Trade Secret Litigation: What You Need to Know

In today’s highly competitive business environment, it is crucial for a company to safeguard its intellectual property to maintain a competitive edge and ensure long-term success.

But what is the best way to do that?

Patents are typically the first thing that comes to mind when someone wants to protect an invention. There are alternatives, though. Many clients look to trade secret law.

If handled correctly, trade secret protection can be a more cost-efficient alternative to patent protection and should be considered as a viable option before filing a patent application.

The Limitations of Patents

Patents come with limitations.

First, the valuable protections patents offer require visibility. Most patent applications and issued patents are published for all to see, with limited secrecy or security exceptions.[1] This is the tradeoff one gets for about twenty years (from the filing date) of exclusive rights to the claimed technology.

Second, patents expire. That means the invention will eventually become part of the public domain. After a set term, one can no longer enforce a patent against competitors.[2]

And third, patent protection is not granted to every invention. Rather, there are three general types of patents in the U.S. Utility patents, design patents and plant patents. Generally, utility patents cover “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof,”[3] design patents cover “any new, original, and ornamental design for an article of manufacture,”[4] and plant patents cover “any distinct and new variety of plant, including cultivated sports, mutants, hybrids, and newly found seedlings, other than a tuber propagated plant or a plant found in an uncultivated state.”[5]

Patent protection is generally not available to anything that is not covered by those three types of patents (e.g., food recipes, financial information, business information, etc.[6]).

The Benefits of Trade Secrets

For those who don’t want to have their ideas known to the public, don’t want to limit the time that their idea is protected or can’t get patent protection, there is an alternative: Trade secret law.

In many cases, it is a desirable option.

Trade secrets are typically governed under state law and, in particularly by the Uniform Trade Secrets Act (UTSA). The UTSA has been enacted in all U.S. states and the District of Columbia, with the exception of New York and North Carolina.[7] Additionally, the UTSA has been enacted in Puerto Rico and the U.S. Virgin Islands.[8]

Inventions that qualify for protection under trade secret law may include ideas or inventions that are also covered under patent law, but they don’t need to be covered under patent law.[9] Under the UTSA, a trade secret is defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process.”

It must:

• derive “independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.”
• be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.[10]”

In addition to the UTSA, there is also the Defend Trade Secrets Act (DTSA), which was passed by Congress in 2016.[11] This does not replace any state UTSA laws. Instead, it “creates a parallel right” for one to file a trade secret misappropriation lawsuit in federal court to protect one’s valuable idea or invention “if ‘the trade secret is related to a product or service used in ... interstate or foreign commerce.’”[12]

As the term “trade secret” suggests, there generally needs to be evidence of efforts to maintain the idea or invention as secret to establish it as a trade secret. Evidence of economic value is also required for an invention or idea to qualify as a trade secret. Although holders of trade secrets do not possess a legally protected monopoly on their intellectual property,[13] one may enforce his or her intellectual property rights against anyone who attempts to improperly steal the invention or idea for as long as the invention or idea remains “secret.” Therefore, maintaining the secrecy of the trade secret is also crucial for preventing others from using it.

Trade Secret Misappropriation

Under the UTSA, a misappropriation of a trade secret is defined as:

• Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
• Disclosure or use of a trade secret of another without express or implied consent by a person who
  • Used improper means to acquire knowledge of the trade secret; or
  • At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was
    • Derived from or through a person who had utilized improper means to acquire it;
    • Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
    • Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
  • Before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.[14]

If a trade secret is misappropriated, one may pursue relief through a civil lawsuit. Given the inherent value in maintaining the secrecy of a trade secret and that “the trade secret can be destroyed through public knowledge,”[15] courts may impose injunctive relief in the event of misappropriation to prevent the dissemination of the trade secret.[16] A court may also award damages.[17]

Recent Decisions

To claim a trade secret was misappropriated, one must first prove it was theirs. While the standard for establishing possession is not uniform throughout the different courts, there are generally six factors that are considered when “determining whether given information is ’ne's trade secret.”[18] These factors include (1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[19]

Recent case law has emphasized these factors, stressing the importance of, and methods for, maintaining the secrecy of trade secrets. In particular, the U.S. Court of Appeals for the Second Circuit has maintained that:

in order to successfully state a claim for trade secret misappropriation, “courts require that the [plaintiff-]possessor of a trade secret take reasonable measures to protect its secrecy.” Defiance Button Mach. Co. v. C & C Metal Prods. Corp., 759 F.2d 1053, 1063 (2d Cir. 1985) (citation omitted). And “[a]bsent such measures,” the information “will cease to be a trade secret and will lose the protections of trade secret law.” Id.[20]

The U.S. District Court for the Southern District of Ohio has further emphasized this need for maintaining the secrecy of trade secrets, ruling that a party did utilize reasonable measures to maintain the secrecy of a trade secret by only distributing the trade secret material within a select number of people within the company who all had signed confidentiality agreements.[21]

In Pauwels v. Deloitte LLP, the U.S. Court of Appeals for the Second Circuit determined that the plaintiff had insufficiently maintained the secrecy of the trade secret because, while the plaintiff had refused “to share the Pauwels Model Spreadsheets with third parties on two occasions,” he had “disclosed the spreadsheets to individuals at BNYM who were not obligated to keep his materials secret” and had an agreement that “allowed them to do so the same.”[22] Because the information was disclosed to individuals not obligated to maintain its secrecy, this disclosure disqualified the plaintiff from being able to seek protection under trade secret law.

Recent case law has also provided further instruction on what information or evidence is needed in a pleading for misappropriation of a trade secret. For example, the U.S. Court of Appeals for the Eighth Circuit has held that allegations that “are pled only on ‘information and belief’”[23] may be appropriate. In particular, the U.S. Court of Appeals for the Eighth Circuit held that, when “provided enough factual material to make the inference of culpability plausible…, allegations pled on information and belief are sufficient to nudge its complaint across ‘the line between possibility and plausibility.’”[24]

This indicates that complaints pertaining to trade secret misappropriation may be successful when based on information and belief, rather than on evidence directly establishing trade secret misappropriation, when based on enough facts that make trade secret misappropriation plausible. However, the court clarified that, “[w]ithout some factual basis for the inference of liability or the reasonable belief that the information supporting such liability is in the sole possession of the defendant, pleadings made on information and belief cannot cure an otherwise threadbare complaint.”[25]

Conclusion

Trade secret law can provide significant protections to ideas and inventions for which patent protection is unavailable or undesirable.

Essentially any idea or invention that has economic value can be protected from wrongdoers indefinitely so long as the owner of the idea or invention maintains its secrecy. In this situation, the public also never learns of the underlying details of the invention. This can certainly be a more desirable option in many situations.

Trade secret protections also provide crucial safeguards against misappropriation when an invention and idea does not qualify for patent protection.

In view of the relevant statutes and recent case law, those wishing to establish trade secret protections should ensure that reasonable measures are in place to prevent the information from being disseminated in ways that would negate the secrecy of the trade secret. One must also take measures to maintain the secrecy at the very beginning of conception to ensure trade secret protection remains a viable option.

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