Trade Secret Litigation Statistics Revisited

Thank God for firms like Skadden Arps.

Unlike some terrible "national" law firms that attempt to blog and end up shoveling out worthless drivel, Skadden regularly publishes great content (not to mention high-quality lawyering).

This January 23 post is no different and provides very helpful, practical information for trade secrets attorneys and litigants. Though the article is titled "The Rise of Trade Secret Litigation in the Digital Age," some of its most interesting tidbits focus on statistical measures.

For instance, Skadden notes the following:

• Trade secrets cases increased 14 percent per year from 2001 to 2012. This runs against the grain, as civil litigation statistics confirm a steady downward trend of filings.
• Trade secrets holders have a recent success rate of 69 percent at trial.
• Trade secrets cases are dismissed at a lower rate (22 percent) than other types of complex civil litigation actions.
• In recent trade secrets cases, only 2 percent resulted in preliminary injunctions -  a surprising trend, given that historically the rate is 10 percent.

Data on litigation outcomes is not easy to come by. Federal court statistics generally can present a skewed picture, given the high percentage of prisoner 1983 actions. So data aggregated on a macro basis is not reflective of all litigation. A high percentage of cases settle very early, so we don't know how meritorious all filings are.

But generally, the public literature shows a few general points to keep in mind, which dovetail nicely with what Skadden summarized:

• Contract claims usually fare better than tort claims. Trade secrets actions are more akin to tort suits.
• Federal court jury verdicts tend to be a bit higher.
• Tort actions involving products liability and medical malpractice fare worse than other civil actions, somewhat skewing the tort number downward. This is even more pronounced in federal court.
• In trade secrets cases where the employee was the alleged misappropriating party, the plaintiff was nearly twice as likely to obtain a preliminary injunction as when the claimed wrongdoer was a former business partner.

The bible, if you will, on statistical analysis of trade secret litigation comes from David Almeling, and his article is available here.

Generally, my rules of thumb are as follows. And bear in mind that these are grounded less in statistics and more in anecdotal experience and general kibitzing with other nerds:

• A court will dismiss a trade secrets case on the pleadings less than 10 percent of the time (assuming no abject incompetence on the plaintiff's part).
• Preliminary injunctions are successful at a rate of 20 and 30 percent.
• Of those, at least 75 percent are partially successful and deny the plaintiff part of what it seeks.
• Summary judgments motions are 50/50 propositions at best, but in trade secrets cases the legal standards push that down closer to 40 percent. Non-compete claims are more amenable to summary judgments.
• At trial, plaintiffs in commercial actions win some material claim at a 60 to 65 percent clip.
• In 85 percent of jury cases, a trade secrets lawyer will put at least two jurors asleep.
• In 100 percent of cases, judges beg the parties to try and settle.

Wisconsin Supreme Court: No-Hire Provision is a Covenant Not to Compete

When they're not suing each other, the Wisconsin Supreme Court justices actually have some interesting stuff to say and some interesting cases to decide.

This past week, the Court held in Manitowoc Company v. Lanning that an employee non-solicitation clause is a covenant not to compete for purposes of the State's relatively strict non-compete statute, Wis. Stat. § 103.465.

To recap, an employee non-solicitation covenant (or no-hire clause) bars employees from inducing former co-workers to quit or join another company, usually a competitor. They are not litigated all that much, except when pied pipers try to build out sales teams beneath them.

The Court held that it has taken a flexible view of the term "restraint on trade" and that no-hire clauses fit within that term, given that they restrict an employee's "ability to engage in the ordinary competition attendant to a free market," specifically with respect to recruiting the "best talent in the labor pool."

What's the significance? The applicable Wisconsin statute requires an employer to clear a number of different hurdles to establish the validity of a restraint of trade. And just as importantly, the statute provides that any covenant that is unreasonable is void and illegal, even if some remaining portion of the restraint would be valid.

It is an all or nothing proposition.

Which is why Manitowoc Company lost on the merits of its claim, after the Court found that the governing statute applied.

What was wrong? Basically, the no-hire clause said the employee could not, for two years, solicit or encourage any company employee to leave. It's actually broader than that, but I'm trying to be brief.

The Court concluded that Manitowoc Company had no protectable interest in maintaining its entire workforce. The employee it sued had no knowledge of the 13,000+ employees the company had worldwide. The covenant, to be sure, was so broad that no protectable interest could support it. Under the statute, it was void. Plain and simple.

This is yet another opportunity to offer a lesson in contract drafting. Many non-competes get tossed out because counsel salivate at the mouth and want to appease their client. Drafting is not an exercise in chest-thumping, in which counsel gets to boast about how tough he was in writing a restrictive covenant. It's actually much more nuanced than that. Part of being a lawyer is being objective, knowing what makes sense, and then communicating that to the client.

Maybe I'm a dying breed.

The Trade Secret Status of Football Game Plans

For the second day in a row, The Wall Street Journal identified interesting questions concerning the law of trade secrets. Today's article comes in the wake of the Alabama-Georgia national title game, which Alabama won in dramatic fashion.

The question the article raises is pretty simple and quaintly summarized: are football game plans trade secrets?

The article explores this question rather indirectly, given WSJ's apparent effort to use Freedom of Information laws to seek these game plans from public universities. My readers will be stunned to learn that the recipients of these FOI letters were less than forthcoming.

One of the traditional exceptions to disclosure of public documents is that information's trade secret status. For their part, FOI laws contain slightly different definitions of trade secrets than do federal and statutes designed to guard against misappropriation. For example, the so-called Exemption 4 under federal law allows for the protection of trade secrets and "commercial or financial information obtained from a person [that is] privileged and confidential." The Supreme Court never has interpreted Exemption 4.

So let's look at Alabama, whose flagship school's football game plans were the subject of the WSJ article today. Alabama's Open Records Act contains no exemption for trade secret material, which is odd but no more odd than sending Roy Moore twice to the state Supreme Court. Though I haven't researched any other statutory basis the University of Alabama may have to withhold game plans under a records request, the Open Records Act does not appear to do so.

Aside from this, the larger question is quite intriguing. Are game plans actually trade secrets?

The best analogy I can come up with is the scripts for popular television serials, a subject I wrote on several years ago in the lead-up to the final Breaking Bad episodes. I've since changed my conclusion and do not believe those scripts are trade secrets, though they can be protected contractually. Why do I say that?

The answer comes straight from the statutory definition of a trade secret. We'll use the 1979 Uniform Trade Secrets Act, whose definition is most in use. The term "trade secret" means that the information must:

(1) derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(2) be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

While much of the text would suggest popular television scripts are protectable, the highlighted part illustrates why they're not. How, for instance, would any other production company, studio, or network gain from knowing what the plot lines of a series finale are? They wouldn't. In all likelihood, the only remedy that the script owner has is contractual. That is to say, the owner could claim that improper disclosure by an insider bound to a confidentiality clause reduced the economic impact of a television run, such as through lost advertising fees.

My rationale, though, supports giving game plans trade secret status.

Let's start with the basics. Those game plans are valuable, in that they reveal compilations of plays, schemes, coverages, and strategies for a variety of in-game scenarios. So too, there are economic interests at stake, as college football is a business. Universities stand to gain in myriad ways from successful football programs.

And game plans, unlike television scripts, are useful to competitors - even if only to the competitor whose being schemed against in the game plan. So assume that the University of Georgia has a copy of Alabama's game plan. It should know the preferred set of plays for 3rd-and-short. It would know how Alabama's blitz patterns. And it may know whether Alabama wants to deploy a trick play on special teams. That would provide it economic value in the form of a marginally better chance of winning a game, which in turn could yield significant economic gains for the university.

The oft-used defense of reverse engineering likely would not be a good one as applied to game plans. Those plans change week to week based on a variety of factors, including newly obtained personnel, injuries to key players, past performance, competition level, and even the weather. Knowing what Alabama did on 3rd-and-short against Fresno State in September is only marginally helpful when it faces a different defensive scheme, and totally different personnel, against Georgia the following January.

The rather unique aspect of game plans, though, is that they likely have a very short useful life as a trade secret-even for a matter of days. That is to say, anyone can watch tape of last night's game and deduce what Alabama's preferred blitz coverages looked like. They could, in theory, reconstruct a game plan in large part. And again, obtaining a game plan for Georgia would prove marginally helpful, if at all, next season when Alabama opens its season with new players and new schemes.

Today's WSJ article is a fun read and even notes that the paper reviewed Alabama's defensive game plan for its first-round playoff win against Clemson. No one from Alabama seems too worked up about that, suggesting that game plans aren't a trade secret for very long. As one of the Alabama assistants even said, "There's some good information in there, but I don't understand it."

Most people, even other college coaches, wouldn't either. The idea of game plans as trade secrets is academically interesting and challenges us to apply timeless concepts to unique situations. But the debate is still largely theoretical.

Sinovel Wind Turbine Case Heads to Trial

The Wall Street Journal reported today that the Wisconsin trade secrets case of United States v. Sinovel Wind Group Co. is scheduled to begin trial this week. The criminal case highlights the growing problem of intellectual property theft by state-sponsored organizations in China. And it further illustrates that multi-national organizations often target vulnerable inside employees to aid and abet in brazen acts of theft.

The Department of Justice back in 2013 issued a Press Release detailing the charges against Sinovel Wind and several individuals, including a former employee of American Superconductor, the victim of alleged trade secret theft. According to the indictment, American Superconductor developed software that controlled the flow of electricity from wind turbines to electrical grids. This software source code is at the heart of the indictment for trade secret theft. The allegation of misappropriation centers on Sinovel's apparent acquisition, through an ex-employee, of the software to produce wind turbines that it previously agreed to buy from American Superconductor.

The charging documents outline a familiar, if not sloppy, pattern of insider theft. The FBI, for instance, was able to discover that the rogue American Superconductor employee used Skype to communicate with Sinovel regarding the stolen source code. He also e-mailed Sinovel to discuss the source code and to send repairs to the source code. Of note, the ex-insider frequently traveled to China to work on Sinovel, which at one time constituted 80 percent of American Superconductor's business. The alleged theft resulted in a drop in American Superconductor's market value from roughly $1.6 billion to approximately $200 million.

For those interested to see what a real trade-secrets theft investigation looks like, and the level of detail undertaken with respect to a forensic analysis, I highly recommend a read through the key charging affidavit, embedded below.

Finally, a topic that frequently comes up in trade secrets cases is closure of the courtroom. On December 28, the court stated that "the trial of this case will be conducted in open court, unless a strong showing is made that some evidence must be kept from public disclosure." The court allowed for limited courtroom protections for trade secrets that were the subject of the government's indictment, but denied any corresponding protection to Sinovel on the basis that it had not made the appropriate showings to gain such protection.

Sinovel Charging Affidavit.pdf by Ken Vanko on Scribd

It's Just Business as Usual for the Year 10 Kick-Off

The more things change, the more they stay the same.

If I had to make three predictions for 2018, they would have been as follows:

(1) Legislators across the U.S. will introduce non-compete bills, which will advance at a glacial pace with incredibly unimpressive results.

(2) Frivolous non-compete and trade secrets suits will continue unabated, and I will break three keyboards writing about them.

(3) Waymo and Uber will end up going to trial, and the court will render a mixed verdict. At some point, Paul Clement will sign an appellate brief for one of the parties.

***

It is January 5, and we seem to have checked the box on numbers 1 and 2.

Representatives in the Vermont General Assembly have introduced a bill that would establish a categorical ban on non-compete agreements, much in the mold of the North Dakota and California statutes. The proposed legislation contains the usual carve-outs for negotiated sale-of-business and partnership-style non-competes. A copy of the bill is available here. This may be the last we hear of it.

Move a stone's throw to the East, and a gaggle of New Hampshire senators have introduced Senate Bill 423, which would ban non-competes for low-wage workers. Similar to the Illinois Freedom to Work Act, the term "low-wage worker" includes those earning the greater of the federal minimum wage or $15 per hour. This is a common-sense reform that probably stands a decent chance of passage. The Senate Bill is available here.

***

The State of Ohio, and people with some connection to the Buckeye State, have produced some pretty terrible trade secrets and non-compete litigation. Which saddens me, because I went to Ohio State.

Well, the trend seems to continue with a company in the business of producing something called "precision braided textiles" filing what appears to be a really crappy suit against a former employee. A&P Technology sued a terminated Phil Lariviere on the theory of inevitable disclosure of trade secrets. Lariviere, a former engineer, sat out his broad, two-year non-compete before obtaining subsequent employment through a recruiter with one of A&P's competitors.

A&P then filed suit claiming that Lariviere's intimate knowledge of everything A&P placed its trade secrets at risk, as if time stood still during the two-plus years Lariviere was gone. The Southern District of Ohio mercifully denied this injunction against Lariviere, despite his relatively hostile attitude to his former employer. The injunction briefing contained some rather amusing exhibits about Lariviere's social media posts, texts, and e-mails. Why? A&P felt that anger and hostility suggested an intent to steal trade secrets.

No reason for this theory appears to be offered, and the court saw through it. According to Judge Black, "Lariviere's mockery of the former employer who terminated him and then sued him is not demonstrative of any actual effort or inclination to violate his contractual obligation to protect the confidentiality of A&P's trade secrets." Maybe this was an unfortunate choice, but I sympathize here with Lariviere. He should be pissed about getting sued on a specious claim after abiding by his non-compete.

An equally interesting aspect of the opinion concerns Lariviere's smart move to force A&P to identify its trade secrets with specificity. The shotgun nature of A&P's claim all but forced Lariviere's hand to proceed this way. And the court was persuaded, ordering A&P to list out its "suspected misappropriated trade secrets" before demanding the same of Lariviere and his new employer. The main impetus for the discovery ruling appears to have been the substantive weakness of A&P's case.

You can review the order and opinion at the end of this post. A further link is available here. It is well worth a read for lawyers and litigants, as the discussion spans a number of substantive and procedural topics likely to recur.

***

In the Waymo v. Uber litigation, the so-called Jacobs letter has received a great deal of attention. The letter was originally part of a dispute between Jacobs and Uber. But it has been interjected into the trade-secrets trial of the century, centered on the conduct of former engineer Anthony Levandowski. The most salacious part of the Jacobs letter was the allegation that former CEO Travis Kalanick had sanctioned trade secrets theft. To be sure, the Jacobs story will be a featured part of the upcoming trial. And to that end, Judge William Alsup, who is overseeing the case, issued a recent Order unlike any I've ever seen.

***

A&P Technology v. Lariviere (Order) by Ken Vanko on Scribd