Why litigate a case for months or years, only to arrive at a settlement that would have been possible before the case began?  In many cases, neither litigant would choose this approach, but it happens quite often nonetheless.  According to Lex Machina data, about 60% of trade secret cases filed in federal court in the last decade ended in either a voluntary (8%) or stipulated (52%) dismissal.  Of course, many of these settlements were likely informed by discovery and the arguments made by the parties in court.  But in other cases, resolutions probably could have been reached before both parties incurred unnecessary litigation expenses.

Evaluating the potential for settlement is particularly difficult at the outset of a trade secret case.  This is because the trade secret owner often suspects that misappropriation has occurred or is imminent, but does not yet know precisely the nature or extent of the misappropriation.  Sometimes quickly filing a lawsuit seeking a temporary restraining order or preliminary injunction is necessary and the best strategy (e.g. in response to brazen misappropriation by a direct competitor).  But in many cases, it is preferable to better understand the facts and attempt an amicable resolution before filing suit.  One way of doing so is by sending the accused misappropriator a “cease and desist” letter and engaging in a conversation from there.

But the specter of litigation often creates immense pressure on the parties to a budding trade secret dispute, stifling any potential for productive negotiations.  One strategy for overcoming this challenge is entering a “standstill agreement” that essentially pauses the dispute while the parties attempt to resolve it.  A standstill agreement can benefit both the trade secret owner and the accused misappropriator by extending the time period for negotiations, while maintaining the status quo, and preserving the parties’ rights to pursue litigation if their negotiations fail.

A standstill agreement may include, for example, the following:

  • A declaration signed by the accused misappropriator under penalty of perjury, stating that he or she:  (1) is not engaged in any business activities that are competitive with the trade secret owner; (2) does not have business relationships with competitors of the trade secret owner; (3) is not in possession of the disputed information; and/or (4) is not in breach of any relevant agreements (e.g. non-competes and non-solicitation agreements).
  • An agreement that neither party will initiate legal action for a certain period of time with respect to the disputed information, but that neither party waives its rights to do so after the term of the standstill agreement.
  • An agreement to toll the applicable statute of limitations for the term of the standstill agreement (if such tolling is permitted in the jurisdiction).[1]
  • An agreement that in any related litigation, neither party may assert equitable defenses (e.g. laches, estoppel) based on delay occurring during the term of the standstill agreement.
  • An agreement that the terms of the standstill agreement are conditioned on the truth of the declaration provided by the accused misappropriator.

Entering a standstill agreement with these types of provisions has many benefits.  It provides the accused misappropriator with formal notice of the problem from the trade secret owner’s perspective, and its seriousness.  The agreement also provides the accused misappropriator the opportunity to remedy the situation or prove that he or she has not misappropriated the information at issue.  The agreement also gives the trade secret owner additional time to investigate the alleged misconduct through, for example, forensic analysis.  The trade secret owner may also be provided an additional breach of contract claim in the event that the accused misappropriator provides a false declaration or otherwise breaches the agreement.  All of the foregoing benefits may be realized by the parties without the threat that a complaint could be filed any day.

The viability and value of a standstill agreement will depend on numerous factors, such as the nature of the trade secrets at issue and the relationship between the parties.  In cases of known brazen misappropriation, a standstill agreement will likely be useless, and immediate litigation will be necessary and prudent.  But in the right case, including cases where the wrongdoing is unclear or minor, or the accused misappropriator may be able and willing to remedy the situation, standstill agreements may help.  When crafted and used optimally, they can help avoid litigation entirely, facilitating an efficient resolution without unnecessary litigation costs.

[1] Such agreements are generally enforceable, but sometimes subject to certain parameters.  See, e.g., Stewart Info. Servs. Corp. v. Great Am. Ins. Co., 997 F. Supp. 2d 650, 666 (S.D. Tex. 2014) (“Parties may enter into an agreement to toll the statute of limitations before the statutory bar has fallen so long as the agreement is specific and for a reasonable time.”); Derrickson v. Circuit City Stores, Inc., 84 F. Supp. 2d 679, 685 (D. Md. 2000) (“Agreements to toll applicable statutes of limitations are not unusual and are generally upheld.”).