Financing Can Level the Playing Field, Manage Risk and Provide Access To Elite Counsel
It is a story that we have heard repeatedly at GLS Capital: A small innovative business and an established industry player wanted to work together to bring the small business’ amazing new product to market. Under the protection of a non-disclosure agreement, the small business showed its secret sauce to the larger company. The larger company abruptly declined to proceed or simply stopped responding. A short time later (shorter than the development cycle), the larger company launched its own identical product. The small business is often devastated and left with no recourse but to sue but may not have the resources to go up against an established player.
Variants of the story abound. Maybe both companies are established. Perhaps the secrets were shared in an exchange of detailed documents or in months of meetings and calls between engineering teams. Maybe the innovator company has the resources to sue but prefers to use its capital for R&D or other products.
Increasing Number of Trade Secret Claims
Over the past several years, the legal industry has seen a significant rise in the number of claims filed involving theft of trade secrets, due in part to the passage of the Defend Trade Secrets Act in 2016. The broad shift toward remote work and a greater reliance on cloud-based data sharing systems may also have contributed to the rise in incidences of trade secret theft and filings of legal claims to remedy these breaches.
Although it presents unique challenges and risks in court, trade secret law offers broad protection for various types of confidential information. Trade secret cases bring the possibility of large damages awards—some of the largest jury verdicts in recent years relate to trade secret lawsuits.
Given the dense subject matter and the amount at stake, these claims are often costly and complex. Accordingly, many claimants and law firms have sought alternative sources of funding for trade secret disputes. As many litigants have discovered, litigation finance presents a suitable alternative to traditional fee arrangements for those looking to increase cash flow and mitigate the risks brought by trade secret cases.
What is a Trade Secret?
In simple terms, a trade secret is any information that, by virtue of its secrecy, has actual or potential commercial value to others who could not legally obtain or recreate the information. There is also an obligation that the person claiming a trade secret make reasonable efforts to maintain confidentiality. The most famous example of a trade secret may be the recipe for Coca Cola, but other examples include manufacturing know-how, algorithms, business plans and marketing strategies, and customer lists and data.
Trade secret lawsuits often overlap with other areas of intellectual property law (such as trademark, patent, and copyright) because sometimes they cover similar types of information. From 2010-2019, about 31% of trade secret cases involved claims in another area of intellectual property law. Since Congress’ passage of the Defend Trade Secrets Act (“DTSA”), however, many plaintiffs are choosing to rely more heavily on trade secret law to protect their proprietary materials. Prior to its enaction, trade secret law was enforced mainly at the state level. With the exception of New York, all states had adopted the Uniform Trade Secrets Act at least in part, which offered some national protection, but was still difficult to enforce across state and country lines. Litigants recognized the federal DTSA to have much greater enforcement capabilities, and during the two-year period following the passage of the Act, trade secret case filings rose 30%, according to analysis by Lex Machina.
Encouraged by the improved litigation landscape created by the DTSA, tech companies have found that trade secret law can sometimes more adequately protect valuable information than patents or copyrights, which require a significant time commitment to complete and have a limited timeframe for coverage. Additionally, to acquire a patent, the inventor must disclose the invention and the method for creating it to the public. Trade secrets do not require this disclosure and their protection never expires, so long as the company is able to maintain reasonable efforts to keep their information confidential. As the intellectual property space becomes increasingly focused on inventions that constantly evolve and outpace the patent office’s prosecution timeline, many companies view trade secret law as increasingly well-suited to cover the dynamic and highly secretive designs of a wide range of new technologies.
Damages and Remedies in Trade Secret Litigation
Trade secret law attracts claimants and litigation funders for its potential to grant large damages awards. Under the DTSA, a finding of misappropriation can translate to damages for the trade secret owner’s actual loss (including lost profits, increased costs of business, a reduction in the value of the trade secret, research and development costs, and legal fees) as well as unjust enrichment or a reasonable royalty. The total award can also be increased up to double the original amount in cases warranting exemplary damages, where the misappropriation was found to be willful or malicious. Depending on the court, unjust enrichment can cover a very broad timeframe of misappropriation, including ‘head start damages.’ In these situations, a trade secret owner is compensated for the significant time and costs a defendant was able to save in jump starting their business or getting a product to market faster through the use of the plaintiff’s trade secrets. Some courts have even found that trade secret owners could be compensated for the current and future anticipated use of their proprietary information.
However, these damages calculations are subject to a degree of variability dependent on the specific court. For instance, courts are just beginning to assess whether a claimant can receive damages incurred outside the United States for misappropriation that occurred in the United States. In March of 2020, the Northern District of Illinois ruled that defendants could be responsible for misappropriation that occurred outside the United States under the DTSA provided that the misappropriator was a citizen or U.S.-based entity and that the act in furtherance of trade secret misappropriation took place in the U.S. The case, Motorola Solutions, Inc. v. Hytera Communications Corp. Ltd., produced one of the largest trade secret jury verdicts to date, at $746.6 million, due in part to the addition of extraterritorial damages. That said, the potential to collect outsized verdicts in trade secret disputes is tempered by the risk of walking away empty-handed.
Litigation Funding and Trade Secret Lawsuits
Due to their size and complexity, trade secret cases can be very expensive. Not surprisingly, litigation funding has become increasingly common in trade secret lawsuits. Trade secrets disputes often involve entities with disproportionate resources, with one side less equipped to engage in a lengthy and expensive court battle. Litigation finance can mitigate these imbalances.
Most litigation finance firms offer a variety of funding arrangements, allowing plaintiffs to offload the significant costs of a legal dispute in return for a portion of the proceeds in the event of a successful resolution. As well as providing funding for claimholder plaintiffs, third-party finance providers can also help law firms de-risk contingency fee arrangements. Especially in times like the current environment when many law firms and businesses are particularly motivated to keep cash reserves on their books, litigation finance agreements are rising in popularity to finance trade secret and other complex commercial disputes.
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If you are seeking to a trade secret misappropriation or other commercial litigation claim and would like to learn more about options for funding from GLS Capital, please contact Jeff Lula (jlula@glscap.com) or David Spiegel (dspiegel@glscap.com) today. GLS specifically invests in businesses, organizations, and plaintiffs with commercial and IP-related claims.