California courts handle most US trade secrets cases, data shows

California courts were home to the most federal trade secrets litigation over the past three years, according to a report released by legal research company Lex Machina. However, a Federal Trade Commission ban on noncompete agreements could spike trade secrets claims nationwide.

Since California has prohibited noncompete agreements in employer contracts for more than 150 years, Morgan Lewis & Bockius LLP partner Seth M. Gerber said, the state has been a "major driver" of economic growth in the intellectual property field.

Seth M. Gerber

"It has also spurred lots of trade secrets litigation in California, and our judiciary is experienced and extremely capable in handling these types of complex intellectual property disputes," Gerber said in an email Thursday.

Duane Morris LLP partner Jeremy T. Elman agreed California's longtime ban on noncompete agreements has propelled the state into a leadership role of trade secrets law and trends. "Other jurisdictions regularly refer to California case law when handling trade secret cases," Elman said.

The analysis follows Lex Machina's release of a 2024 litigation report Thursday that found the Central District of California handled the most trade secrets cases from 2021 to 2023, accounting for 5.4% of the thousands of such filings nationwide.

The company also found the federal court in Northern California accounted for the third highest active trade secrets caseload with 4.5%. The Southern District of New York, the federal court in Manhattan, had the second highest with 4.9%.

The report encompasses 12,375 trade secret cases filed in federal trial courts from 2014 to 2023. However, the report focuses on data from 2021 to 2023.

In those years, 3,544 trade secrets cases were filed; 191 of which were in the Central District of California. California based judicial officers who handled most of these active cases were U.S. District Judges James V. Selna, 16, and Michael W. Fitzgerald, 15.

The judge who presided over the most trade secrets matters was now-retired U.S. District Judge Earl Leroy Yeakel III with 24 cases in the Western District of Texas.

The Central District remained in the top spot this year. It was also the highest in Lex Machina's 2023 report, which prioritized litigation analysis between 2018 and 2022.

Elaine Chow, a Menlo Park attorney and legal data expert for patent and trade secret law at Lex Machina, was listed as an editor of the report. She said that the Central District's prominence in the trade secrets litigation is likely due to the area's dense population and the state's noncompete ban.

"The large population of C.D. Cal includes Los Angeles and Orange County, which are very large metropolitan areas. So, more people, more lawsuits," Chow said in a phone interview. "Also, California doesn't enforce noncompete clauses. You can't go after a former employee for violating the noncompete clause in their employment contract. So, then you go after them for a trade secret appropriation."

Gerber - who was recognized in Lex Machina's report as one of California's top two trade secrets defense lawyers, along with his partner, Debra L. Fischer - said a nationwide noncompete ban would likely raise federal trade secrets complaints in more states because, "Plaintiffs typically bring claims to enforce restrictive covenants with claims for misappropriation of trade secrets." Fischer and Gerber defended 10 cases over the past three years, the second-most in the nation.

The question of how a national ban of the employee clause would impact the volume of trade secrets claims was raised following an Aug. 20 decision by U.S. District Judge Ada Brown in the Northern District of Texas. She issued a nationwide injunction that stopped the FTC from enforcing its new rule that sought to ban noncompete agreements in the United States. Ryan LLC et al., v. Federal Trade Commission, 3:24-cv-00986, (N.D. Tex., filed Apr. 23, 2024).

Elman said a nationwide ban on noncompete clauses would cause a rise of national trade secrets claims because the employee agreements have often been used as an avenue to protect a company's intellectual property.

"Companies have traditionally taken the existence of their own trade secrets for granted, knowing that they could enforce noncompetes in certain situations, and companies may need to re-look at how they are creating and maintaining their trade secrets going forward, which may also spur more litigation," Elman said.

Gerber said, "If you remove noncompetes from the equation, employers most likely would turn to allegations concerning stolen trade secrets as the tip of the spear."

Since 1872, California has prohibited employers from entering noncompete agreements, which was codified in Business and Professions Code Section 16600 in 1941. Minnesota, North Dakota, and Oklahoma are the only other states that enforce full bans on noncompetes.

In April, the FTC approved a rule that was set to ban noncompete agreements for all workers nationwide on Sept. 4. However, auditor Ryan LLC, along with the U.S. Chamber of Commerce, sued the FTC and claimed the new rule was arbitrary and capricious, and the commission exceeded its statutory authority. Brown, the Texas district judge presiding over the case, agreed in her August ruling.

Paul Hastings LLP partner Jennifer S. Baldocchi said a national ban on noncompete agreements would increase trade secrets claims because, "If companies were left without this contractual recourse to protect their valuable intellectual property, they will be more likely to rely on the statutory protections provided by the Uniform Trade Secrets Act (state) and the Defend Trade Secrets Act (federal)."

She added, "This likely explains why California courts tend to see more trade secrets cases than other states, given the California ban on most noncompete agreements."

According to Lex Machina's report, Gordon Rees Scully Mansukhani LLP was the most active law firm representing trade secrets plaintiffs, with 95 lawsuits in 42 districts. Ogletree Deakins finished second, with 81 plaintiffs in 41 districts.

Walnut Creek insurance attorney Caraine Rosyn Leon Guerrero represented 12 individual plaintiffs in that time frame, the highest for a California-based practitioner.

Financial institutions and insurance companies were among the most active filers of trade secrets cases from 2021 to 2023, the report said. Texas-based JTH Tax LLC, known as Liberty Tax Service, was the single most active plaintiff, with 66 lawsuits in 35 districts.

Littler Mendelson PC defended the most cases, with 40 in 24 districts. Lewis Brisbois Bisgaard & Smith LLP was right behind it, with 39 defended cases in 24 districts.

Almost half of the most active law firms on the defense side were also on the most active plaintiffs' side, including Ogletree Deakins - which finished in the top five on both sides - and Gordon Rees, the report noted.

Lex Machina found that 79% of trade secrets cases terminated in the last three years were either settled or resolved on procedural grounds. For cases resolved on substantive grounds, plaintiffs won 580 and defendants 148. Of the 115 cases that went to trial, the plaintiffs won six times as often as defendants.

Most of the defense wins were on summary judgment or judgment on the pleadings, with 65 each.

The 9th U.S. Circuit Court of Appeals was the most active circuit, with 77 trade secret cases.

Of the 213 cases terminated with a decision on the merits of the appeal, 45% were reversed. In last year's report, the reversal rate was 39%, Chow said.

However, Chow added the reversal rate in Lex Machina's findings didn't always equate to a trade secret issue that was reversed.

"The appellate data, the reversal rate, is not necessarily reversed on a trade secret issue. The way the appeals are counted in Lex Machina, basically, is that in the district court case, there is at least one allegation of trade secret misappropriation. The case is appealed, but it may or may not be based on trade secret misappropriation. It could be some other issue that was alleged in the case," Chow said.