Trade Secret Theft: How Litigation Finance Can Save Companies on the Brink of Losing It All

June 07, 2017

Trade Secret Theft: How Litigation Finance Can Save Companies on the Brink of Losing It All

By: Matt Harrison, Investment Manager and Legal Counsel

Bentham IMF frequently receives litigation funding inquiries from companies of all sizes facing potentially enterprise-endangering trade secret theft.

Trade secret misappropriation can be particularly acute in hubs of innovation like Silicon Valley, where startup companies often hope to develop and commercialize unique ideas with larger companies or business incubators. The disparity in size between the startup and its larger partners sometimes creates a classic David v. Goliath situation if the larger firm uses the technology without its counterpart’s consent. In one scenario commonly seen by Bentham, a larger company may (or may not) execute a non-disclosure agreement with an upstart technology company to jointly develop a product. Sometimes the larger company absconds with the technology and commercializes it without the developer’s consent, fully aware that the startup lacks the resources to challenge the behemoth in our often prohibitively expensive judicial system.

By providing financial resources to pursue a trade secret misappropriation case, a funder can help the startup level the economic playing field. This includes allowing the startup to engage top-notch legal representation and competent expert witnesses, and withstand protracted litigation without having to accept an early settlement that is not tethered to the merits of the case. Unlike contingency lawyers, a funder can also provide a company with operating capital needed to keep it afloat for the lifespan of the litigation. 

One key issue that arises in trade secret misappropriation cases – especially for untested technology – is the projected financial success of a particular innovation. The invention may have great prospects, but no track record to help the court determine appropriate damages. Startup owners and investors should be vigilant about retaining any information, such as sales projections, that can help the court assign an appropriate dollar value to an innovation. Litigation funding helps in this regard by allowing companies to engage strong expert witnesses on damages issues to avoid a court’s conclusion that projected damages are overly speculative. 

Setting aside the “David v. Goliath” scenario, Bentham also receives many inquiries from larger companies because the misappropriation of trade secrets – say from departing key employees – can be devastating. Large companies with sufficient capital may be able to fund litigation on their own. But often, litigation budgets are tight and legal fees detract from earnings with no commensurate return on the financial statements. That is, the company’s payment of legal fees results in a reduction of EBITDA, while any recovery (often years later) is recorded below the EBITDA line as a non-recurring event. Thus, savvy GCs and CFOs understand the benefit of reaching out to a funder to ameliorate negative financial consequences of such lawsuits and send a message to competitors that they will protect their rights. 

To learn more about how Bentham can help your business in bet-the-company trade secret cases, contact us for a consultation.