of those elements, the ITC will issue an exclusion order that bars the importation of the accused products into the United States. And the exclusion order is enforced by U.S. Customs – a very, very powerful remedy.

Jolene Wang: In patent cases, the exclusion order lasts until the patents expire, but trade secrets don't have an expiration date. Do trade secret exclusion orders last forever?

Matt Rizzolo: No, but for some, I imagine it feels like forever. The ITC has typically set the length of trade secret exclusion orders to “level the playing field.” Essentially, they'll peg it to the length of time that it would've taken the party accused of misappropriation to have developed the trade secrets independently. So it typically ranges from 10-25 years, but in the Botox case that Mike mentioned earlier, it was only 21 months.

David Chun: There's also interesting questions of what law to apply. The ITC applied its own unique federal standard, pulling from sources such as the Restatements of Unfair Competition and of Torts, the UTSA, the DTSA and even federal common law. There’s also an unresolved question of whether a statute of limitations or some other time bar—which is typically 3 years in other courts—applies at the ITC.

Matt Rizzolo: Yes, that's right, Dave. The statute of limitations, I think, is a particularly interesting question. It came up in the Botox case and the administrative law judge there said that he didn't need to resolve it, but I'll note that that case is being appealed, so this issue may come up during the appeal. And the ITC also gave a good explanation of the legal standards that it applied—that federal common law, UTSA, DTSA restatement amalgam you mentioned—in both the Botox decision and in its recent final opinion in Certain Bone Cements, which is Investigation No. 337-TA-1153, for those of you who are interested.

Mark Rowland: Thanks, Matt. Well, that concludes another interesting session. Again, thanks to Dave, Matt, Jolene and Mike for joining us today and for sharing your insights. Subscribe to Conductive Discussions and other RopesTalk podcasts in the newsroom page of ropesgray.com. If you have any questions or comments, just drop us a line. For more information about our practice specific to semiconductors, just type "semiconductors Ropes Gray" to get our semiconductors page. Thank you for listening, and we hope that you join us next time.