INSIGHT: Will Trade Secret Litigation Supplant Patent Trolling?

Patent litigation is slowing down. One area where this is most apparent is litigation brought by non-practicing entities—also referred to as patent trolls. Both the intellectual property and business communities are well aware of the volume of patent litigation brought by trolls over the past couple decades. But due to recent legislative reform and developments in the law, this type of litigation has dropped sharply.

Given this slowdown, one can only wonder if the plaintiffs’ bar will turn to other types of cases. Recent court decisions suggest one possible candidate—trade secret litigation.

During the past year, cases such as Title Source Inc. v. HouseCanary Inc. have demonstrated the substantial sums of money at stake in trade secret litigation. In that case, HouseCanary received a $706 million verdict against Title Source (now known as Amrock). That judgment was later raised to nearly $740 million to include attorneys’ fees and interest.

Two Issues Explain the Potential Rise

Recent developments in that case, including multiple whistleblowers coming forward against HouseCanary alleging fraud and deception, raise questions about that particular judgment. But nonetheless the case highlights two issues relevant to a potential increase in trade secret litigation.

The first issue is the enormous amount of money that is potentially at stake in such litigation. HouseCanary’s award was one of the largest in all of 2018. Given a potentially significant award, it seems reasonable to assume that the plaintiffs’ bar will take notice, resulting in an uptick in trade secret litigation. One may argue that this has already started.

This is not to say large awards are never justified. To the contrary, such awards are entirely appropriate in certain cases. It is simply that those large awards may embolden others to seek similar payouts even where there is little (or no) basis for it.

This raises the second issue highlighted by the HouseCanary case: what types of companies would be involved?

The recent allegations against HouseCanary, if taken as true, suggest that unsuccessful businesses having no commercial product of their own may instead rely on litigation (or even the threat of litigation) to generate revenue. That is, the prospect of a near-billion dollar reward, while undoubtedly appropriate in certain cases, may lead failed businesses to monetize their purported trade secrets through litigation even where there is little basis to do so.

Along with those types of cases, there should also be a rise in meritorious claims. And there will be instances where near-billion dollar awards are appropriate, and even necessary. Take, for example, a small company with a successful product based on innovative know-how. If that company is lured into revealing its secrets to a larger company with promises of confidentiality only to have the larger company steal its innovations, a jury may very well be justified in deciding to award substantial damages.

A Surge Similar to Patent Trolls

Here, the very conditions which gave rise to patents trolls—commercial businesses facing potentially massive damages from companies having no assets other than intellectual property—seem to point to the potential emergence of a similar type of cottage industry based on trade secrets.

This possible surge in trade secret litigation likely (and unfortunately) would include some cases based on questionable theories of misappropriation. If true, this new surge in trade secret litigation could have similarly pernicious effects as those attributed to patent trolls.

These effects may manifest in different ways. For example, as trade secret misappropriation frequently arises in the context of a failed confidential relationship, such as a joint venture between two companies, a surge in dubious suits has the potential to alter businesses’ calculus regarding collaboration with other companies.

An increase in trade secret cases having dubious foundations, such as many believe was seen in patent litigation over the past few decades, could also have a chilling effect in all sectors of the economy given the broad subject matter that is eligible for trade secret protection.

Shift in Cases

Changes in the law seem to have paved the way for an increase in cases based on trade secret misappropriation. Trade secret protections are being utilized more frequently given the diminishing protections offered by patents. Given the concurrent downturn in patent litigation and the increased reliance on trade secret protections—fueled by the passage of DTSA—one can argue that we may be on the cusp between patent trolling and a new wave of litigation based on trade secrets.

This new wave of cases, while offsetting in part, may never eclipse the sheer number of patent troll cases. The requirements for trade secret misappropriation differ from patent infringement and limit the number of potential parties a given company could target. Thus, because of the smaller pool of litigation targets, there may never be as many cases. But the potentially huge awards suggest there will be some.

Where Does this Leave Us?

Given the potentially huge awards, it stands to reason that amongst the surge in trade secret cases there will be some that are premised on shaky claims. This is widely considered to have been the case with patent trolls. Indeed, the surge in cases may be fueled in part by the entities behind patent trolls shifting their focus to trade secrets as another means to monetize intellectual property. Weak trade secret cases, however, would pose similar risks to those attributed to trolls and span across all sectors of the economy.

The courts therefore must remain vigilant, ensuring that meritorious claims are rewarded—even substantially—while dubious claims are not.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Derek Dahlgren is a partner at Rothwell, Figg, Ernst & Manbeck P.C. His practice encompasses all aspects of intellectual property law including patent and trade secret litigation. The opinions expressed are those of the author and do not necessarily reflect the views of the firm or its clients.