Analysis shows trade secret litigation is being “brutally hard fought” – and companies must prepare

Trade secrets are front of mind for those in the IP sphere right now – and for good reason. As litigation continues to surge, companies around the world are having to urgently reassess their IP strategies in order to keep up.

Contributors to the Trade Secrets Hub – the new destination for the latest on-the-ground developments in this fast-moving space – reveal that although court wins are difficult to come by in China the United States and Japan, rights holders in the United Kingdom can take some comfort from the fact that courts appear cognisant of the tension between the principles of open justice and the fundamental need to keep trade secrets secret.

Meanwhile, in Denmark and Sweden, trade secrets are having a marked impact on the innovation ecosystems – presenting new opportunities but also exposing vulnerabilities.

Concrete plans are critical for US, Chinese and Japanese companies amid challenging litigation

US companies should brace for tough litigation as California sets leading example

Many US businesses are focusing on integrating trade secrets into their IP portfolios, Dylan Wiseman of Buchalter reports (see United States: Trade secrets – policy and latest developments). But it is in California that companies are leading the way. “As the fourth largest economy in the world, California’s laws regarding trade secrets drive its innovation economy.” Given its wealth of tech firms, life sciences companies and AI and machine-learning enterprises, California’s businesses were early adopters when it came to advancing their competitive positions by protecting trade secrets.

“At the federal level, Congress has only recently sought to replicate California’s trade secret protections and its hostility toward employment covenants not to compete,” Wiseman says. “In 2023, the Biden administration’s FTC proposed eliminating non-compete clauses in employment agreements as anti-competitive.” The rest of the United States is now trying to catch up to the approach that California has been using for almost 40 years.

In order to do this, US employers will need to implement solid plans to safeguard claimed trade secret information, including IP assignment terms and specific audits, and deploy technological measures. “With the FTC embracing California’s approach toward non-compete agreements, employers may likely need to litigate to protect claimed trade secrets,” Wiseman says. “Trade secret litigation is fast-paced, often brutally hard fought and highly specialised, so employers should seek experienced counsel.”

Low win rates in China indicate that greater awareness is sorely needed

“Currently, the framework of trade secret protection is mainly achieved through three dimensions [in China]: civil enforcement litigation, criminal measures and administrative enforcement requests,” says Guanyang Yao of Liu Shen & Associates (see China: Trade secrets – policy and latest developments).

The most difficult aspect of civil enforcement litigation for trade secrets is evidence collection. “Compared to the discovery procedure in the United States, China implements the evidence rule [that] the burden of proof is on the party that claims.” Therefore, plaintiffs need to submit evidence to prove that their trade secrets have been infringed, which can be challenging to obtain.

Although the number of trade secret cases is increasing in China, the win rate is relatively low. According to Yao, this indicates that Chinese companies still lack awareness of the importance of protecting these rights. He recommends that organisations strengthen their trade secret regimes by improving confidentiality systems and also highlighting the importance of trade secret protection when engaging in activities with external parties.

Uptick in Japanese infringement cases presents fresh difficulties

“The rise in trade secret infringement cases, whether criminal or civil, is attributed to the rise in job changes owing to increased job mobility in Japan,” says Shogo Matsunaga of Sonderhoff & Einsel Law and Patent Office, with the courts highlighting the  lack of sufficient management for these rights. “The main challenge in proving the existence of secrets management is demonstrating the presence of measures that clearly indicate the company’s intention to manage confidential information,” he says (see Japan: Trade secrets – policy and latest developments).

Being a defendant in a trade secret infringement case and losing a civil or criminal lawsuit poses significant compliance and business risks, Matsunaga warns. Companies have found it challenging, partly owing to shifts in court rulings, to grasp the specific content and level of secrets management mandated by the Unfair Competition Prevention Act and many had given up on trade secret protection under the act altogether. However, fresh regulation in this area, along with the continuing rise in infringement cases, means that ignoring trade secrets is no longer an option.

Litigation on the rise in the United Kingdom

Trade secrets have been a growing subject of litigation in the United Kingdom as well, Tony Proctor of Potter Clarkson reports (see United Kingdom: Trade secrets – policy and latest developments). “Disputes are often concerned with commercial information rather than technical information and are often concentrated between former business partners or employer and employee, such as in Mulsanne v Marshmallow.” The court’s ruling in Mulsanne highlights how crucial it is to demonstrate the steps being taken to prevent information from being misused.

The finding in Bamford Excavators v Manitou will likely increase the frequency of disputes under the Trade Secrets Regulation 2018, Proctor predicts. This might further dilute claimants’ previous concerns about jeopardising the very trade secret they were seeking to protect by litigating it in a public forum. “Rights holders may take comfort in knowing that the Court will support in ensuring the continuing confidence of such information when in public dispute,” he says.

Trade secrets making waves in Scandinavia

Good news for agritech in Denmark, although risks rise for renewables sector

“The continued rise of the popularity of trade secrets in Denmark has been underlined by the volume of the recent trade secret litigation arising in Denmark,” say Lars Karnøe and Emily Dahl Jensen of Potter Clarkson (see Denmark: Trade secrets – policy and latest developments). This is highly encouraging for the country’s vital sectors – such as agriculture – although it presents pressing challenges in other fields.

“As trade secrets offer an effective way to protect proprietary information, agritech businesses recognise it is highly applicable to the protection of internal methods, procedures and the techniques used, for example, to propagate new strains of plants.” This is an area where AI is playing a key role. “AI is being used to enhance the precision, efficiency and productivity of fermentation processes,” Karnøe and Jensen say. It can be used to analyse the vast amount of data involved quickly and accurately, and is not prone to human errors. It can also “identify and make immediate adjustments to maintain optimal fermentation conditions, efficiency and quality of product”, to reduce the risk of batch failure and wasted resources.

As coding behind AI is difficult to patent in Denmark, more inventors are turning to trade secrets to protect their algorithms and applications.

Looking ahead, it appears that it is in-demand technologies that could most benefit from this protection – and that are most vulnerable. “Trade secret theft is a particularly high risk in the renewables sector,” Karnøe and Jensen warn. “As the world’s demand for more sustainable energy sources grows, so does the threat of industrial espionage as competitors look to cut corners so that they can bring their own solutions to market more quickly.”

Sweden’s automotive industry open to breach threats, but additional protections helping life sciences thrive

Similarly, Sweden’s automotive industry has always been fast moving and highly innovative. However, due to the growing demand for electric and autonomous vehicles and AI advancements, the industry has had to re-evaluate its approach to protecting and leveraging its intellectual property, say Jesper Sellin and Sonja Hyvarinen of Potter Clarkson (see Sweden: Trade secrets – policy and latest developments). “As trade secrets are perfect for sectors that innovate at a faster pace, it is no surprise the automotive industry’s use of trade secrets is increasing.”

“The pace at which tech is being employed in new models and new types of cars has seen more manufacturers teaming up with specialist tech companies,” Sellin and Hyvarinen report. “This has hugely increased the risk of trade secrets being breached, a threat that must be minimised by putting the right contractual protections in place.”

Sweden has a vibrant life sciences industry, and innovation continues at a rapid pace – making  patent protection a must. But trade secrets are increasingly being employed to protect assets that cannot be patented. “Trade secrets are an effective means to complement and supplement patent portfolios, because they can be an effective way to protect gaps that patents cannot fill,” Sellin and Hyvarinen say. They are viewed as valuable because they are quicker and cheaper to progress, but “their true value in a portfolio is far more extensive”.

The IAM Trade Secrets Hub provides practical and timely guidance for practitioners trying to navigate this fast-moving space, and can be found here