In our practice, we routinely defend clients in non-compete and theft of trade secret matters. But on occasion, we also prosecute these types of claims. This post will focus on prosecuting theft of trade secrets claims. I’ll be blunt: I see lots of sloppy lawyering by firms that represent companies in theft of trade secret cases. So I am going to explain how it’s done.
Suing for Theft of Trade Secrets: The Blueprint
(1) You better have trade secrets.
It may seem like I’m stating the obvious, but apparently it is necessary to begin with this premise. That’s right: Before you sue someone for theft of trade secrets, you should be sure that you actually have trade secrets. Here is an example from one of our recent cases: A company called American Registry sued our client Showmark Media and its principal. The principal had formerly worked for American Registry, left the company and started his own competing venture. American Registry sued Hanaw and his company in the Middle District of Florida for breach of a non-disclosure agreement and theft of trade secrets. The court sua sponte dismissed the complaint and amended complaint for various jurisdictional defects. Then we stepped in. We had the second amended complaint dismissed under Twombly for failure to state a claim (which is pretty hard to do in a trade secret case). Eventually, American Registry filed a third amended complaint. But after discovery, American Registry threw in the towel: They voluntarily dismissed their own lawsuit with prejudice. Why? Because they never had any trade secrets. And even if they did, we never stole them. Their claim was bogus. And now, there’s a good chance that American Registry will be required to pay my client’s attorney’s fees. So American Registry wound up pouring away money on a bogus theft of trade secrets case. It had to pay its own attorney’s fees and now probably has to pay ours.
Bottom line: Before you sue someone for theft of trade secrets, you’d better make sure you have trade secrets and you’d better have a good faith basis for making a claim of misappropriation.
(2) Get into federal court
It’s not always possible to get into federal court. But if you’re going to sue someone for theft of trade secrets in Florida, I urge you to take a hard look at any possible route into federal court. In practice, that means one of two options: Diversity or pendant claims.
Diversity Jurisdiction: If you have diversity, great. Then you have a right to be in federal court. But side note: A contractual forum selection clause can trump that right. So if you are the corporate entity drafting the contracts and you have a forum selection clause that locks you into a certain county, you need to reevaluate that in a hurry. If the clause says Pinellas County, then you’re locked into state court: There are no federal courts sitting in Pinellas County, Florida. If you have a legitimate claim, then you always want to be in federal court regardless of whether you’re the plaintiff or the defendant. So, if you have diversity and it’s not trumped by a forum selection clause, file in federal court.
Pendant Jurisdiction: If you don’t have diversity, the only other route into federal court is via pendant jurisdiction. If you have separate federal cause of action, then you file in federal court and bring the theft of trade secrets claim as a pendant claim. Whether or not you have separate federal causes of action all hinges on the specific facts and circumstances. But as a rule, if you are going to bring a trade secret claim, you should always evaluate whether or not you also have a claim under the Computer Fraud and Abuse Act (“CFAA”). Note: The CFAA has very specific requirements. Lawyers frequently try to get trade secret claims into federal court by bootstrapping them to CFAA claims. Often, this fails: The requirements of the CFAA claim are not met, those claims get dismissed and the court declines to exercise supplemental jurisdiction over the remaining state law (i.e. trade secret) claims. There are some other contenders here (i.e. RICO). But it all turns on the specific facts.
Bottom line: Consider separate federal claims that can secure federal jurisdiction.
Final note on jurisidiction: If you cannot get into federal court, then to the extent possible, bring the case in a county that has a separate complex litigation division of the circuit court. Several counties throughout Florida have these, including Miami-Dade, Broward and Hillsborough. If you absolutely must litigate in state court, it is imperative that you get the case into the complex litigation division.
(3) Get Specific
You should focus on specific, concrete trade secrets. You should (1) Be able to specifically identify the trade secrets that were stolen (2) Explain how that data/material constituted a trade secret (3) Explain how it was protected and kept confidential (4) Explain how the defendant had access to it (5) Explain how and when the defendant misappropriated it (6) Explain how the defendant is using it now (7) Explain why the trade secrets are valuable (8) Explain the damage it is causing to the company.
Let’s return to the American Registry case mentioned earlier for an excellent example: American Registry alleged that Showmark and Hanaw stole absolutely everything and the kitchen sink. This comes directly from their second amended complaint:
[Hanaw stole] “customer lists, customer identity, purchase and credit information, sales and operation procedures of American Registry, software of American Registry, system architecture of American Registry, financial data of American Registry, sales and marketing strategies and data of American Registry, lists compiled by American Registry, statistics, programs, research, development, employee, personnel and contractor data, information and records and information relating to products offered by American Registry.”
Once again, American Registry lost this case in epic fashion. They caved. This is not the way to pursue a theft of trade secrets claim. Rather than pleading a boilerplate, generic list of different trade secrets (and these aren’t even trade secrets—these are just broad categories of information), plaintiffs should get specific: If the defendant stole a specific customer database and a specific, top secret software program that the company had developed, then leave it at that. Go hard at those specific trade secrets.
Think about it: The case will be so much easier to prosecute. Let’s stick with this hypothetical: The defendant stole a customer database and a proprietary software program and is now using these materials in his new venture. The entire case is focused: Discovery is focused on proving the defendant stole these two things. That alone makes the case dramatically more efficient (and dramatically less expensive). Let’s be clear: If you are going to pursue a theft of trade secrets case, you should be prepared to make a significant investment in litigating the matter until you reach an acceptable resolution. But there is no reason to “beef up” the complaint by adding allegations about a bunch of other documents/materials/information when (A) much of it is not even a trade secret (B) you have no idea whether or not the defendant actually stole it and (C) you are just adding it because your attorney wants it in there just in case. From my experience, the lawyers most inclined to adopt the laundry list approach (regardless of the underlying facts) are (A) Lawyers at large firms (who do so for a variety of reasons including financial ones) and (B) Bad lawyers who have no idea how to litigate trade secret cases.
Another point about being specific and focused: When most lawyers are preparing a complaint, they never think about trial. This is because most commercial litigation attorneys never actually go to trial. And if they do, they’re third or fourth chair and some senior partner is calling the shots. So the lawyer drafting the complaint does not consider what happens at trial. Let’s go back to the real example of American Registry. If a case like that goes to trial, the plaintiff is in trouble. Let’s say the plaintiff has alleged 20 different “trade secrets” that were supposedly stolen. And the defendant can show that 18 of them are bogus. And the remaining two are a close call. The jury is going to be so livid over the plaintiff pursuing those 18 bogus allegations that it will give a close call to the defendant.
Bottom line: Focus and get specific. Stick to what you can prove. If evidence of more misappropriation comes out during discovery, you can always amend or file another lawsuit.
(4) Aggressive Discovery
This one works both ways: If you’re up against good defense counsel, you need to be prepared to respond to aggressive discovery requests. When our clients gets sued for misappropriation of trade secrets, we hit the plaintiff with some of the most aggressive discovery requests imaginable seeking – literally – every piece of information available about every single alleged trade secret. Like this:
- Identify the trade secret
- Who created it
- How is it stored/kept/maintained
- Who had/has access to it
- Are there any licenses
- When was it misappropriated
- Manner of misappropriation
- Why is it valuable
- What is its value
That’s just off the top of my head. We make it ugly. If you are the plaintiff in a trade secrets case, then you must be prepared to respond to these sorts of requests. Stonewalling during the discovery process is a bad idea and is sanctionable. Yes, you need to protect your intellectual property. Yes, there should be a confidentiality agreement and possibly an attorney’s eyes only agreement in place. But you must be prepared to provide robust responses to the defendant’s discovery requests. On the flip side, the plaintiff needs to get aggressive. That means aggressive discovery requests— particularly requests to inspect the defendant’s computers, phones, systems, etc. In addition to possibly yielding valuable evidence, that process makes people extremely uncomfortable and can create leverage re possible settlement.
Bottom line: Be prepared to respond to aggressive discovery requests and be ready to hit back in kind. Make it ugly.
(5) Get an Injunction
Easier said than done. But the point is a simple one: If the defendants stole your trade secrets and are now using them to harm you in the market, you have to move fast. The more you delay, the greater the harm. Also, the more you delay, the less compelling your argument for an injunction. Move immediately. Seek a TRO and then a formal preliminary injunction. Don’t mess around with demand letters or cease and desist letters: It’s a waste of time.
(6) Think about Trial
Some of these cases end after the court has ruled on the preliminary injunction. That ruling can often be dispositive. But sometimes the cases continue. Right now, I have a non-compete case where my clients were enjoined, we appealed, won the appeal, had a second injunction hearing, won that injunction hearing….. and the case is still going. It’s headed to trial in June 2015.
Many lawyers who litigate these types of cases are woefully unprepared for what happens after the injunction is decided. That’s just bad lawyering.
Bottom line: If the defendants are well-capitalized or there’s the prospect of permanent injunctive relief on the table, then you need to be prepared for trial.