IP alternatives

The importance of trade secrets

Grant's Take on IP Law

Grantland Drutchas

Grantland Drutchas, a founder and current managing partner of McDonnell Boehnen Hulbert & Berghoff, currently serves as chair of the firm’s patent trial and appeals board trials practice group and of the litigation  and appeals practice group. He also teaches in the IP program at IIT Chicago-Kent College of Law.

Trade secrets have many benefits to other forms of intellectual property: The protections, damage awards and injunctions can be worldwide, misappropriation can be subject to criminal as well as civil penalties, the costs of obtaining trade secrets are generally much less than obtaining worldwide patent rights and trade secrets have no expiration date. But trade secrets have risks as well, particularly in this global economy.

Trade secret protection, as an alternative to patents, has become increasingly important over the last two decades. And recently, in 2016, in recognition that U.S. companies must have better options to protect against the misappropriation of trade secrets, Congress enacted the Defend Trade Secrets Act, which made it easier to bring a trade secret misappropriation action in federal courts.

The last 20 years have seen the number of trade secret litigations skyrocket with multiple big-ticket judgments, including:

  • ASML Holdings N.V. v. XTAL Inc. (Cal. Sup. Ct. 2018): $845 million judgment and an injunction
  • HouseCanary v. Amrock (Title Source) (73rd District, Texas, 2018): $740 million judgment, including $400 million in punitive damages and $33 million in interest and attorney fees.
  • Pacesetter v. Nervicon (Cal. Sup. Ct. 2011): $2.3 billion judgment, reduced to $947 million
  • GM v. Lopez/Volkswagen (E.D. Mich. 1997): $1.1 billion: $100 million cash, $1 billion products
  • Epic Systems v. Tata Group (W.D. Wis. 2016): $240 million damages, $700 million punitive
  • DuPont v. Kolon Industries (E.D. Va. 2011): $919 million judgment — overturned on appeal (settled: $85 million criminal fines, $275 million restitution)
  • TSMC v. SMIC (Sup. Ct. Cal. 2009/2005): $290 and $175 million settlements

These decisions also emphasize the global reach of trade secrets. Although all of these litigations were filed (at least in part) in the U.S., many had a substantial international component: ASML is a Netherlands-based company whose documents were stolen by senior U.S.-based employees with indirect links to China; Iguancio Lopez De Arriortua was GM Europe’s purchasing manager and brought his wares to Volkswagen; Tata’s conduct was primarily in India; Kolon has no offices in the U.S.; and semiconductor companies TSMC and SMIC were based in Taiwan and China, respectively.

Criminal charges may also be brought for trade secret misappropriation. Last year, for example, Weiqiuang Zhang, a Chinese national and U.S. legal permanent resident, received a 10-year prison sentence for conspiracy to steal trade secrets, conspiracy to commit interstate transportation of stolen property and interstate transportation of stolen property for trying to smuggle samples of proprietary rice seeds worth tens of millions of dollars back to China.

Just two months later, Sinovel Wind Group Co., a Chinese wind turbine manufacturer, was forced to pay a $90 million in fines and settlement payments and face a year of probation for conspiracy to commit trade secret theft, theft of trade secrets and wire fraud based on its actions against a U.S. firm, AMSC.

Unlike patent rights, the costs associated with obtaining worldwide trade secret protection are minimal. Trade secrets have no application preparation and filing costs, or maintenance fees. Trade secrets also have no expiration date.

In litigation, under the Defend Trade Secrets Act, the owner merely needs to show they have taken “reasonable measures to keep such information secret” and that the information “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person … ”

Moreover, the costs that are associated with such “reasonable measures to keep such information secret” are ones that are well-spent in any event and are just good business practices, such as well-drafted employment and vendor agreements, exit interviews, limiting visitor and employee access and strong corporate trade secret policies.

From an enforcement perspective, however, trade secrets present unique challenges.

A trade secret owner’s documentation of their trade secrets is essential to proving that their secrets have been misappropriated. And there can be no trade secret misappropriation without, well, misappropriation. That is, the owner must have proof that someone acquired the trade secret through improper means (such as theft, espionage, bribery, misrepresentation or a breach of a duty to maintain secrecy).

And under the Defend Trade Secrets Act, at least, one person had reason to know such acquisition was improper. Further, unlike patent protection, trade secrets do not protect against either reverse engineering or independent development. As such, there are some types of innovation that are much more amenable to trade secret protection, some to patent protection and some to a blend of the two (and some to copyright and design patents, which I will discuss in future articles).

The selection of IP protections, and how best to use them, must be carefully calibrated to the technology, the product life and characteristics, the industry and the global competitive landscape for the particular innovation. And given that clients, potential licensees and investors may accord different values to trade secrets vs. patents, careful consideration must also be given to the direct economic impact of proceeding with one IP approach over another as well.