Entertainment Industry: Take Note Of Surge in Trade Secrets Litigation

Greenberg would know: Digital messaging company LivePerson has been embroiled in trade secrets litigation with competitor 24/7 for nearly three years. Originally, the companies were partners and 24/7, which LivePerson viewed as primarily a labor company rather than a technology one, had access to LivePerson's technology through the agreement. LivePerson, claiming that 24/7 maintained access even past the agreement's expiration, filed a trade secrets lawsuit against its former partner. 24/7, meanwhile, shot back with a patent infringement suit of its own. At present, only two of the original patent questions are being litigated, and the two cases have been consolidated in the Northern District of California. 24/7 Customer v. LivePerson Inc., 15-cv02897.

Michael De Vries, partner at Kirkland & Ellis and outside counsel for LivePerson in the case, believes this particular case isn't unique. “We think that this case is part of a growing trend and is something I'm certainly seeing a lot of in my practice now, which is the role of trade secrets in both protecting intellectual property that's been developed by technology companies and then disputes over misappropriation,” De Vries says.

But that begs the question: Why is the trend growing, and what will trade secrets look like in technology-laden sectors like the entertainment industry moving forward? The easiest place to start is the Defend Trade Secrets Act (DTSA). Enacted on May 11, 2016, the act allows the owner of a trade secret to sue in federal court when its trade secrets have been misappropriated. The act extended the Economic Espionage Act of 1996 and brought federal legislation more into alignment with the widely-adopted Uniform Trade Secrets Act.

Don't think the ability to file in federal court seems like that big of a change? De Vries says it was a monumental shift in the LivePerson litigation. “We're seeing many cases where there are overlap between patent and trade secret issues, particularly in the high technology space,” he explains. “Although the trade secrets claims could be litigated in state court, there are often advantages to having these issues all before the same court, in federal court, where they can also deal with the patent-related issues.”

C. Bryan Wilson, a Washington, DC-based partner at Williams & Connolly, notes that, although many big technology companies already have a number of routes to protect IP at the federal court level, the DTSA allows trade secrets claims to be a “gap filler” around those other types of claims. He says trade secrets claims “can also be faster and a bigger hammer to bring against a competitor.”

However, he adds: “That can be a two-sided hammer. If the case is not strong or it risks invalidating what the plaintiff otherwise thinks is a strong claim, then taking a loss in a federal court that is more likely to be widely disseminated is a bigger risk for a plaintiff that has a more marginal case.”

That widely disseminated piece is important, he says — as the DTSA gains prominence, in federal court, it will become a more common strategy for litigators. “They're going to get more attention in that respect, because it's easier to follow the work of the federal courts,” Wilson explains. “So you're going to get a more developed body of law on some of these questions than you do picking and choosing among state courts, where a lot of their opinions aren't necessarily published.”

There is also the issue of large rewards occurring in federal trade secrets cases, making litigation a risky proposition for those on the losing side. In the ZeniMax case from February 2017, for example, the U.S. District Court for the Northern District of Texas ordered virtual reality developer Oculus VR (owned by Facebook) to pay $500 million to computing firm ZeniMax Media for copyright and trade secret infringement. ZeniMax Media Inc. v. Oculus VR LLC, 3:2016mc00098.

“There obviously have been famously large damages awards,” De Vries notes. “I think juries dislike the conduct that they see. … Those types of remedies can be available in patent cases, but there have been a number of changes in the law over the last several years around patent damages. That, I think, also presents a very different profile when looking at a trade secrets case.”

Trade secrets are present in just about every industry. But currently, the large rewards and litigation seem to be more prevalent in technology sectors than anywhere else.

De Vries posits that there are two main reasons for this. The first is the speed of the technology industry itself: “I do think the temptations are very high here, because technology moves very quickly. You have an environment where you have a number of different technology suppliers, and the technology is evolving rapidly. So the temptation to not go do the work and the independent ingenuity required to develop the technology, but to go and take it from someone else who's already done that so you can get into the market, is very high. And I think it's higher than it would have been in more traditional industries and looking back in time.”

The second that many technology companies make money through the knowledge of individuals more than mechanized processes. “There is a sweat equity associated with really deep know-how and technology that really works on all fronts,” Greenberg adds. “There is no real way to accelerate that; you have to do the work. So I think it's quite possible that a company faced with 10 years of work, where 10 years later [or much less given the fast-paced technological changes in the entertainment industry] it's no longer relevant to enter the market with that, or finding a shortcut, I can imagine that the temptation to find the shortcut could be quite high.”

Wilson agrees with that assessment, noting that this know-how is the most important aspect of a technology company. “That is the product that they are selling, whether it's something that they make or something that they provide.”

Trade secrets issues inherently loom large when this know-how is shared with third parties as part of the system integration that is crucial to expanding a technology platform in today's market. This, De Vries says, is “really no different than an employee who as part of his or her job is given access to systems that contain proprietary information.”

So what do technology-driven companies need to watch out for in trade secrets litigation? Wilson explains that a company might be a candidate to be a plaintiff in trade secrets litigation simply by watching the market and what competitors are doing.

A trade secrets claim begins, he says, if another company is “competing on product lines A and B, but not C, and from what you can tell they didn't have a good base to compete on product line C, but now they are. That change in where they're competing with you, in how they're competing with you on a technology side … the company would then work backward from that. Have we had a group of people leave recently? Have we had exchanges with this company on unrelated things where some of our IP might have gone out the door without us knowing it? Do we share a third party through some relationship that might have passed information onto the competitor? You start looking at the links between you and them.”

But could the other company have developed this information independently? Not likely in the technology industry, he says. “How you build a widget, there are really only so many ways to do it, unless you are talking about something extremely cutting edge,”

De Vries notes that these links are exactly what LivePerson noticed when filing its initial complaint. According to the complaint, LivePerson believed that “24/7 came out with a very similar offering that, from our perspective at the time of filing the suit, could only have occurred by abusing the access that they were given to our trade secret technology.”

And these complaints will only continue; more awards will be given. A side effect of the increase in litigation is that courts, particularly on the federal level, are understanding how to try these cases more efficiently. “Courts are doing an excellent job at dealing with these issues,” De Vries says, adding that they are thinking “critically and seriously” and “have seen a lot of evolution in the past couple of years.”

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Zach Warren is the Editor-in-Chief of Legaltech News, an ALM sibling of Entertainment Law & Finance in which this article originally appeared.