This month, the Defend Trade Secrets Act (DTSA) turned eight years old. Signed into law by then-President Barack Obama on 11 May, 2016, the DTSA significantly shifted the needle in IP enforcement rights in the United States. Crucially, it gave trade secret holders the option to file civil claims over a trade secret theft in federal courts, without having to include a related federal claim or prove that the parties were citizens of different states.
IAM spoke to a Silicon Valley lawyer and international trade secret expert James Pooley – described as being “instrumental” in the creation and establishment of the DTSA – to reflect on the changes it has brought in and what is coming next.
According to Pooley, getting access to federal courts in cases that have some interstate dimension was a “massive improvement in the suite of tools” that were available to trade secret owners. The DTSA has made the process of enforcement much more efficient in many ways and promoted a more unified view of what trade secret law is all about, he tells IAM.
The DTSA provided much-needed uniformity across all US states – an ambition that the Uniform Trade Secrets Act (UTSA), a piece of legislation created by a non-profit organisation Uniform Law Commission (ULC), had largely failed to achieve. Historically, the law governing trade secret misappropriation developed separately in each state at the cost of uniformity and predictability.
Statistics show that every year hundreds of trade secret owners turn to the DTSA as a means of seeking redress when their most valuable business secrets are misappropriated. In the first year of enacting the new law, the number of court cases filed in the US district courts under the DTSA amounted to 173, but already a year later in 2017, it jumped to 600, an increase of 247%, and as of 2023 grew to 749 cases, up by 333% compared to 2016. According to Docket Navigator data, as of 13 May this year, the US district courts received a total of 5,159 case filings involving DTSA claims, of which 4,097 or 79% have been terminated and 1,062 or 21% are still active.
In addition to domestic concerns over uniformity and harmonisation, the DTSA was meant to help address challenges related to trade secret misappropriation globally.
“In around 2014, there were fairly pressing issues around trade secret theft internationally and industry coalition started to come together to make sure that there were available sufficient tools,” Pooley recalls. “There was a push for legislation in the US and in the EU simultaneously, so in 2016 we got the DTSA and the European Union got the EU Trade Secrets Directive.”
While the DTSA includes no explicit provision on the law’s extraterritorial application, the fact that the DTSA was enacted as an amendment to the Economic Espionage Act of 1996 (EEA), which does have extraterritorial reach, gives an important clue on the intentions of the Congress.
In 2020, Motorola Solutions Inc v Hytera Communications Corp, became the first case where a US federal court held that a civil action for private damages under the DTSA could arise from acts of misappropriation that occur completely outside the US as long as they have connection with some activities within the US. Importantly, that ruling by the Northern District of Illinois is on appeal currently. The outcome from the US Court of Appeals is being closely watched.
“The general rule against extraterritorial application of the law is normally measured against any contrary intent from Congress,” explains Pooley. “When you read the Bill that was passed and see all of that language, you come away with the sense that Congress expected that this law would apply extraterritorially, otherwise it wouldn't help resolve some of the major dimensions of the problem that it had identified.
For example, the DTSA includes recommendations of legislative and executive branch actions that “may be undertaken” to reduce the “threat of and economic impact caused by the theft of the trade secrets of United States companies occurring outside of the United States”.
Additionally, if the intent of the Congress plays a role in how courts interpret the law, it might have an extra weight that the DTSA was passed amidst a rare bipartisan support: the Bill was unanimously approved in the Senate by a vote of 87-0, and in the House of Representatives by a vote of 410-2.
The next big thing occupying the minds of the trade secret community will be a change in how this vital form of IP is managed, Pooley expects: “Trade secrets represents an area of commercial concern that still does not get adequate attention because it happens below the awareness of the executives in a company, and I think where we're headed is a major shift in that direction.”
It's a slow-moving shift, however, which started with the America Invents Act which brought about two major changes in trade secret protection when it came into force in 2011. Although it was a patent reform statute, it introduced two impactful changes on trade secrecy and around the comfort level that companies have in treating innovations as a trade secret rather than patenting them, Pooley stresses.
“One of those important changes was the effective elimination of best mode requirement, which used to threaten the validity of patents and required companies to throw all related information into their patent applications, which would get published and thereby destroy any trade secret status,” he says. “And the other one was the prior user right, which gives companies that have been using a particular technology the assurance that they can continue to use it if they've been protecting it as a trade secret, even if some later inventor comes along and tries to patent it.”
These changes, along with companies’ struggles in terms of enforcing their patent rights, are seen as motivators pushing businesses to strengthen trade secret management. “And when there is a decision made to patent something and not to patent something else, that ‘something else’ no longer just falls on the floor and everyone forgets about it, but people recognise it is an asset. So, somebody needs to be in charge of overseeing it, making sure that it is monetised and protected,” underlines Pooley.
His feeling is that this “next big thing” – normalisation of trade secret management – will happen more slowly but it will have a “profound effect” on trade secrets protection. “My professional mission has been to elevate trade secret law and practice to the same level as the registered IP rights,” he adds.
I recently returned from a ten-day trip to China, the first time I’ve visited since before the COVID-19 pandemic. Late last year my business book Secrets had been translated into Mandarin by Fang (Helen) Liu, a lawyer/scholar at the Beijing office of law firm TianTai, and published by the Tsinghua University Press.
Liu had arranged a ‘book tour’ for me to talk about US trade secret law and management to eight of the country’s leading law schools, as well as business executives.
I had been to China quite a few times before. My first ‘official’ (that is, not tourist) visit was in 1998, to mark the opening of the Beijing IP training centre, where we were told that 600 people a month from around the country were being taught the basics of IP.
And we visited the national office of SIPO, where China’s relatively new patent system was obviously in expansion mode.
This was at the time that the country had submitted its application to join the World Trade Organization (WTO), and despite the hopeful implications for global trade, there were some in our delegation that doubted China’s intentions.
They wondered aloud whether China was really serious about building IP systems, given then-current concerns about counterfeiting. I didn’t share that perspective; while there we met with judges and government officials who obviously were deeply engaged and very well informed about the importance of IP. (They also had a good sense of humour—one judge joked that they were in the process of calculating accrued royalties owed by the rest of the world for paper, printing, gunpowder and the compass!)
I returned again in 2010, this time representing the World Intellectual Property Organization and the Patent Cooperation Treaty (PTC). China had been a member of the WTO for eight years, and any doubts about the intensity of its IP focus had disappeared. That single SIPO office in Beijing was now one of two dozen throughout the country, with PCT windows like bank tellers where patent applicants could walk up for help with filing their international applications.
China’s PCT filings were growing faster than any other country, and the quality of patent examination by China as an International Searching Authority was viewed as world class.
Specialty IP courts were established. And the related promise of rapidly expanding global commerce seemed to be realised, as the number of countries for which China was their largest trading partner increased from 10 to 50 (it’s now around 80).
As we all know, trade tensions between the US and China have increased significantly in recent years, reinforced by other aspects of their geopolitical rivalry. Some believe that a slow and inexorable ‘decoupling’ is taking place. Suspicions and disruptions caused by the pandemic have not helped.
Perhaps ironically, in January 2020, just before that global crisis took hold, the two countries had signed the ‘Phase One’ trade agreement as part of a multi-year effort to reduce trade friction. And intellectual property—specifically trade secrets—was front and centre in that document.
Much more recently, I was preparing for my ‘re-entry’ into China, and I admit to having felt some apprehension about it. Not only was (and is) the US political relationship with China at the lowest ebb I can remember, but at the end of February China had just expanded its state secrets law (for the first time since 2010) to include ‘work secrets’ in the category of restricted confidential information.
No official interpretation of this new phrase was provided. And the month before, reports had surfaced about a British businessman having been detained and charged with spying. I was now going there to lecture about ‘secrets’: what could go wrong?
Such is the grasp of (mild) paranoia on our minds. As it turned out, my visit to China was enjoyable and fascinating, and I look forward to going back. Thanks to the tireless efforts of Liu and her colleagues, I was able to meet students at the top law schools in the country: Tsinghua, Renmin, Beihang, Peking University and China University of Political Science and Law; and (in Shanghai) East China University of Political Science and Law, Shanghai Jiaotong, and Fudan.
In each of these schools, the rooms were packed, with 40 to 60 students and professors. I spoke in English, only occasionally with translation. And when I was done with my talks, the questions posed by the students were unusually insightful and sophisticated, in some instances beyond what I have experienced with my students in the US.
The TianTai law firm also organised a conference in Beijing where my remarks were supplemented by business and government representatives, all focused on practical aspects of IP protection and enforcement. And my time in Shanghai included a discussion with companies at the Commercial Mediation Center.
A significant takeaway from these events and conversations was that, even though the US-China pre-pandemic trade talks seem to have broken off, China continues to work on refining its implementation of the Phase One agreement.
As I have noted elsewhere, China started surprisingly quickly on transforming its promises into relevant changes in its laws. What I learned on this trip is that those efforts are continuing today.
Even more impressively, the scholars and soon-to-be lawyers at its law schools are deeply engaged and curious about how in the US we handle issues as specific as shifting the burden of proof in a trade secret case. Clearly, they are thinking deeply about how their domestic laws can be improved. They seem equally intrigued by how US businesses view the day-to-day management of trade secret assets.
Most frequently and consistently, however, the message I heard was that those in China who deal most directly with IP—executives, scholars and students—lament the precipitous reduction in personal contacts that began with the pandemic but continues due to geopolitical and trade tensions.
Repeatedly I heard a plea for expanded, personal engagement from people who recognise that China, like all other industrial countries, needs robust IP laws not just to encourage inbound investment but as an essential support for domestic innovation.
Global trade is important. When it involves any sort of technology, trade relies largely on aligned IP laws. This was true in 1883 when the Industrial Revolution drove agreement on the Paris Convention, and even more so now that the vast majority of business assets are intangible.
Bilateral agreements such as Phase One and plurilateral arrangements like the IP5 have led to higher quality and more reliable protections. Those good outcomes start with engagement. That doesn’t mean we should let down our guard and accept misbehaviour. But just drawing into our own corners and nursing suspicions won’t move us forward.
I’m now feeling rather embarrassed that I harboured any concerns about this trip. I absolutely plan to return again. There’s too much at stake not to continue to explore our common interests in IP.
“The possibility that an inventor who believes his invention meets the standard of patentability will sit back [and] rely on trade secret law . . . is remote indeed.”
— Justice Burger, for the majority in Kewanee v. Bicron (1974)
When May rolls around, lots of people – well, trade secret people that is – think about the Defend Trade Secrets Act of 2016 (DTSA), which for the first time in U.S. history granted original jurisdiction in federal courts for civil claims of misappropriation. The DTSA was signed into law on May 11, 2016, so it’s now eight years old. And performing pretty much as Congress intended.
But this year there’s a far more consequential anniversary to celebrate. May 13 marks 50 years since the U.S. Supreme Court issued its 1974 opinion in Kewanee v. Bicron. I remember that time very well. Barely a year out of law school, I was still learning the ropes of legal practice. While walking down the hall I saw something very unusual: the senior partner sitting at his desk reading one of the “advance sheets.” (Back in pre-internet days, new case opinions were printed in pamphlets and rushed out to lawyers ahead of the bound volumes.)
I had never before seen this partner actually reading a case, so I knew it had to be something important. I stopped and asked what it was about. He just said, “the Supreme Court says trade secret law is okay.” I went on, not knowing what he was talking about. At that time, trade secret law was not taught at law schools. It was only a few years later, as the rapid emergence of Silicon Valley brought me dozens of disputes over engineers departing for competitors, that I began to understand why he had snatched up this report just as soon as it came in. And why Kewanee was undoubtedly the most important trade secret case of the century.
The seeds of this debate had been planted back in 1939, when the American Law Institute (ALI) issued its Restatement of Torts. As the name suggests, the nominal purpose of that work was to summarize for lawyers and courts the common law, as reflected in decades of decisions in individual cases from state courts. Where trade secrets were concerned, however, the ALI did not so much restate as reframe the law as it ought to be, according to the views of a few professors. How that came to be is an intriguing story, to be told another time.
This reframing began with putting trade secret law in its place relative to its statutory cousin patent law; only the latter was directed at incentivizing innovation; secrecy was just about protecting a private transaction. The Restatement went even further, denying the status of trade secrets as “property” (reversing the common law consensus) and limiting their scope to a process or device “in continuous use” in a business. No longer protected, except against deliberate espionage, were secret bids or marketing plans, or any of a company’s records of experimentation. This cramped scope of trade secret rights represented a sea change from the common law, and courts responded by creating a new, separate category to protect mere “confidential” information that didn’t “rise to the level” of a trade secret.
Trade secret law hobbled along this way for years, walking on two different legs. In this weakened state, it provoked the question whether it should even exist in the company of the more refined and majestic federal patent law, which was recognized as a spur to innovation and which benefited the public by required disclosure of inventions. Trade secrets, in contrast, developed an image of smoky back room deals among unsavory characters.
If that is a bit of overstatement for dramatic effect, it can’t be denied that the sharp knives were coming out. The drama began to unfold in 1964, when the Supreme Court decided a pair of cases, Sears, Roebuck & Co. v. Stiffel, and Compco Corp. v. Day-Brite Lighting. Emphasizing that the Constitution gave Congress the exclusive power to legislate in the field of patents and copyrights, the court invalidated state laws declaring it a form of “unfair competition” to copy an item on sale in the open market. Since trade secret misappropriation was seen as a type of unfair competition, academics suggested that it too should be “pre-empted” by patent law.
In 1973, the Sixth Circuit agreed with this argument in the Kewanee case, and because other courts had come to a different conclusion, the Supreme Court agreed to review it. Looking back from the vantage point of modern trade secret law, it might seem bizarre even to question whether trade secrets had a right to exist. As you already know from the spoiler, the Supreme Court got it right, declaring trade secrets to be no “obstacle” to the purposes of the patent law. But the decision wasn’t unanimous; two justices dissented. And the majority’s primary reasoning was flawed.
Justice Burger authored the opinion, first pointing out that as a form of protection trade secrets were “far weaker” than patents because they did not bar independent discovery by another. “Where patent law acts as a barrier, trade secret law functions relatively as a sieve.” He then described three ways to view an invention: clearly patentable, clearly not patentable, or of “dubious” patentability. The second and third categories were easily disposed of as beyond the public interest, while only the first presented a serious question of interfering with the objectives of the federal law. But in that situation, he explained, the possibility that an inventor would choose the “weaker” form was “remote indeed.” (It’s surprising that no one seemed to have informed the Court that companies with patentable processes had long opted for secrecy over patenting, in part because discovering secret infringement is difficult, and in part because secrets have an indefinite life. DuPont, for example, protected its chloride process for producing titanium dioxide as a secret for decades beyond when the patent would have expired. This is something familiar to me, as the house where I grew up was just a few miles from the DuPont factory, and its dust regularly settled on our neighborhood).
The majority’s wobbly logic about an inventor’s preferences wasn’t the only justification offered, however. Justice Marshall, concurring in the result, articulated a much simpler and more compelling reason: Congress had frequently amended the patent statute over the years while being fully aware of state trade secret law; its silence reflected an acceptance that the two regimes were complementary.
In deciding Kewanee, the Supreme Court didn’t just preserve trade secret law; it restored to it a measure of respectability. The Court directly contradicted the Restatement by declaring that one of the two pillars of trade secret policy (along with maintenance of commercial ethics) was the “encouragement” of invention – putting trade secrets closer to a place of honor equivalent to patents.
In cases decided since Kewanee, the Court continued to be kind to trade secret law. Aaronson v. Quick Point Pencil Co. enforced continuing royalties after rejection of a patent application because the licensee had bargained for an early look at the technology while still a secret. In Ruckelshaus v. Monsanto Co. and Carpenter v. United States it confirmed that trade secrets are, after all, a form of “property.” And in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., it emphasized that products available on the open market can be reverse engineered, despite contrary state laws.
In the meantime, the Uniform Trade Secrets Act was proposed, and the states steadily adopted it (or some form of it), grounding the law in statutes. The old Restatement view that only secrets “in continuous use” could be protected was discarded, in favor of the much broader measure of information of “actual or potential value” to the business. And all that “confidential information” that was supposed to “rise” like warm bread was now fully within the definition of trade secrets.
With all the patent reforms wrought in 2011 by the America Invents Act, you would have been excused for missing its two major provisions that have since reduced “trade secret hesitancy” in companies: first, the “best mode” requirement that led to pouring secrets into patent applications to avoid invalidity is now toothless; and second, the prior user right now universally protects against the threat of being blocked by a later inventor.
All of this has led to a widespread increase in focus on trade secrets as a corporate strategy. Ironically, and distressingly, at the same time the Supreme Court in a string of decisions has been diminishing, if not dismantling, the power of patents, by limiting allowable subject matter and making enforcement more difficult. We can only hope for a reset at the Court, or enlightened action by Congress.
As for trade secrets, it’s been some time since the Court has taken on a case, and honestly, I’m not sure I want to see that happen, given its current views about intellectual property. Nevertheless, we should all be deeply grateful that back in 1974 it saved trade secret law, even if its reasoning wasn’t perfect. Happy anniversary!
Maintaining control over trade secrets is mostly about risk management, and one dimension of risk lies in having to tell hundreds or thousands of employees to keep quiet and then depend on each of them to do so. Human nature being what it is, risk increases quite a bit when the secret is about something really big and important. And it increases even more if the secret shows that your employer is lying to the public. Indeed, you might think that kind of information is the very hardest to keep under wraps. But there seems to be a growing number of people who think it’s quite easy.
It was July 1969 when I first visited California, with two weeks to go until the crew of Apollo 11 were to land on the moon. But having grown up on the East Coast, I was completely distracted by the unusual climate: no humidity, no bugs, and no rain until October, guaranteed. Eventually the novelty wore off a bit and I was able to take in the amazing reality of Armstrong and Aldrin landing the Lunar Module on the powdery surface.
But was it reality? Many years later I heard that some people claimed it was all a stunt organized by NASA and the federal government to generate propaganda during the Cold War. I laughed off the idea, which represented my first exposure to a lingering conspiracy theory. (In 2002, one of its proponents managed to catch up to Buzz Aldrin and accuse him of fakery, whereupon the then-72-year-old astronaut punched him in the face.)
More recently, I was bemused to see reports that pop icon Taylor Swift’s relationship with Kansas City Chiefs star right end Travis Kelce had been engineered as a “psyop” (psychological operation) by the Pentagon to favor President Biden’s reelection with an endorsement by Swift during halftime at the Super Bowl. I was less bemused when I learned that a significant portion of the population actually believed that the government could pull off such a trick, or would even risk trying.
I have written before about how we lawyers, when dealing with “circumstantial evidence” use probabilistic logic to help us distinguish between reasonable inferences and mere speculation. When it comes to conspiracy theories like the moon landing and the Swift “psyop,” the ideas seem so preposterous that they hardly deserve a reaction. But then there’s the undeniable fact that, in the age of social media and declining trust in institutions, a whole lot of people do get drawn in to this sort of thing.
Indeed, the widespread acceptance of some conspiracy theories is disturbing, as they can corrode social cohesion. Each tribe can embrace false narratives that read on hateful stereotypes of the others, pushing us all further apart. The pull is emotional; even the term “conspiracy theory” has been attacked as the output of its own conspiracy, supposedly generated by the CIA in order to ridicule and discredit true believers.
Although “conspiracy” is used broadly in the law – defined generally as the activity of secretly planning with other people to do something illegal – “conspiracy theory” is distinct and pejorative, referring to a hypothesized conspiracy, and suggesting that the person promoting it is motivated by prejudice and emotion and has no actual evidence that the hypothesis is true. In a sense, the conspiracy theorist operates on the same set of principles that define the law of evidence, but the “circumstances” they draw on to support an inference are spread almost infinitely thin, as when just two stars are said to represent a complex constellation.
Setting themselves against the mainstream consensus on whatever the topic is, the conspiracy theorist takes comfort in the fact that, although they cannot prove the proposition with evidence, neither can their opponents conclusively disprove it. All they need is what they view as a plausible assumption, and then any absence of evidence to support it is folded into the conspiracy as proof of its existence and of the determination of the powers that be to fool the gullible public.
You will probably be relieved that I don’t intend here to weigh in on Pizzagate, whether jet contrails are actually “chemtrails,” or whether the attacks on 9/11 were faked. For those who have convinced themselves of these stories, there is almost no point in arguing. Rather, my concern is with the current inclination of society to accept as genuine these deeply improbable ideas just because they align with an assumption of malevolent and all-powerful institutions.
Indeed, the readiness of substantial portions of the population to accept the most outlandish claims of government manipulation is well demonstrated by the “Birds Aren’t Real” conspiracy. In 2017 Peter McIndoe began circulating the story that all birds are actually robotic surveillance drones created and operated by the federal government, which had supposedly killed the real birds in a secret operation between 1959 and 1971. He managed to hide the satirical purpose of his organization for four years, by which time he reportedly had amassed a movement with hundreds of thousands of members.
Reflecting on the general subject of conspiracy theories, I decided that I might be able to make a small contribution to the discussion, drawing on my own experience in government, as well as over 50 years dealing with issues around secrecy management.
First, consider the government, which in most cases is presumed to have designed and implemented an extremely complex operation, with the presumed cooperation in most cases of hundreds or thousands of employees and officials. Put aside for the moment the supposed slaughter of billions of birds while no one was paying attention, and focus just on the details of planning and execution in the moon landing, when hundreds of engineers were watching from Mission Control (where their equipment had to have been modified to receive a feed from a studio with actors in spacesuits, instead of from Apollo 11 and the actual astronauts). The “psyop” involving Taylor Swift would have been equally daunting to organize, involving not only Ms. Swift and her boyfriend but all those close to them who would have to play their roles.
The complexity of conspiratorial designs increases dramatically when (as is very often the case) the supposed objective is some form of collaboration among elites to establish a New World Order. In that case you would have to coordinate the activities of almost 200 countries that have in recent decades (or centuries) become rather settled in their own sovereignty.
Having spent five years inside the world’s largest bureaucracy, I have experienced firsthand the pace and quality of decision-making among nations. One example should make the point. At the outset of a meeting (among all the member states) that was scheduled to last five days, it took us an entire day and a half just to get agreement on the meeting agenda. That’s not to say that the delegates were not hard-working and sincere; I found the working level representatives to be dedicated and smart. But when it comes to usurpation of national prerogatives, I can confidently report that we have absolutely no reason to fear the formation of a transnational government exercising authority in the United States.
In a similar vein, while at the UN I worked closely and frequently with State Department staff, who I found to be almost universally competent and committed to their mission. I could not conceive of them forming some cabal to seize the reins of power and construct an elaborate scheme to trick the American public.
But there is a more prosaic, and reliable, reason to feel confident about this, apart from the professionalism of those who work at UN or U.S. agencies. That’s because virtually all of these imagined “conspiracies” depend on hundreds or thousands of people keeping silent about what they are actually doing. On this point, I depend not only on long experience with people dealing with commercial secrets. All of us began learning this basic message in grade school: if someone tells you a secret, you can’t wait to get out on the playground and find someone else to tell it to. That inclination to share can be brought under control to an extent when we become adults; but as we know, even in the CIA there are those (thankfully few) who break their promise.
So, the next time you run into someone who is pushing a conspiracy theory, especially one that involves a big event or a big set of consequences, ask them this: how many people would have to be in on it in order for the government to pull it off? And how likely is it that every one of those people, down to the lowest staff levels, will never utter a word about the plot?
Secrecy can be hard to manage. For most people, the more important the information, the more it burns inside until they get to share it. Even the Pentagon could not have kept the lid on the Taylor Swift caper – if it were a real thing.
This is what international trade secrets expert, IP Hall Of Famer, and attorney Jim Pooley refers to as “progressive incremental disclosure.” There’s a conundrum, he points out, when you’re up against someone who doesn’t want to sign an NDA and you need to encourage them to do so without spilling what it is that you want to keep confidential.
So, here’s what he tells people to do.
“Tease the recipient with information about whatever it is that you have that doesn't have to be kept secret. So, for example, you can tell them what the output is and be very precise about it in a way that will be enticing to the person,” he explains. “You sort of peel back the various layers of sensitivity going down towards the kernel of what's really innovative. You can get people to the point where they'll say, okay, boy, that sounds really interesting and to get any farther, I'm going to have to sign an NDA.”
(This strategy won't work with certain classes of people, like venture capitalists, he added, who are famous for never signing NDAs.)
Basically, what you’re trying to do is build trust as you approach each other. Imagine a middle school dance, Pooley said, with girls and boys lined up on opposite ends of the gymnasium floor, slowly figuring out how to engage by reading each other’s body language until the point where they’re holding hands and dancing. The process of getting an NDA signed is not that different.
NDAs that include language regarding reverse-engineering are becoming more common, Pooley said. “But it is an aggressive ask depending on the circumstances,” he added.
NDAs help set a professional tone. I highly recommend having a legal professional draft an NDA that addresses all of your needs. Pooley laments that NDAs are often treated as a form to fill out, when in reality they are a contract — and “contracts have consequences.” A lot of the terms can vary, including the definition and breadth of the confidential information.
SRS' complaint alleged that PNC employed Tsarnas, formerly its managing director for global business development and head of sales, and Kelly, senior vice president and relationship manager who reported to Tsarnas to break into this market. Both had "intimate knowledge" of how SRS' innovative platforms operated and were subject to strict confidentiality agreements, the plaintiff said.
The company initially sought a preliminary and permanent injunctive relief, a jury trial, exemplary and punitive damages, and attorney fees.
But PNC fought back hard. By 5 January this year, when the parties informed the court that they had reached a settlement, there were almost 700 docket entries recorded. During the rocky course of the case, decisions differed as to which party they favoured. Trade secret expert James Pooley says that a high level of uncertainty, like that seen in SRS v PNC is a "classical driver" of settlement.
When parties find themselves facing an imminent jury trial, it is a moment of realisation that the hard facts need to be looked at. "And rather than having a third party, particularly a jury - that does not know the business - decide on what the outcome of the trial should be, the parties have a dawning awareness that this is the last chance for them to control their own destiny in fashioning the outcome in a way that they can live with,'' Pooley notes.
According to Pooley, that must have been exactly one of those moments when parties to the conflict feel responsibility to take sober decisions about their respective companies. "If they are thinking clearly as rational actors, then what they should be doing is minimising the uncertainty and risk, addressing it and moving on where they can control things,'' he said.
SRS commented that "trade secrets are central to its competitive advantage, and we will always do what we must to protect them". SRS declined to comment on how the case was funded.
Pooley notes that "a really good settlement is one in which both sides can interpret it for themselves as a form of victory because they have withdrawn from a very risky situation." However, given the high cost of litigation, Pooley suggests it might have been wiser for the parties to settle earlier.
Several countries are urging the United States to dismantle a cornerstone of its economic success. And the Biden administration may give them exactly what they want.
The intention behind the proposal is to ensure people living in developing countries can access the same life-saving medicines available in wealthier nations. It’s an admirable goal, but unfortunately the proposal at hand will have precisely the opposite effect, by gutting the U.S. biotech industry and depriving future generations of revolutionary treatments.
Here’s some background. Last year, with support from the U.S, the World Trade Organization waived global intellectual property protections for COVID-19 vaccines — a measure originally proposed by India and South Africa. The WTO has since debated expanding the waiver to COVID-19 therapeutics and diagnostics, but no final decision has been made.
It’s time for the Biden administration to nix this misguided IP waiver once and for all. While some U.S. policymakers depict it as a humanitarian measure that would expand access to COVID-19 tests and treatments in poorer countries, there’s no need for such an effort today. The “emergency” phase of the pandemic is over. The White House, The Centers for Disease Control and Prevention, and the World Health Organization have all said as much.
In reality, the waiver is a Trojan horse that would jeopardize U.S. manufacturing and research competitiveness, even as China and other rivals are working overtime to surpass us in the life sciences. That would work directly against the Biden administration’s efforts to strengthen U.S.
biotech innovation.
Even if the COVID-19 emergency wasn’t over, a broad IP waiver would still be a solution in search of a problem. Many companies have already signed licensing deals to ensure access to oral antivirals in more than 100 low- and-middle-income countries.
The same dynamic was at play when the WTO passed last year’s vaccine waiver. India, South Africa and other countries that pushed for the measure actually had a surplus of shots when the waiver was approved. In September 2022, India’s largest vaccine manufacturer disposed of a staggering 100 million expired doses. Around the same time, South Africa’s Aspen Pharmacare factory shut down production of a vaccine it licensed from Johnson & Johnson due to low demand.
Simply put, IP protections weren’t precluding countries from distributing vaccines. Organizational issues and persistent vaccine hesitancy were the real culprits.
Similarly, as a recent report from the U.S. International Trade Commission confirms, global IP rights aren’t to blame for low uptake of tests and treatments in the
developing world.
While it wouldn’t solve any real problem, waiving IP protections would have serious consequences for America’s world-class biotech industry. The waiver would compel U.S. companies to hand over not just the chemical formulas behind their COVID-19 treatments, but also the technical details of the manufacturing processes needed to create these advanced drugs. It would essentially allow developing countries to help themselves to billions of dollars’ worth of U.S. trade secrets — for free.
Patents and other IP rights enable life sciences firms to participate in the risky process of drug development. Without these protections, copycats can freeload off the years of work and billions of dollars required to invent just one new medicine. Arbitrarily ignoring IP rights — as the WTO proposal would do — robs life sciences firms of the opportunity to earn a return on their investments and lessens their incentive to innovate in the first place. As a result, we’d lose out on countless future treatments.
By stifling investment in the life sciences sector, the waiver would harm everyday Americans by threatening hundreds of thousands of biotech manufacturing and
R&D jobs.
An expanded IP waiver would also have significant implications for U.S.-China competition. China already leads the United States in 37 of 44 advanced technologies. Leaders in Beijing have made no secret of their desire to make China a global biopharma superpower, and biotech was singled out as a crucial growth industry in the so-called Made in China 2025 national strategy. America may lead the world in developing novel therapies today, but a waiver expansion could change that.
Luckily, no country took advantage of the original vaccine waiver. But there’s no guarantee the same will be true for a waiver on tests and treatments — which, if used, would represent an unprecedented transfer of proprietary U.S. biotechnology overseas.
A robust global IP system enabled the development and distribution of breakthrough COVID products that saved millions of lives. The proposed waiver would fail to achieve its purported humanitarian goal of broadening access to treatments, since IP protections aren’t actually a barrier. Instead, the waiver would only undermine our ability to counter future public health threats and weaken U.S. economic competitiveness. It’s imperative that the White House abandon this disastrous proposal.
In Part I of this article, we recapped some of the most notable trade secret cases of the past year that dealt with issues such as proving secrecy and exercising reasonable efforts, as well as the publication of a key judicial resource for trade secret cases. Below, we continue with some of the top trade secret cases and subject matter the courts addressed in 2023.
One of the unique aspects of trade secret law, in comparison to other forms of intellectual property, is that the boundaries of the right are not specified in a government-issued grant. As a result, a preliminary – and usually consequential – question in every trade secret case is: what exactly is the trade secret information that’s being claimed? Usually, companies have not made an inventory of their information assets, and even if they have, the specific data involved in any given dispute is unlikely to have been described with precision before litigation begins. As a result, identification of the subject matter – and when and how to do it – has become a frequent early battleground in trade secret litigation.
Voicing a lament that has become all too common in cases where judges are called upon to discern discovery relevance in trade secret disputes, the court in Wilbur-Ellis Co., LLC v. Gompert, 2022 U.S. Dist. LEXIS 227155 at *11 (D. Neb. December 16, 2022) denied a plaintiff’s request for issuance of a third-party subpoena. The plaintiff had been ordered to prepare a particularized description of its trade secrets. Instead, it filed what the court characterized as a list of “seven generic categories, with corresponding generic definitions, which Plaintiff alleges are trade secrets.” That the plaintiff claimed also to have produced “nearly 6,000 pages of documents” in discovery merely “emphasizes Plaintiff’s lack of specificity in identifying the trade secrets at issue, rather than its commitment to robust discovery.” In addition to denying the request for third-party discovery, the court ordered that the plaintiff’s list be unsealed, as it “does not contain material that implicates confidentiality to the extent necessary to overcome the strong presumption of public access to court documents.” Id. at *16.
While trade secret plaintiffs are allowed to describe their secrets in broad terms in a publicly-filed complaint, see Neutron Holdings, Inc. v. Hertz Corp., 2023 U.S. Dist. Lexis 100085 at *10 (N.D. Cal. June 8, 2023) (acceptable to use the qualifier “including but not limited to” in complaint), after the pleading stage real particularity is required. Where software is involved, that often means producing specific algorithms, along with associated documentation. In Reald Spark LLC v. Microsoft Corp., 2023 U.S. Dist. LEXIS 80221 at *10-12 (W.D. Wash. May 8, 2023) the court addressed the sufficiency of responses to an interrogatory asking for a description of each alleged secret. At first, the plaintiff just repeated a list of categories from its complaint; then it responded by referring to almost 3,000 pages of documents and stating that its source code would be made available for inspection. In filing its motion to compel, Microsoft addressed the requirement that a trade secret be defined in a way that separates it from “matters of general knowledge in the trade,” and it submitted related patents showing that some of the claimed concepts were well known. This led the court to order production of the specific algorithms used to implement those concepts, along with related “datasets” and “know-how” (including negative know-how) and source code. In the meantime, pending compliance by the plaintiff, it issued a protective order preventing the plaintiff from conducting discovery into Microsoft’s confidential information.
Although California’s “sequencing order” that requires early identification of trade secrets before the plaintiff gets related discovery from the defendant is technically mandatory only for state law-based litigation, courts considering DTSA claims may find the procedure useful as a discovery management tool. See Blockchain Innovation, LLC v. Franklin Resources, 2023 U.S. Dist. LEXIS 104537 at *5-6 (N.D. Cal. June 15, 2023). As the court there pointed out, however, the defendant may not simply grant itself a unilateral discovery stay by citing the statute; rather, it must move for a protective order at the outset of the case.
The question of whether secrets are adequately described remains live throughout the litigation. Even after trial and a verdict, in a case where the trade secrets were alleged to have been disclosed entirely orally, the judge may revisit whether they are too indefinite. See Coda Dev. S.R.O. v. Goodyear Tire & Rubber Co., 2023 U.S. Dist. Lexis 57556 at *19-20 (N.D. Ohio March 31, 2023) (granting JMOL to defendants following a jury verdict in plaintiff’s favor).
Because those who misappropriate trade secrets would like to keep their actions, well, secret, it’s often difficult to find direct evidence of theft, and plaintiffs must prove their case with circumstantial evidence. However, there is a real (if indeterminate) difference between permissible inference and impermissible speculation, and so it is important to marshal as much convincing circumstantial proof as possible. One common factor used to help prove misappropriation is the speed with which the defendant has produced a competing product. However, the evidence of implausible speed has to be tied to the specific claimed secrets, in order to raise the argument beyond the level of speculation. See Wisk Aero LLC v. Archer Aviation Inc., 2023 U.S. Dist. LEXIS 100960 at *42-43, *80-81 (N.D. Cal. June 9, 2023) (on motion for summary judgment, finding misappropriation claim unjustified as to a broad design secret, while allowing another claim for “indirect” misappropriation based on request to a common vendor to use a known confidential process).
In an era of digital communications, ubiquitous storage options, and remote work, there are bound to be opportunities for misappropriation, or what looks like misappropriation, by departing employees who abscond with information they were supposed to use only in their jobs. In TF Glob. Mkts. Ltd. v. Sorenson, 2023 U.S. Dist. Lexis 27983 at *11-12 (N.D. Ill. Feb. 17, 2023) the court agreed that where a former employee “retained without authorization” a large number of confidential files the plaintiff had adequately alleged misappropriation through “acquisition by improper means.”
Assuming trade secret misappropriation has occurred or is threatened, the question becomes what to do about it. In many cases, the urgency of avoiding continuing damage leads the plaintiff to request a preliminary injunction. But because that remedy is “extraordinary,” the requirements can be difficult to meet. One of those requirements is that the harm be proven “irreparable,” and when the defendant appears intent only to use the information without further dissemination or irreparable impairment of value, it can be argued that money damages will provide a complete remedy. See TomGal LLC v. Castano, 2022 U.S. Dist. Lexis 231415 at *10 (S.D.N.Y. December 19, 2022) (denying preliminary injunction).
Where the identified threat to the plaintiff derives from a departing employee’s “personal knowledge or public sources,” it is proper to deny preliminary relief in a case relying on section 1836(b)(3)(A)(i)(I) of the DTSA, due to its prohibition against “inevitable disclosure” injunctions. See CAE Integrated, LLC v. Moov Techs., Inc., 44 F.4th 257, 262-263 (5th Cir. 2023). On the other hand, it is error to deny a preliminary injunction without careful consideration of possible future harm. See Direct Biologics, LLC v. McQueen, 63 F.4th 1015, 1022-23 (5th Cir. 2023) (reversing denial where district court had not analyzed likelihood of future harm due to destruction of metadata).
As a form of relief, damages are not available at all until the plaintiff has prevailed on the merits. However, success at trial usually requires early attention to damage theories and the adequate preparation of experts. For example, it is common for damage experts to assume misappropriation as a predicate for their analysis. However, if the case involves multiple claimed secrets and the expert assumes misappropriation of all of them, there is a risk that the jury will lack guidance on what to do if it finds misappropriation of fewer than all. This was the situation in Versata Software, Inc. v. Ford Motor Co., 2023 US Dist LEXIS 75318 at *51-52 (E.D. Mich. May 1, 2023), where the trial judge granted JMOL in favor of the defendant following a verdict in excess of $100 million. The damage expert had grounded his analysis on the estimation that it would have taken Ford just over eight years to independently develop the four alleged secrets. But he failed to provide any alternative approach that would apply if the jury did not find misappropriation of all four. This “all or nothing model,” as the judge termed it, left the jury without a reliable basis to calculate nonspeculative damages. Id. at *62. The case stands as a stark warning to anticipate various outcomes and prepare for them, either with some sort of allocation among the secrets or a plausible basis for determining the same dollar figure for a variety of outcomes. (Heaping further disappointment on the plaintiff, the trial judge later denied a permanent injunction, emphasizing the absence of any presumption of irreparable harm, particularly when the “head start” obtained by the defendant had already run its course. Versata Software, Inc. v. Ford Motor Co., 2023 U.S. Dist. Lexis 188219 at *11 (E.D. Mich. Oct. 19, 2023).)
It is interesting to contrast the opinion in Versata with that in Caudill Seed v. Jarrow, 53 F4th 368, 388-90 (6th Cir. 2022), where the court affirmed a judgment based on a finding of lesser misappropriation than had been claimed, justifying the award as lower than the plaintiff had requested, and backed up by sufficient analysis from the expert to allow the jury to base its award on the value derived by the defendant from savings in research costs.
In what is likely to be seen as one of the more controversial trade secret opinions of the past year, the Second Circuit addressed the issue of avoided cost damages as a measure of unjust enrichment. In Syntel Sterling v. Trizetto, 68 F.4th 792, 811 (2d Cir. 2023), the court vacated a judgment based on an almost $285 million verdict. Trizetto had presented evidence of lost profits from some limited sales, amounting to $8.5 million, but had withdrawn that claim to avoid “double counting” with the avoided cost award. In reversing the trial result, the Second Circuit reasoned that the DTSA was designed to provide unjust enrichment damages only “in instances where the value of the secret is damaged, or worse yet – destroyed.” Id. at 809. In this case, where the trial court had entered a permanent injunction preventing further use or disclosure of the trade secrets, Trizetto retained the use of those secrets, leading the court to conclude that it had not been damaged beyond the $8.5 million. Id. at 810.
The court referred to, but did not define, a required “comparative appraisal” where equitable remedies have been applied, to ensure that avoided costs awards are not “more punitive than compensatory.” Id at 811. It recognized that its ruling might be seen as conflicting with the plain language of the DTSA, as it acknowledged contrary holdings by the Seventh and Third Circuits. Id. at 812-13, n. 42. Curiously, while it expressed its ruling in broadly applicable terms, it also repeatedly stressed that its holding was limited to the facts of this particular case. Time will tell if the Syntel ruling remains an exceptional example of strained analysis applied to an uncomfortable verdict. In the meantime, however, considering that New York state law disallows any trade secret damage award based on avoided costs, E.J. Brooks Co. v. Cambridge Sec. Seals, 31 N.Y.3d 441 (N.Y. 2018), plaintiffs may be well advised to avoid filing suit there if possible.
dmarcian, Inc. v. dmarcian Eur. BV, 60 F.4th 119, 134-141 (4th Cir. 2023) (personal jurisdiction can be based on remote access meetings led by people within the forum).
GateGuard, Inc. v. Amazon.com Inc., 2023 US Dist LEXIS 26905 at *17 (SDNY Feb. 16, 2023) (Computer Fraud and Abuse Act applies to interference with intercom system).
Trade secrets in the United States have a fascinating history, during which courts shaped the common law tort as a way to enforce confidential relationships. Now the legal framework is statutory, with some version of the Uniform Trade Secrets Act (UTSA) in effect in every state except New York, and with uniformity in the federal system thanks to the Defend Trade Secrets Act of 2016 (DTSA). Nevertheless, the law continues to evolve much as it did a century ago—that is, through the opinions of judges deciding individual cases on their facts.
What follows is a selection of those decisions, along with other resources, which have come out during the past year and which I believe provide helpful guideposts about important aspects of trade secret law and practice.
Inspired by the Patent Case Management Judicial Guide, some of us who worked on that volume joined with other practitioners and scholars to create the Trade Secret Case Management Judicial Guide, which has just been published by the Federal Judicial Center for distribution to all federal courts. It provides judges and counsel with a comprehensive resource for surveying trade secret law and managing trade secret litigation. Chapters are organized according to the stages of litigation and guided by an early case management checklist.
Counsel should also consider the recent efforts of The Sedona Conference Working Group 12 on Trade Secrets, a volunteer think tank of over 200 judges, attorneys and other professionals who have produced a series of commentaries representing consensus views on various aspects of intellectual property litigation. Because courts routinely cite to the Sedona Commentaries as authoritative, they represent a valuable resource. The most recent final commentaries, issued in July 2023, are:
This is where every case begins. And secrecy is not just about the information not being generally known; in the absence of actual espionage, it is grounded on sharing in a trusted, confidential relationship. Therefore, in a business transaction, even if the owner had a subjective expectation of secrecy, there can be no claim for misappropriation where the contracts show no direct confidential relationship with the defendant. Novus Group v. Prudential, 74 F.4th 424, 428 (6th Cir. 2023) (affirming summary judgment). In a similar way, a lack of attention to confidentiality can lead to loss of associated rights. In Minerva Surgical v. Hologic, 59 F.4th 1371, 1377-79 (Fed. Cir. 2023), the Federal Circuit upheld summary judgment of invalidity of a patent based on the bar of 35 U.S.C. § 102(b) that prevents patenting an invention more than a year after it was “in public use.” In this case, the inventor had taken samples of the device to display at an industry conference. Although no one was allowed to disassemble or even handle the samples, there were no confidentiality agreements in place, and so simply showing the device was enough to start the clock running.
One tricky area of trade secret jurisprudence lies in the so-called “combination secret,” which derives its value from a unique (and secret) combination of elements which themselves may be found individually in the public domain. Think of a simple food recipe, for example. Each of the ingredients may be well known, and probably are. The amount of each one may have shown up in other recipes. Ditto for the baking time and other variables. But if it can be shown that this one is “special” in the sense that you can’t find that specific combination elsewhere, then – subject to your ability to demonstrate the value, or “synergy” of the recipe (more on value below) – you may have a defensible secret. But the other requirements of the law still apply, including that the secret not be “readily ascertainable by proper means” by others. (I’ve seen people who can taste a piece of cake or a cocktail and confidently recite how to make it.) Thus, the court in DT-Trak Consulting v. Kolda, 979 N.W.2d 304, 311 (S.D. 2022) determined that no protection was available for a combination that could be “compiled by others with the general skills and knowledge” in the field.
In contrast, consider Allstate Ins. Co. v. Fougere, 79 F.4th 172, 189 (1st Cir. 2023), where the alleged secret consisted of spreadsheets containing information about thousands of customers, including email addresses, premium rates and policy renewal dates. Although they also included some otherwise accessible data, the court observed that duplication of the entire compilation would be “immensely difficult.” Summary judgment for plaintiff was affirmed.
The UTSA and the DTSA require that protectable trade secrets “derive independent economic value” from secrecy. In their 2021 article, Abandoning Trade Secrets, 73 Stan. L. R. 1, 9, Camilla Hrdy and Mark Lemley asserted that in the litigation of trade secret cases the courts are less rigorous than they should be, “allowing plaintiffs to rely on weak inferences and assertions of hypothetical value rather than meaningful evidence.” While I don’t fully embrace the larger theme of their article that trade secrets may be declared “abandoned” if not actively used by the business owner (there’s good reason that the statutes qualify “value” as “actual or potential”), they do have a point that courts tend to accept conclusory assurances rather than demand robust evidence. Some judges have taken notice of the criticism and are trying to elevate expectations for litigants. In Health Care Facilities Partners, LLC v. Diamond, 2023 U.S. Dist. LEXIS 97611 at *30-31 (N.D. Ohio June 5, 2023), the court granted summary judgment on this issue, noting that conclusory allegations of competitive value are insufficient to establish a trade secret. The opinion quoted from Providence Title Co. v. Truly Title, Inc., 547 F.Supp. 3d 585, 610-11 (E.D. Tex. 2021):
“In a general sense, there is ‘value’ to a business in keeping all confidential business information secret; that’s the motivation for classifying such information as confidential. But just because a business benefits from keeping certain information confidential does not necessarily mean that the information has independent economic value derived from its confidentiality. Otherwise, all confidential business information would constitute a trade secret and the additional statutory requirement that the information have independent economic value would be rendered meaningless.”
What is required, the Health Care court explained, is “discrete, particularized facts” based on personal knowledge to support the conclusion of value. Stated another way, the plaintiff must provide evidence of “some objective indicia of (or rationale for)” the existence of independent economic value that derives from secrecy.
In addition to establishing a foundation that meets the requirements of the Rules of Evidence, proof of value should focus on the specifically claimed trade secrets, rather than on products that incorporate them, or more distantly the value of the company that owns them. This was the primary message of Synopsys, Inc. v. Risk Based Security, Inc., 70 F.4th 759 (4th Cir. 2023). Having been accused by RBS of misappropriation, Synopsys sought a judicial declaration that it had not misappropriated any legitimate trade secrets. Affirming the district court’s grant of summary judgment in Synopsys’ favor, the Sixth Circuit pointed out that RBS had only presented evidence of the commercial success of the company’s primary product and the price that a third party had paid to acquire the company. Even though the product embodied the trade secrets and represented 90% of its revenue, RBS had failed to provide “evidence that its seventy-five alleged trade secrets had value because they remain secret.” (emphasis in original) Under the circumstances, the plaintiff should have presented expert testimony about the competitive value of each discrete trade secret, or at least of groups of them that share the same evidence of commercial value. However, the RBS expert had not assessed the asserted secrets directly, justifying exclusion of his report.
Closely related to the concept of secrecy is the requirement that the trade secret owner exercise “reasonable efforts” (UTSA) or “reasonable measures” (DTSA) to protect the information. In effect, courts will not step in to help if the owner has failed to help itself with security measures that match the business risk. Occasionally the failure is so obvious that it can result in a judgment on the pleadings. For example, consider Pauwels v. Deloitte LLP, 83 F4th 171, 182 (2nd Cir. 2023), where the plaintiff consultant alleged a verbal agreement with two Deloitte partners not to disclose or use his analytic model outside of their firm. In affirming dismissal, the court found a failure to use reasonable measures because the agreement did not prevent widespread disclosure within Deloitte to people who were not bound to confidentiality.
Two other cases decided this year address whether and how the question of reasonable efforts can be addressed through experts. A challenge to testimony from a law professor was turned back in Neural Magic, Inc. v. Meta Platforms, Inc., 2023 U.S. Dist. LEXIS 37357 at *56-*57 (D. Mass. Mar. 6, 2023), because she also had experience as a consultant on reasonable measures. It did not matter that she lacked a degree in, or deep understanding of, the relevant technology because she could still provide context to help the jury understand “how certain security measures are viewed in the field.” Id. at *58-*59. And FMC Technologies, Inc. v. Murphy, 2023 Tex. App. LEXIS 5984 at *30-*31 (1st Dist. Houston Aug. 10, 2023) affirmed the trial court’s decision to allow a lawyer (ahem, that would be me) to testify in view of my separate experience in managing information security issues, emphasizing that reasonable efforts is a question of fact, id. at *53, and that analyzing the circumstances in terms of risk management was a reliable methodology. Id. at *56-*57.
In Part II of this article, we will look at cases dealing with the proper identification of trade secrets, misappropriation and cases assessing injunctions and damages.
“The more you tighten your grip, the more slips through your fingers.”
— Princess Leia speaking to Tarkin in the first Star Wars movie
Princess Leia wasn’t the first person to use the “tighten your grip” metaphor, but I think she’s the most memorable. To be totally accurate, she warned Tarkin that “more star systems will slip through your fingers.” And her philosophizing did not stop him moments later from using the Death Star to destroy her home planet, Alderaan. But that’s a quibble. The point for our purposes is that tightening your grip on a company’s trade secrets can actually lead to losing them. Stay with me here; this kind of excessive protection is more widespread than you might think, and most companies don’t appreciate the risks that they are taking by overdoing it.
The first category is legal risk. Recall that courts require, as part of any case for misappropriation of trade secrets, that you prove you have taken “reasonable measures” to maintain control over the information. Because most trade secret loss happens through employees, you might assume that judges want you to have strong confidentiality agreements. And you would be right; in fact, if you don’t have them, you are statistically likely to lose. But here’s the hidden problem: if your employee non-disclosure agreements (NDAs) are too broad, courts could throw them out.
On this issue lawyers may not be your best friend. Trained to turn over every pebble on the path, they come up with contracts that identify as “confidential information” everything that happens or is communicated in the business. Avoiding any attempt at actually explaining what makes particular information sensitive and in need of special handling, they opt instead for an open-ended set of examples, usually preceded by “including but not limited to” and listing such high-level abstractions as “all information regarding business methods and procedures, clients or prospective clients” or any information the employee “may obtain knowledge of” while working for the company.
This was the language used in one recent case, TLS Management v. Rodriguez-Toledo, where the judge concluded that the contract would cover information that was in the public domain or general knowledge of the sort that employees are supposed to be able to take to the next job. The court refused to “fix” the agreement by narrowing its terms and instead held that it was totally unenforceable.
Let’s pause and acknowledge that the business is always on the razor’s edge regarding confidentiality agreements, in the sense that employee NDAs must be fairly vague. That is because at the outset no one can predict exactly what trade secrets the company will have, and what the employee will be exposed to, during what may be years of employment.
But what seems a conundrum for the business – how to be comprehensive enough without being overbroad – can be resolved if there’s not almost exclusive reliance on the contract (and perhaps an equivalently vague Code of Conduct or Employee Handbook). The business has it within its power – and some courts might say has the responsibility – to communicate effectively to the workforce about confidentiality by training and other messaging delivered throughout the employment lifecycle. This can continue through the exit process, which presents a particularly powerful opportunity to ensure a common understanding of what the company views as its trade secrets and what are its expectations for the departing employee’s behavior after they leave.
The second kind of risk is operational. By making your confidentiality controls and rules too complex, or too demanding, chances are that a substantial portion of the workforce will either ignore them, or even deliberately circumvent them. For example, consider the requirement that the word “confidential” must be placed on every sensitive document. Unless you have a simple and easy way for people to add that term every time, they will tend to ignore the rule, especially if they see that others are doing the same. Another example is the prohibition against taking confidential information off the premises (or sending it to a private email address), when people need to work at home to get the job done.
In a Texas case where I testified as an expert in 2021, FMC Techs. v. Murphy, the company had sued a departing senior engineer for taking a secret, unpublished patent application describing undersea oil drilling equipment. The company had a suite of policies about protecting confidential information, including a requirement to mark sensitive documents. But in practice, documents were seldom marked “confidential,” including the patent application at the center of the dispute. Worse, the senior manager in charge of engineering couldn’t even explain what confidential information was. Basically, this was a company with valuable information, but they had decided to protect it mainly by patenting, and ultimately failed to police compliance with the “standard” rules they had established for trade secrets.
The jury decided that the claimed trade secrets didn’t qualify, because the company failed to exercise reasonable security measures. The moral of the story: if you create a rules-based framework for trade secret protection, you need to enforce it. And a corollary: only create rules that you reasonably expect the workforce to follow.
Trying to protect every bit of the company’s information as if it is equally important creates its own set of risks. First, that approach almost always results in a false sense of security. It leads management to think “we have set up really tight procedures for handling secrets, and so we must be safe.” The trouble is, the vast majority of information loss – whether through carelessness or espionage – happens below the awareness of management. When you have lost control of secret information, it’s still there, so you may not know that there’s a problem. As a result, you can easily miss all sorts of related vulnerabilities and ways to address them.
Second, by treating everything at the same level of sensitivity – for example, by giving all your engineers access to the entire database of information about the company’s ongoing research and development – you may think that you are encouraging collaboration and creative work. But by choosing not to partition access by project groups, you could be missing opportunities for more supervised collaboration, where managers know what’s going on, participants stay focused on their projects, and confidential information is less likely to leak.
Third, overly aggressive rules can slow things down when they need to move very fast, as in response to a reported data breach. The same phenomenon can work to reduce compliance with external regulatory requirements, where a too “locked-down” environment collides with the need for a certain amount of managed transparency that enables effective reporting.
Fourth, and perhaps most important, your workforce, properly trained and incentivized, is your primary bulwark against possible loss or contamination of data assets. If you put them inside a security regime that is too strict, not only do you risk noncompliance and circumvention, but you will be sending a message that you don’t trust them. Conversely, if you design your systems in a way that distributes an appropriate level of authority to determine what is confidential and how to protect it, employees are likely to be more engaged and effective.
This balanced way of implementing security measures takes more time and effort than simply issuing a standard set of policies and expecting that they will work. You need to have a good idea of what data assets are most important for protecting the company’s competitive advantage, and what are the risks to their integrity. From that point, you manage to those risks, and not so much to a precooked set of rules. Be realistic about what can work in your business. Often, that requires that you relax your grip.