Trade Secrets Litigation Clock Puts Companies in a Costly Bind

The obscure nature of trade secrets theft adds a layer of complexity to the issues of when companies must sue and what they need to allege when they do, dividing appeals courts.

The statute of limitations in federal trade secrets law turns on the discovery rule: the clock starts when a party discovered or should have discovered a violation. But key information indicating whether a rival stole secrets often lies within the competitor’s walls, making it difficult to ascertain in the absence of discovery, obtained from a rival during the early stages of litigation.

As a result, courts have had to engage in a balancing act between encouraging litigation that’s timely, but not suspicion-driven fishing expeditions—and doing so in a manner predictable to litigants.

Even without that clarity, attorneys need a handle on what their corporate clients know about perceived threats, and that sitting on even unverified—or unverifiable—concerns until better information becomes available can prove costly.

That was the case for Insulet Corp., which recently lost a $59.4 million award after the US Court of Appeals for the Federal Circuit said the company waited too long to sue over insulin pump trade secrets. Dissenting, Judge Sharon Prost warned the decision will induce a “rush to the courthouse based on mere suspicion.”

“The dissent raised a valid concern,” IP attorney Agatha H. Liu of Duane Morris said. “Because of the secretive nature of trade secrets cases, often times the actual proof cannot be uncovered until you are in discovery.”

In addition to a nebulous boundary on what can start the clock for filing a complaint, the amount of information needed in a complaint presents a related conundrum for counsel.

Courts have wrestled with how specifically secrets must be described in complaints as well as the degree to which they must be backed with factual allegations.

“I do think the pleading standard is particularly hard in trade secrets cases based on the nature of the cases,” Duke University IP law professor Arti K. Rai said. “I’m not necessarily an IP maximalist, but I think for trade secrets cases the bar is sufficiently high that I’m concerned. If you’re trying to protect trade secrets it’s going to be hard.”

In any case, attorneys will have to make highly consequential judgment calls.

“The safest thing will be not to wait until you feel like you have really substantiated evidence that clearly showed the defendant actually made the offense,” Liu said.

‘Access and Similarity’

The tension came to light in the Insulet case, where the Federal Circuit majority found Insulet should have known rival EOFlow Co. stole its trade secrets by at least 2019, yet waited to sue until 2023—longer than the three-year limitations period allowed.

The company knew EOFlow had hired former Insulet employees to work on their competing EOPatch 2 product, and that the product looked a lot like its OmniPod model. Internal emails indicated concern, with one stating “EOFlow has cloned our product.”

But Prost said the court should have trusted the jury to assess the credibility of experts who testified whether Insulet would have had reason to suspect theft based on the appearance of the product alone.

Criticizing the majority’s “access and similarity” threshold, she said they functionally applied an “inquiry notice” standard, which is triggered when a party should have known to start investigating—not when the investigation bore fruit.

Knowing that EOFlow had its former employees and a similar-looking product didn’t necessarily mean it had discovered theft, she said.

Rai said attorneys are “a little bit between a rock and a hard place” based on US Supreme Court precedent requiring complaints to have a “good amount of information.”

Insulet’s situation isn’t uncommon, especially in areas like software with competing products’ obscured internal workings, she said.

The Federal Circuit indicated the clock starts ticking if you know ex-employees worked on a superficially similar competing product, Rai said. “The Supreme Court requires more specificity” in complaints.

Inquiry or Discovery

Fabio E. Marino, an IP attorney with Womble Bond Dickinson, said he doesn’t think the inquiry notice versus discovery rule issue was as important as Prost suggested.

There’s not necessarily a huge gap between when you know you should investigate and when you have enough information to sue—considering that a trade secrets investigation will quickly hit a wall at the company’s doors, he said. He said the panel “ultimately did the right analysis” and justifiably found Insulet knew enough to sue in 2019.

Liu said courts may subconsciously perceive something akin to inquiry notice as the proper framing in the trade secret context.

The Federal Circuit majority seemed to be “trying to find a more elevated position than the inquiry notice,” and considered additional factors beyond that standard, Liu said. But it didn’t want to “go as far as requiring actual proof or substantiated evidence” of a violation, she said.

Companies concerned about filing deadlines do have an alternative that can buy time, or at least flush out a signal of a problem requiring attention, Marino said. Counsel can reach out and offer a tolling agreement—a contract not to start the clock on the statute of limitations in exchange for not suing until learning more, he said.

“It’s very standard here in California,” the Silicon Valley-based attorney said. “When it happens the defendant will generally engage,” and if not then “you know you have to file something, as there is now real reason to suspect something.”