As part of our Spotlight series, we invited litigation partners Dana E. Becker (Philadelphia), Shon Lo (Chicago), and Krista Vink Venegas, Ph.D. (Chicago), to talk about recent trends and issues in IP-related and other commercial litigation that would be of particular interest to our readers. Dana, Shon, and Krista are deeply knowledgeable practitioners in the IP and commercial contracts space who handle a broad spectrum of leading-edge and high-profile litigation for our clients.
- Learn more about Dana E. Becker
- Learn more about Wan-Shon Lo
- Learn more about Krista Vink Venegas, Ph.D.
Dana, Shon, Krista, thank you for taking time to share your thoughts and experiences with us. Let’s start by talking about recent developments in IP-related and other commercial contracts disputes. Can you describe any noticeable trends that you are seeing?
IP claims may arise from situations where there is no contract other than a non-disclosure agreement (NDA) executed during the negotiation phase, including where a commercial contract was not formed yet (think about failed negotiations) or a contract was already terminated.
Another clear trend we are seeing is a rise in trade secret disputes, not only in state and federal court where injunctive and monetary damages are available, but also in the fast-paced, administrative US International Trade Commission, which has jurisdiction over imported goods and can issue exclusion orders to block such imports. IP theft and misappropriation remains a huge risk for innovative companies, exacerbated by unenforced practices in identifying and protecting IP especially in collaborations, increased employee mobility, and non-uniform treatment of restrictive covenants, and such instances can have a detrimental effect on key company assets and the overall economy.
In instances where a deal was reached, post-deal disputes are also quite common, especially where the deal (1) includes an earnout structure or ongoing royalty or milestone payments, (2) contains sunset and survival provisions that lack specificity, or (3) contemplates ongoing collaboration between the parties over a period of years.
Post-deal disputes often involve claims of breach of contract asserted in tandem with claims for breach of the implied covenant of good faith and fair dealing. In general, every contract contains an implied covenant of good faith and fair dealing that requires that neither party will do anything that will have the effect of destroying or impairing the right of the other party to receive the benefits of the contract. They are mechanisms for a party to seek relief even where there is no clear breach of an express provision of a contract, but there is a concern that the counterparty has evaded the spirit of the agreement, abused its discretion, or interfered with the other party’s performance. These claims are incredibly fact-dependent, which means they are often challenging to prevail on at the motion to dismiss stage.
Another fertile ground for disputes relates to contract termination; IP infringement claims commonly arise from the facts central to contract termination.
And certainly, the growing availability of litigation funding may have contributed to a notable rise in the number of IP disputes proceeding to litigation and to trial. It appears that the end of COVID-19 pandemic and new investments may have contributed to this trend as well.
These are very interesting trends. Could you talk a bit more about failed deal negotiations and common situations where a dispute may arise?
A common dispute arising from a failed deal negotiation is where the parties were in negotiations and have shared certain confidential information with each other, but then the deal has fallen apart and one of the parties is alleged to have intentionally or unintentionally taken or used the information disclosed, for instance by applying for a patent, accelerating its own R&D, launching a competing business, or marketing a competitive product. In these scenarios, the aforementioned trade secret misappropriation claims are often asserted along with claims for breach of NDAs and/or unfair competition claims.
Based on our experience with these cases, if a party is going to share any commercially sensitive information, it is crucial to demonstrate that that information is routinely protected from the public and within the organization, to clearly articulate (and enforce) how access to such information should be limited, tracked, and terminated, and to make clear how long that protection should extend beyond the termination or expiration of the rest of the agreement. The importance of these protections is only amplified by the current work environment, with so many companies and their employees still working remotely, meaning even more sensitive information is distributed electronically.
Where due diligence by a counterparty is involved, you should also think about limiting access to only those individuals necessary for decision-making, a “clean-room” approach, tracking access to due diligence information, providing for the return or destruction of commercially sensitive information upon the break-down of negotiations, and, of course, making your confidentiality policies and tracking and enforcement efforts robust with clear penalties and favorable procedures in the event of a breach.
These are great practical tips. Thank you for sharing. You also mentioned trade secret disputes. Could you share with us what the common challenges in such disputes are?
While patent cases focus on the assertion of published claims that define the scope of the patent rights and federal courts now require the patent owner to plead with some specificity as to how the alleged product infringes, trade secret assertions tend to be a more amorphous collection of allegedly valuable, proprietary business or technical information closely held by the company.
Consequently, at the outset of a trade secret case, which can be brought under federal or state law, initial allegations may be vague as to what was allegedly taken, and courts have varied approaches as to when and how to require trade secret plaintiffs from clarifying their contentions. Challenging the sufficiency of plaintiff’s identification of trade secrets is one of the few procedural mechanisms for defendants to achieve a quick resolution. Once a claim survives the motion to dismiss stage, it is difficult to obtain early resolution on the merits. Therefore, trade secret litigations can be very costly to both sides of the “v.”
Further complicating these cases, trade secret disputes are often paired with claims for breach of contract (e.g., breach of an NDA or employment agreement), breach of implied covenant of good faith and fair dealing, unjust enrichment, unfair competition, or patent infringement, and may proceed in multiple venues (multiple countries or multiple venues within the US).
As transactional lawyers, we always appreciate an opportunity to pick the brains of litigators about what we may be overlooking or could be doing better. What practical experience can you share as far as things to keep in mind when looking to minimize the risk of an IP or other commercial contracts dispute?
Thinking strategically about deal development, understanding the business processes and technical details behind the deal, as well as considering all contingencies and addressing them as best you can are important. While the goal is to enter a deal in the interest of both parties, it is necessary to identify and anticipate the risks of landing a party in a worse position than had they not dared to deal at all.
Simply put, during the deal negotiation phase, you should consider what aspects of the deal are most likely to give rise to disputes, and it’s always a good practice to get both business and legal teams involved to discuss the practical aspects of the transaction and identify possible issues. Not all deals are the same; dialoging about the unique aspects of the deal, envisioning all potential outcomes and the potential impact on the business is critical.
Oftentimes, a dispute could have been avoided if the contract was clearly drafted. For instance, in many post-deal disputes, claims often involve disputes about the adequacy of efforts used by a party to achieve certain goals or milestones, the extent of discretion an acquiring company has to operate the acquired business, or competing views about post-closing objectives (including the circumstances in which those objectives can change). Precision in drafting these types of provisions can help avoid or narrow disputes.
If there is a provision on calculating a certain royalty, earnout payment, or other amount, it is always helpful to attach an exemplar calculation with detailed instructions about the methodology for the calculation. Similarly, where a contract includes key milestones, the achievement or non-achievement of which triggers significant payments, penalties, or other events, sufficient clarity on the standards by which achievement will be measured are key.
While we like to help avoid disputes, it is nevertheless important to include clear (and favorable) dispute resolution provisions in the contract in case the dispute materializes. Many parties agree to settle disputes via arbitration, believing that arbitration will be speedier and less costly than litigating in court. This is not necessarily the case.
Parties should weigh whether confidentiality of the details of the proceedings and the high burden of vacating an adverse decision, as the only true certainties for arbitration, would in fact be beneficial should a dispute arise. Against these benefits, parties should consider that they may not end up with their arbitrator(s) of choice, arbitrators’ tendency to “split the baby,” and the real possibility that an arbitration could cost as much as court proceedings. Additionally, arbitrators may not be as familiar with IP disputes, legal standards, and accepted practices (such as more detailed factual development of technical issues) and other procedures as judges in venues that regularly litigate IP disputes. Thus, using arbitration as a preferred dispute resolution is not necessarily a one-size-fits-all provision for commercial contracts.
As much as transactional lawyers hate to admit it, we’ll acknowledge that even well-drafted contracts can result in disputes, not to mention situations with poorly drafted contracts or no contract at all. In the unfortunate scenario where a dispute has materialized or is becoming increasingly likely, when should we bring you in and how can you help?
We would actually recommend looping in the litigators as early as possible, ideally when drafting agreements to help with issue spotting, not after there is a problem! And after that, during performance of the contract, you may want to talk to us about any communication with your counterparty on a potentially contentious matter or changed circumstances that may warrant amendment of the agreement before a contentious situation arises. Remember that any non-privileged communications will be produced in litigation, if it arises, so use prelitigation communications as an opportunity to set forth your position clearly and be cautious with the use of written communications.
When we are looped in early, we often can help avoid litigation, but when a dispute is on the horizon, we can help to assess the risks and costs of litigation and work with the client team to form positions, strategies, and develop a cost/benefit to assist the client in managing the situation, seeking resolution, and/or preparing for litigation.
In developing this assessment, it is particularly important to understand the business’s understanding of the deal terms as well as any facts or communications that might be inconsistent with that understanding; it is challenging to take a position in litigation that is not aligned with the business’s contemporaneous views and communications.
We bring needed synergy where our legal strengths intersect, and we deliver the highest value, offer the most options and best outcomes when we collaborate as a client team to understand the corporate objectives, regularly monitor the progress and execution of a deal (it is not done when the ink is signed!) and jointly respond in times of crisis.