IP Law Essentials

Trade Secret Litigation v. Patent Litigation: Similarities, Differences, and Interplay


Following up on our recent blog comparing trade secrets and patents, the Q&A below explores some similarities and differences between trade secret and patent litigation. As both patents and trade secrets often constitute key elements of a company's IP portfolio, it is crucial to understand what a litigation in either or both of these contexts would mean for you.

Q. What are some examples of conduct that give rise to trade secret or patent litigation?

A. Patent infringement can occur anytime someone makes, uses, offers to sell, sells, or imports any patented invention that they don't own or have a license to use. 35 U.S.C.  271(a). A party can also indirectly infringe a patent by contributing to another's infringement or inducing someone else to infringe. 35 U.S.C.  271(b)-(c). Patent litigations can arise in many situations but commonly occur, for example, where a company introduces a new device that is similar to a competitor's device or patent. Patent litigations may also arise when a non-practicing entity obtains a patent and enforces it against others. Failed patent licensing negotiations or offers may also give rise to a patent litigation.

A trade secret is violated when another "misappropriates" the trade secret. This generally means that the trade secret was acquired "by improper means" such as "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage. . . ." 18 U.S.C.  1839. Trade secret litigations often arise when an employee or employees leave a business and found or join a competitor. Another common trade secret fact pattern is when another entity (such as a manufacturer, distributor, or other potential partner) obtains someone's confidential business information through a prior business relationship or through negotiations to enter into a potential business relationship, the relationship is terminated or never begins, the entity that received the confidential information enters the same market, and the party who shared the information then believes that the information was wrongfully retained or used.

Q. What are some considerations before initiating a trade secret or patent litigation?

A. Before filing a suit for either patent infringement or trade secret misappropriation, the aggrieved party must identify a right it believes has been violated. In the context of a patent portfolio, a patent or patents themselves are likely the source of the violation since a patent confers on its owner the right to exclude others from practicing the invention. Trade secrets are a little more complicated. There may not be a single document which fully defines a company's or individual's trade secret(s). This means that the aggrieved party must identify if it has any trade secrets and what those trade secrets are. This may require the trade secret owner to analyze formulas, methods, or business information. This information could be contained in a trade secret database or in restricted files at the business. Failing to adequately identify your trade secret may be fatal to the case, as studied in our prior blog post.

In both trade secret and patent litigations, the aggrieved party also needs to determine whether it has a good faith argument that its right is valid and enforceable. Patents already carry a presumption of validity. However, before proceeding a party intending to institute a patent litigation should endeavor to determine whether it, in fact, owns or has a valid assignment right in the patent. (A similar issue arises when a licensee of a trade secret is considering filing suit.) The potential plaintiff should also confirm that patent maintenance fees have been paid. And, because patent law changes quickly, the best practice is to confirm that no recent case law affects the patent's validity.

Trade secrets do not carry a presumption of validity and are generally only valid where the information derives economic value from not being generally known or readily ascertainable, and has been the subject of reasonable efforts by its owner to maintain its secrecy. A party alleging misappropriation of a trade secret must thus determine whether it has a good faith argument that the information is indeed a secret and whether it has reasonably maintained the information's secrecy.

An aggrieved party must also determine whether it has a good faith basis to believe that its rights are infringed. In the patent context, this means that the party must determine whether the potential opponent's product or conduct meets all of the limitations of at least one patent claim. A trade secret plaintiff must have a good faith belief that the defendant "misappropriated" a trade secret. In other words, the key inquiry for trade secret litigation is whether the defendant engaged in "improper means."

Q. Can trade secrets and patents be asserted in the same lawsuit?

A. As we explained in an earlier post, trade secret and patent protection is often synergistic or complementary (and a best practice). The District of Delaware, for example, recently affirmed a jury verdict of patent infringement and trade secret misappropriation that resulted in a $49,920,000 judgement. Liqwd, Inc. v. L’Oreal USA, Inc., No. CV 17-14-JFB-SRF, 2019 WL 6840353 (D. Del. Dec. 16, 2019) (appeal filed).

Plaintiffs in both patent and trade secret lawsuits may also assert many other claims such as copyright infringement and state business torts. For example, a plaintiff in the District of Massachusetts recently pled federal and state trade secret claims, breach of contract, and various state business torts. Phio Pharm. Corp. v. Khvorova, No. 18-CV-12181-DJC, 2019 WL 2393792 (D. Mass. June 6, 2019). That case also implicates patent law issues, as the defendant allegedly filed for a patent on an invention wrongfully derived from the plaintiff's trade secrets. It is not unusual for a trade secret case to involve breach of contract or unfair competition claims, as many trade secret cases arise from a scenario involving a prior employee (i.e., an individual who had an employment contract with an employer) who has joined a competitor (who may allegedly be improperly using trade secret information obtained via the employee).

Q. How do trade secret and patent litigation court procedures differ?

A. Patent lawsuits can be brought in federal district courts or in the International Trade Commission ("ITC"). Parties can also bring administrative proceedings involving patents before the Patent and Trademark Office and the Patent Trial and Appeal Board. Patent law issues are rarely adjudicated in state court. Trade secret cases, on the other hand, can be brought in federal court under the Defend Trade Secrets Act, or in state court under that state's trade secret laws. As with patents, trade secret rights may also be enforced at the ITC. Where trade secret theft is involved, a defendant may also be subject to a parallel criminal proceeding.

Most courts have developed specific procedures for patent cases. For example, parties to patent lawsuits typically dispute the meaning of specific words in a patent, so the court must hold a "Markman" hearing to rule on the correct definitions of those words within the context of the patent. Similarly, parties to a patent lawsuit are required to produce "contentions," which outline their infringement and invalidity theories. Several federal courts have promulgated patent-specific local rules, intending to facilitate those issues routine for patent lawsuits. As many of the patent-specific procedures are not applicable in trade secret cases, courts generally do not have special trade secret-specific procedural rules. However, added protective measures are often put in place so that the trade secret owner is not forced to publicly divulge their trade secrets.

Discovery in both types of cases is governed by the Federal Rules of Civil Procedure or, for trade secret disputes in state court, the state court's procedural rules. Regardless of the type of litigation, the parties will be required to respond to discovery requests, including by producing confidential information.

Q. What other practical considerations exist?

A. Because the parties in a trade secret lawsuit often had a close relationship that ultimately degraded (such as an employer/employee relationship), trade secret lawsuits may have an individualized and emotional aspect that many patent cases lack. These prior dealings may lead to increased unproductive adversarial behavior and irrational settlement positions.

Trade secret litigations are also more likely than patent litigations to name individuals and businesses as defendants. Defense counsel in these cases must recognize possible conflicts of interest and keep in mind that "Upjohn" instructions may be required. An Upjohn instruction is when a company's attorney informs an employee that the attorney represents the company and not the employee. The employee is also told that communications with the company's attorney will not be kept from the company. Upjohn instructions are especially important where an individual may be prosecuted for criminal trade secret theft.

More questions? Contact the authors or visitFish's Intellectual Property Law Essentials.