August 24, 2018

California District Leads Nation in Trade Secret Litigation

Holland & Knight Trade Secrets Blog
Matthew Zimmerman | Seth J. Welner

A recent report from Lex Machina, an IP litigation research company, shows that the United States District Court for the Central District of California had more trade secret lawsuits in the last decade than any other district court in the country. See Trade Secret Litigation Report 2018, Lex Machina (July, 2018); see also World Intellectual Property Review, California Court Most Popular Destination For Trade Secret Cases: Lex Machina (July 19, 2018). Since the enactment of the Defend Trade Secrets Act (DTSA) in 2016, trade secret litigation has become even more prevalent, with all federal courts seeing a 30 percent uptick in these cases. With approximately 6 percent of all federal trade secret litigation occurring in California’s Central District, that court may become an important trend-setter in interpreting the new DTSA.  

Although the Lex Machina report notes a correlation between population size and IP Filings, and California’s Central District includes the populous Orange and Los Angeles Counties, another contributing factor could be California’s disfavor of noncompete agreements for employees. It is well known that California courts generally do not enforce noncompete agreements between an employee and employer. Indeed, California has been labelled as the most difficult state for employers to enforce a noncompete agreement. See Norman D. Bishara, Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants Not to Compete, Trends, and Implications for Employee Mobility Policy (U. Penn. Bus. J., May 11, 2011) (ranking California as the least likely state to enforce employee restrictive covenant agreements). California law does permit the enforcement of noncompete agreements in other situations (e.g., regarding the purchase and sale of a business). 

With strict prohibitions against the enforcement of employee restrictive covenants, California’s employers sometimes turn to trade secret claims to protect sensitive information and trade secrets from competitors, who hire away key employees. Under the DTSA, injunctive relief is available to an employer if that employer can show that a former employee has misappropriated or threatened to misappropriate company secrets. California employers may turn to the DTSA to protect company information kept by employees. If trade secret litigation has become a substitute in some cases for noncompete agreements, one is left to wonder whether certain, high-level employees would be better suited with negotiated and narrowly tailored noncompete agreements that provide some certainty and protections, than the potential uncertainty of defending a trade secrets claim. 

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