Trade Secrets, DTSA, and the Federal Court Splits Shaping Litigation Outcomes

Courts across the country fall all over the map in how they tackle and consider various aspects of trade-secret claims. Ten years ago, Congress enacted the Defend Trade Secrets Act ("DTSA")[1] with the goal of promoting uniformity in federal trade-secret enforcement. The reality today, however, is that federal courts have taken decidedly non-uniform approaches to various aspects of DTSA litigation, leading to sharply divergent approaches by different courts and sharply divergent outcomes.

The stakes are high. Where a case is filed can determine whether a complaint makes it past a motion to dismiss, whether hundreds of millions of dollars in awards are viable, and whether a jury verdict survives. It is thus imperative that companies with trade-secret concerns closely monitor the dividing lines, recognizing that they can materially affect litigation strategy:

Divisions Over Pleading Requirements

The DTSA does not specify what pleading standard applies to private suits-particularity or something less demanding. In the face of that silence, the federal courts of appeals have staked out inconsistent positions.

On one end, the Third and Fourth Circuits demand "sufficient particularity" at the pleading stage. In 2021, the Third Circuit became the first court of appeals to wade into this issue. In Oakwood Laboratories LLC v. Thanoo,[2] the Third Circuit explained that "a plaintiff need not 'spell out the details of the trade secret to avoid' dismissal" but must plead the trade secret "with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies."[3]

Last year, the Fourth Circuit followed suit. In Sysco Machinery Corp. v. DCS USA Corp.,[4] the Fourth Circuit held that the DTSA "require[d] the plaintiff to identify 'with sufficient particularity' the trade secret it claims has been misappropriated."[5] The Fourth Circuit found that Sysco's generalized descriptions of its trade secrets were so "sweeping and conclusory" as to "suggest that nearly Sysco's entire business is a trade secret"-rendering it "impossible for DCS to know what it has been accused of misappropriating."[6]

On the other end, the Ninth Circuit has counseled patience and permitted plaintiffs to develop "sufficient particularity" over time. In Quintara Biosciences, Inc. v. Ruifeng Biztech, Inc.,[7] it endorsed an "iterative process where requests between parties lead to a refined and sufficiently particularized trade secret identification."[8] In so holding, the Ninth Circuit emphasized that the DTSA "does not require a plaintiff to identify with particularity its alleged trade secrets from the start," and thus suggested that "whether a plaintiff has sufficiently particularized a trade secret under DTSA is usually a matter for summary judgment or trial."[9]

• Takeaway: The stringency of pleading requirements for a DTSA claim varies nationwide. Depending on the district, more details may need to be divulged at the complaint stage-and the differences may change the calculus for where to strike the balance between disclosing enough about the secret to survive a motion to dismiss and preserving the future value of the secret. More stringent pleading requirements can also present more opportunities for trade-secret misappropriation defendants to secure an early out from a case.

Divisions Over Availability of "Avoided Costs" Damages

Under the DTSA, three types of damages are available for misappropriation of trade secrets: unjust enrichment, actual loss, and reasonable royalty damages.[10] Unjust enrichment damages commonly take the form of "avoided costs"-that is, the amount the defendant would have had to spend to independently develop the relevant secret (and thereby avoided through misappropriation of the secret). In recent years, the federal circuits have adopted inconsistent standards over when avoided costs are available.

The Second Circuit in Syntel Sterling Best Shores Mauritius Ltd. v. The TriZetto Group, Inc.[11] wiped out a $285 million judgment based on a narrow view of when avoided cost damages are permissible. Specifically, the Second Circuit held that to be eligible for avoided costs damages, a trade-secret plaintiff must show compensable harm (for example, public disclosure of its secret). Allowing avoided costs "whenever there is misappropriation" would be unduly permissive, in the court's view, because it would "unhinge[] avoided costs from the DTSA's compensatory moorings" and "risk[] producing an unjust windfall for trade secret holders [i.e., DTSA plaintiffs]."[12]

By contrast, the Seventh Circuit signaled a less restrictive approach to avoided costs damages in Epic Systems Corp. v. Tata Consultancy Services Ltd.[13] Epic, a developer of electronic-health-record software, secured a $140 million award based on avoided R&D costs, even though Epic had suffered no actual loss.[14] The Seventh Circuit affirmed, finding that "even though it is hard to quantify, Epic likely suffered a competitive harm" because "TCS, a potential competitor, had access to Epic's confidential information for years without Epic's knowledge."[15] Still more recently, the Seventh Circuit in Motorola Solutions, Inc. v. Hytera Communications Corp. Ltd.,[16] echoed Epic's more permissive view of when avoided costs damages are viable.[17] Specifically, it found that Motorola had "suffered large and measurable harms caused by the theft of its trade secrets" because, for instance, Hytera used Motorola's trade secret source code "to launch an entirely new and successful product line . . . that it then sold worldwide, in direct competition with Motorola."[18] The Seventh Circuit thus affirmed a $135.8 million award to Motorola, including $73.6 million in avoided R&D costs.[19]

The Fifth Circuit, meanwhile, has gone further, decisively rejecting Syntel's compensable harm requirement for avoided costs damages. In Computer Sciences Corp. v. Tata Consultancy Services Ltd.,[20] the Fifth Circuit held that "[t]o the extent that" Syntel's "standard is intended to require proof of some quantifiable impact on the secret holder that goes beyond proof of the misappropriator's unjust enrichment, that interpretation is divorced from the text of the DTSA and from traditional understandings of the 'unjust enrichment' remedy."[21] The court held that because "the DTSA authorizes damages 'for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual,'" the statute "does not separately require a compensable, quantifiable injury suffered by the secret holder."[22]

• Takeaway: The hurdles to obtaining avoided costs damages awards are greater in some jurisdictions than others; some courts have signaled more openness to crediting "hard to quantify" competitive harms, while others, like the Second Circuit in Syntel, have required a showing of compensable harm. Trade-secret plaintiffs in jurisdictions following Syntel should endeavor to demonstrate competitive harms caused by the alleged misappropriation, and may be able to turn the tide by showing the misappropriation caused their secret to become public or enabled a new competitor to enter the market.

Divisions Over Whether Damages Must Be Apportioned Per-Trade-Secret

The DTSA's text makes clear that damages are available to plaintiffs that prove misappropriation of trade secrets, but courts have splintered over the extent to which damages evidence must be apportioned per-trade-secret. This issue has profound significance in situations where multiple trade secrets are alleged.

On one hand, the Fifth Circuit indicated in Trinseo Europe GmbH v. Kellogg Brown & Root, L.L.C.[23] that, where a jury finds misappropriation of some but not all alleged trade secrets, the jury's damages award has no legally sufficient basis unless the trial evidence apportioned damages per-trade-secret or prescribed a methodology to do so. The jury in that case found misappropriation of some but not all of the alleged trade secrets (four of 10)-all 10 of which related to one system-and awarded some but not all the alleged damages (approximately $77 million of the $130 million requested for the system). The Fifth Circuit held, however, that absent a per-trade-secret apportionment showing or methodology, the damages award was "speculation" with "no basis" as a matter of law.[24] (Fried Frank represents Trinseo in its pending petition for certiorari to the Supreme Court seeking review of the Fifth Circuit's decision.[25] )

In adopting this strict approach, the Fifth Circuit purported to follow decisions of the Federal Circuit. In cases like Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc. ("TAOS")[26] and O2 Micro International Ltd. v. Monolithic Power Systems, Inc.,[27] the Federal Circuit has vacated jury awards where the trial evidence attributed unapportioned value to a greater number of alleged trade secrets than were ultimately left standing.

By contrast, however, the Sixth and Ninth Circuits have upheld jury awards against similar apportionment critiques and taken a more flexible, deferential approach to their evidentiary bases. In Caudill Seed & Warehouse Co. v. Jarrow Formulas, Inc.,[28] for example, the Sixth Circuit declined to disturb an award after the jury found misappropriation on four of six alleged trade secrets.[29] Although the plaintiff's damages model assumed misappropriation of all six alleged secrets, the Sixth Circuit declined to overturn the award as a matter of law because the jury had downward-adjusted the expert's unapportioned estimate.

Meanwhile, the Ninth Circuit in EchoSpan, Inc. v. Medallia, Inc.,[30] reversed and reinstated a jury's award after it was initially vacated by the district court for a purported failure to apportion.[31] EchoSpan went to trial on nine alleged trade secrets pertaining to one integrated product, and the jury ultimately found liability on one of the nine, awarding $11.7 million-roughly half the requested damages. Rejecting the need for mathematical precision in jury awards, the Ninth Circuit reasoned that the $11.7 million award could be viewed as the jury's effort "to approximate the share of total unjust enrichment attributable to the misappropriat[ed]" secret.[32]

• Takeaway: Courts have exhibited dramatically different levels of deference to jury damages awards in multiple-trade-secret cases involving near-equivalent facts. The very survival of a jury damages award can turn on the court's position on apportionment of damages. In matters involving multiple alleged trade secrets, the apportionment issue can critically inform the risks of a jury trial for litigants.

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A decade after Congress enacted the DTSA, federal courts addressing DTSA cases appear starkly divided on numerous issues that shape litigation outcomes. The cross-cutting divisions create a complex legal landscape that companies with trade-secret concerns and litigation must navigate carefully and strategically.

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