Delaware's Two Courts for Trade Secrets and Restrictive Covenants
By C. Malcolm Cochran IV, Steven J. Fineman, Selena E. Molina, and Nicole K. Pedi – January 26, 2016
Delaware is known for its robust litigation in the field of corporate governance, generally arising from transactions among some of the country’s largest and most well-known companies. But Delaware also has become a forum of choice for litigants seeking to protect a variety of intellectual and competitive interests, including trade secrets, restrictive covenants, and confidentiality agreements. Delaware offers parties in such disputes two sophisticated trial courts: a court of equity, the nationally recognized Delaware Court of Chancery, and its parallel law-court option, the Delaware Superior Court.
While the Court of Chancery invokes thoughts of breach of fiduciary duty and other stockholder suits, it will devote the same formidable judicial resources to trade secrets cases. Expedited proceedings before experienced and business-savvy judges, without a jury, are the norm. Enforcement of noncompetition and confidentiality provisions also can be quickly obtained, and preliminary relief is frequently granted, where warranted.
Likewise, the Delaware Superior Court, known for the efficient adjudication of damages claims at law, can also hear trade secrets cases where equitable relief is not at issue. Juries are available in the Superior Court’s Complex Commercial Litigation Division (CCLD), which has adopted special procedures that are particularly well suited for even the most time-sensitive and complex trade secrets matters. Where injunctive relief is not required, the CCLD can efficiently resolve damages claims arising from restrictive covenant violations and confidentiality agreements.
Delaware’s two business courts share concurrent jurisdiction in these cases and generally act as partners to ensure that Delaware’s one million (plus) business entities have recourse to highly specialized and efficient tribunals when it comes to the protection of their intellectual and competitive capital. This article briefly describes Delaware’s dual system and surveys legal principles that may be important to those who litigate in this expanding field.
Delaware has long been a hotbed for corporate litigation, particularly in its Court of Chancery. But Delaware’s business constituents grapple with more than just formation issues and stockholder disputes. Most have proprietary information they wish to protect, including customer lists, designs and specifications, profit margins, marketing plans, costing information, component lists, computer codes, formulas, and most anything that derives economic value from not being generally known to others. The need for effective protection arises in a variety of contexts: some of the more common include joint venture and due diligence situations, where confidentiality agreements are a standard form of protection, and the employment and consulting arena, where restrictive covenants are frequently used. Delaware companies may also choose to enforce their rights via Delaware’s version of the Uniform Trade Secrets Act, Del. Code Ann. tit. 6, §§ 2001 et seq. Delaware’s courts have seen an increasing number of suits in this area, as its many business constituents have chosen to return to their state of formation to litigate—most often via forum selection clauses.
Concurrent Forums and Jurisdictional Considerations
As mentioned, Delaware offers aggrieved parties two fora in which to pursue trade secrets, restrictive covenant, and confidentiality claims: the Court of Chancery and the CCLD. The two courts have concurrent jurisdiction, though consideration of where to file is not a “one fits all” issue. Each court offers different means for halting, or providing redress for, the harm caused by misappropriation or breach.
Court of Chancery. The Court of Chancery is Delaware’s court of equity. Its jurisdiction primarily embraces the assertion of equitable claims or the pursuit of equitable remedies, though damages are available if “ancillary” to equitable relief. Del. Code Ann. tit. 10, § 341. While it has special statutory jurisdiction over certain kinds of disputes (i.e., actions for advancement or indemnification and guardianship, estate, and trust matters), the Court of Chancery lacks jurisdiction “to determine any matter wherein sufficient remedy may be had by common law, or statute, before any other court or jurisdiction of this State.” Del. Code Ann. tit. 10, § 342. Further, juries are not permitted in the Court of Chancery, and the court lacks jurisdiction to award punitive damages except “exemplary” damages expressly permitted by statute—such as under the Uniform Trade Secrets Act. Del. Code Ann. tit. 6, § 2003(b). The Court of Chancery is also known for its flexibility in accommodating expedited matters and will generally proceed as quickly, or slowly, as the parties may wish and the circumstances may require. Parties are also given flexibility in agreeing, subject to the court’s approval, to matters such as case schedule, expert discovery protocols, e-discovery protocols, and protective orders. The court has written guidelines on these matters, but parties are expected to negotiate and agree on the specific terms. The court also comes with some predictability through its five skilled and business-savvy judges, one chancellor and four vice chancellors.
Delaware Superior Court. The Delaware Superior Court is Delaware’s general trial-level court. Unlike the Court of Chancery, the Delaware Superior Court is a court of law with the power to award the full range of legal remedies and hold jury trials. While the Delaware Superior Court can issue declaratory judgments, declaring rights and other legal relations, it cannot grant injunctive or other equitable relief. The CCLD is available to parties with claims involving $1 million or more in potential damages, an exclusive choice of the division in an agreement, or where the president judge designates the matter for consideration. The CCLD exists primarily for business disputes, and parties are provided with forms of case management orders, e-discovery plans, and other protocols in administrative directives published by the court. Only four “business specialist” judges are assigned to this division, which provides some predictability.
Utilizing both. The Delaware Constitution provides a unique procedure that permits litigants to utilize the benefits of both the Court of Chancery and the Delaware Superior Court. If the issues involved in a case span the jurisdiction of both courts, a judge from one court may be temporarily appointed as a judge in the other court. Del. Const. art. IV, § 13(2). Several CCLD cases have seen Delaware Superior Court judges serving temporarily as vice chancellors of the Court of Chancery, as well as vice chancellors serving as temporary Superior Court judges within the CCLD. See, e.g., AFH Holding Advisory, LLC v. Emmaus Life Scis., Inc., No. N12C-09-045 MMJ CCLD, 2013 WL 2149993, at *1 n.1 (Del. Super. Ct. May 15, 2013). A request to utilize this option is first made to the assigned trial judge, then approved by the president judge or chancellor, with ultimate responsibility resting with the chief justice of the Supreme Court of Delaware. See Del. Const. art. IV, § 13(2). Through this procedure, the claimant can have the benefits of the traditional features in law courts (i.e., juries and punitive damages) along with equitable (primarily injunctive) relief.
Delaware’s Well-Developed Jurisprudence
In addition to its unique two-court system, Delaware’s well-developed trade secrets jurisprudence provides certainty and predictability. Examples include the requirement that a trade secrets plaintiff provide a detailed trade secrets statement before discovery can commence; uniform precedent enforcing contracts as written and refusing to find “ambiguity” in the absence of multiple “reasonable” interpretations; and the Delaware courts’ recognition of the inevitable disclosure doctrine, enabling litigants with well-drawn confidentiality agreements to obtain protection from unfair competition even in the absence of an enforceable noncompete. The availability of monetary damages in accordance with Delaware’s version of the Uniform Trade Secrets Act and Delaware common law demonstrates the array of remedies available to parties seeking to litigate trade secrets (and related) matters in the Delaware courts.
Trade secrets statements. Delaware law requires that plaintiffs asserting a claim for trade secrets misappropriation serve a trade secrets statement, setting forth “the allegedly misappropriated trade secrets with reasonable particularity” before discovery may commence. SmithKline Beecham Pharm. Co. v. Merck & Co., 766 A.2d 442, 447 (Del. 2000); see also Magnox v. Turner, No. 11951, 1991 WL 182450, at *1 (Del. Ch. Sept. 10, 1991). The purpose of the trade secrets statement is “to set the outer boundaries of discovery in order to avoid the needless exposure of a defendant’s trade secrets.” Magnox, 1991 WL 182450, at *1. Thus, a plaintiff in a trade secrets case will first be required to serve a trade secrets statement “before it will be allowed (given a proper showing of need) to compel discovery of its adversary’s trade secrets.” Engelhard Corp. v. Savin Corp., 505 A.2d 30, 33 (Del. Ch. 1986).
Restrictive covenants. Delaware courts generally uphold reasonable restrictive covenants, stemming from a fundamental policy of respecting parties’ right to contract. See O’Leary v. Telecom Res. Serv., LLC, No. 10C-03-108-JOH, 2011 WL 379300, at *5 (Del. Super. Ct. Jan. 14, 2011). This policy translates to courts’ willingness to enforce noncompetition agreements as they are written, if they meet the requirements of general contract law, are reasonable in geographic and temporal scope, “advance a legitimate economic interest” of the enforcing party, and “survive a balance of the equities.” Kan-Di-Ki, LLC v. Suer, No. 7937-VCP, 2015 WL 4503210, at *19 (Del. Ch. July 22, 2015). As such, injunctive relief is usually available to parties seeking to enforce a reasonable noncompetition clause in Delaware in order to prevent the misappropriation of trade secrets. Furthermore, even when a noncompetition agreement is unenforceable as written due to an unreasonably large geographic scope or duration, Delaware courts consistently “rewrite” the restrictive covenant to make it reasonable rather than striking it altogether. See, e.g., Del. Express Shuttle, Inc. v. Older, No. 19596, 2002 WL 31458243, at *13–14 (Del. Ch. Oct. 23, 2002); Norton Petroleum Corp. v. Cameron, No. 15212-NC, 1998 WL 118198, at *3 (Del. Ch. Mar. 5, 1998); Knowles-Zeswitz Music, Inc. v. Cara, 260 A.2d 171, 175 (Del. Ch. 1969). This practice of enforcing noncompete agreements to the extent they are reasonable can result in the issuance of injunctive relief despite deficiencies in governing noncompete clauses.
Inevitable disclosure. Delaware’s recognition of the inevitable disclosure doctrine authorizes the grant of injunctive relief to remedy actual or threatened trade secrets violations even in the absence of (i) a noncompete agreement, or (ii) explicit proof that trade secrets have been or will be disclosed. The doctrine exists to prevent a former employee (or counterparty similarly situated) from working for the employers’ competitors when there is a threat of “inevitable” misappropriation—that is, where the employee cannot “unlearn” his former employer’s secrets and will inevitably use the secret information in his new job. See W.L. Gore & Assocs., Inc. v. Wu, No. 263-N, 2006 WL 2692584, at *13–14 (Del. Ch. Sept. 15, 2006), aff’d, 918 A.2d 1171 (Del. 2007); E.I. duPont de Nemours & Co. v. Am. Potash & Chem. Corp., 200 A.2d 428, 435–36 (Del. Ch. 1964). The Court of Chancery notably invoked the doctrine in Wu, citing the former employee’s extensive exposure to the plaintiff’s trade secrets and ultimately finding a “substantial likelihood of ‘inevitable disclosure’” if the defendant was not enjoined from working for the competitor. 2006 WL 2692584, at *14.
Recently, in UtiliSave, LLC v. Miele, No. 10729-VCP, 2015 WL 5458960, at *9 (Del. Ch. Sept. 17, 2015), the Court of Chancery again invoked the doctrine, stating “confidentiality provisions begin to operate more like non-competes in an inevitable disclosure situation.” The court found that knowledge of confidential information such as client contact information and a unique auditing process were enough to raise a “colorable inevitable disclosure argument,” leading the court to deny the defendant’s motion to dismiss. Id.
Damages. In addition to the availability of injunctive relief, parties litigating trade secrets misappropriation in Delaware may seek a variety of monetary damages. Under Delaware’s version of the Uniform Trade Secrets Act, available damages remedies “can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” Del. Code Ann. tit. 6, § 2003(a). Alternatively, damages may be “measured by imposition of liability for a reasonable royalty” in lieu of other forms of relief. Id. Delaware courts have incorporated calculations for both lost profits and unjust enrichment into the determination of damages for trade secrets misappropriation. In Agilent Techs., Inc. v. Kirkland, No. 3512-VCS, 2010 WL 610725, at *27–30 (Del. Ch. Feb. 18, 2010), for example, the Court of Chancery awarded the plaintiff damages based on unjust enrichment and lost profits theories. Notably, the court awarded damages totaling $4,530,017.75, including the lost profits the plaintiff would have earned “but for” the defendants’ misappropriation, the plaintiff’s projected future lost profits, and the amounts by which the defendants were unjustly enriched during the head start period, that is, “the time it would have taken the defendant to discover the secret without misappropriation.” Id. at *31 (internal quotation marks omitted).However, the court found that a permanent injunction was not necessary because the monetary damages imposed compensated the plaintiff without also impacting “innocent third parties whose interests might be harmed by an injunction.” Id. at *31–32.
Similarly, in Professional Investigating & Consulting Agency, Inc. v. Hewlett-Packard Co., No. N12C-06-196 MMJ CCLD, 2015 WL 1417329, at *1 (Del. Super. Ct. Mar. 23, 2015), the Superior Court upheld a $1 million jury verdict for out-of-pocket expenses or lost profits and unjust enrichment stemming from the defendants’ trade secrets misappropriation. Nonetheless, as the Court of Chancery demonstrated in Revolution Retail Systems, LLC v. Sentinel Technologies, Inc., No. 10605-VCP, 2015 WL 6611601, at *24 (Del. Ch. Oct. 30, 2015), requests for monetary damages under lost profits and unjust enrichment theories must not amount to a windfall for the moving party, nor can they be “inherently speculative.”
Because Delaware’s version of the Uniform Trade Secrets Act authorizes courts to award exemplary damages “in an amount not exceeding twice any award” where “wilful and malicious misappropriation exists,” trade secrets litigation in Delaware may also lead to punitive damages for particularly wrongful misconduct. Del. Code Ann. tit. 6, § 2003(b). Fee shifting is also available in cases of “wilful and malicious misappropriation” or where the “claim of misappropriation is made in bad faith, [or] a motion to terminate an injunction is made or resisted in bad faith.” Id. § 2004. For example, in Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, No. 3718-VCP, 2010 WL 338219, at *30 (Del. Ch. Jan. 29, 2010), the Court of Chancery, after finding that the defendant “willfully and maliciously misappropriated” trade secrets, awarded the plaintiff “$61,538 in compensatory damages, . . . $61,538 in exemplary damages, and one half of its attorneys’ fees.”
Having chosen Delaware as their corporate home, it is perhaps unsurprising that many of the country’s preeminent businesses would choose to return to Delaware when the time comes to protect trade secrets and other competitive, intellectual capital. As with corporate governance and related disputes, Delaware’s two business courts are again meeting the increased volume with judicial expertise in substantive and procedural matters that assures efficient—and expert—outcomes. Delaware’s two judicial partners in the pursuit of justice are developing a body of precedent and judicial expertise that will help to ensure prompt relief when these unfortunate situations arise.
Keywords: litigation, commercial, business, Delaware, trade secrets, noncompetition agreements, Court of Chancery, Delaware Superior Court, inevitable disclosure
C. Malcolm Cochran IV, Steven J. Fineman, Selena E. Molina, and Nicole K. Pedi, are with Richards, Layton & Finger, P.A. in Wilmington, Delaware. The views expressed herein are those of the authors and are not necessarily shared by Richards, Layton & Finger, P.A. or its clients.