The Uniform Trade Secrets Act requires that a trade secret be subject to “reasonable efforts under the circumstances to maintain its secrecy.” The Defend Trade Secrets Act similarly requires that the owner have taken “reasonable measures to keep such information secret.” But what is reasonable and what isn’t? And how do you prove one proposition or the other? We will examine here the role of the expert in assisting the trier of fact to reach a conclusion.
Rule 702 of the Federal Rules of Evidence permits a court to accept expert testimony when the proponent has demonstrate each of four requirements: (a) the expert’s specialized knowledge will “help the trier of fact” determine an issue; (b) the testimony is based on sufficient facts; (c) the opinion is grounded on “reliable principles and methods” which (d) have been “reliably applied” to the facts of the case.
Use of experts is common in trade secret litigation. Where the subject matter of the claimed secrets is highly technical, retained specialists will be presented by each side to help explain the evidence in a way that the judge or jury can understand its nature and whether it is likely to have been misappropriated by the defendant. And in almost every case, damage experts will be called to provide an opinion of the amount that should be paid by the defendant in case misappropriation is found.
But despite the universal requirement that a plaintiff prove “reasonable efforts,” there have been only a few opinions reporting on how that element is established or disproved through experts. Instead, most of the case law seems to come from attempts to test the issue by summary judgment, the majority of which fail because the courts see it as a fact issue for the jury.
Based on my experience and review of reported cases, the “reasonable efforts” issue appears not to have been seriously challenged in most disputes. In part this may be the result of a sensible assessment in those cases that the facts do not suggest that the plaintiff was sufficiently careless. Alternatively, the defendant’s misappropriation may have been so obvious that asserting lack of reasonable efforts might be seen as insulting to the jury’s sense of morality.
"[Trade secrets] are supposed to be protected under the Freedom of Information Act from being disclosed, but people make mistakes," said James Pooley, an attorney and trade secrets expert who has written several books on the topic. "If we have fewer people that are experienced in these agencies or just fewer people at all, or we have people running around inside them that don't have experience with these kinds of very, very sensitive issues, mistakes are much, much more likely to happen."
In one of his books, "Secrets: Managing Information Assets in the Age of Cyberespionage," Pooley tells the story of how the EPA inadvertently provided Monsanto's Roundup herbicide formula to an attorney who represented one of the company's competitors. The attorney informed the EPA of the disclosure and the secret of Monsanto's formula was maintained, Pooley said, but he cites it as a cautionary tale of "the severe consequences that could result" from a mistake.
"This is uncharted territory for people who have to share their secrets with the government," Pooley said. "I'm deeply worried."
Even though trade secret rights are governed today almost entirely by statute (the Uniform Trade Secrets Act (UTSA) in every state except New York, and the federal Defend Trade Secrets Act [DTSA]), its operative principles are rooted in common law traditions of tort and the twin policy objectives of “maintenance of standards of commercial ethics and the encouragement of invention.” Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481 (1974). Therefore, the Restatement (of Torts, from 1939, and of Unfair Competition, from 1995) can hold sway with courts even when they are engaged in statutory interpretation. For a quick review of how the law has developed through individual cases, take a look at my article, “Brief History.”
Here is a selection of those decisions, along with other resources, which have come out during (approximately) 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, the Trade Secret Case Management Judicial Guide, was published in 2023 by the Federal Judicial Center and has now been distributed to all federal courts, providing judges and counsel with a comprehensive resource for managing trade secret litigation. Chapters are organized according to the stages of litigation and guided by an early case management checklist. The Guide has been cited and applied in a growing number of cases, encouraging a process of harmonization that is also driven by federal standards under the DTSA.
Counsel should also consider the 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. In addition to its existing publications, the organization is soliciting ideas for new commentaries on international trade secret enforcement, incident response plans, and issues affecting departing employees.
Most trade secrets are not absolutely secret, because modern business requires that they be shared with employees, vendors and other partners. Therefore, the issue is more about maintaining control over the information to keep it from becoming generally known. One of the more challenging, persistent questions is how to treat “compilations” of information, some aspects of which may be in the public domain, while the entirety of the combination remains unknown. The UTSA and the DTSA each include “compilation” in the non-exhaustive types of information that can be covered; and the Restatement (Third) of Unfair Competition, § 39, comment f teaches that even where individual elements are well known, a “secret combination, compilation, or integration” of those elements can qualify. This concept was elaborated in Allstate Ins. Co. v. Ameriprise Fin. Servs., 2023 U.S. Dist. Lexis144791 at *48 (N.D. Ill. Aug. 18, 2023), where the court analogized a combination secret to a recipe using known ingredients, since the “secret lies in how it all comes together – what to mix in, when, and how much;” and to a collection of Easter eggs, where individual eggs may not be protectable, but a “basketful” may be – “especially from a competitor hoping to avoid the hunt.”
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 summary judgment. For example, consider Jacam Chem. Co. v. Shepard, 101 F.4th 954, 965-966 (8th Cir. 2024), where the plaintiff had failed to designate materials as required under the parties’ contract, and there was no proof of an alleged “implied obligation within the industry to keep information secret.” See also Analog Technologies v. Analog Devices, 105 F.4th 13, 19 (1st Cir. 2024), where the license agreement’s time period for confidentiality had expired, leaving the defendant free to use the information.
On the other hand, the issue of whether the plaintiff’s efforts were “reasonable under the circumstances” is a fact question for the jury; therefore, in a case where the trade secret owner was a small company with basic access controls for its facility and its computer system, summary judgment was denied even though documents were not marked and the company had no security policies, no training, and no exit interviews. Consol. Indus. v. Maupin, 2023 U.S. Dist. Lexis 199032 at *26 (W.D. Tenn. Nov. 6, 2023). Finally, consider that some courts addressing the reasonable measures issue base their analysis on a short list of factors derived from the pre-UTSA common law (contractual restrictions, nature and extent of precautions, circumstances of disclosure, and degree of public disclosure.) See Koch Acton v. Koller, 2024 U.S. Dist. Lexis 44137 at *23 (W.D. Tenn. Mar. 13, 2024.
The DTSA as enacted by Congress did not contain any specific provision for extraterritorial application. But it did express strong congressional interest in curbing foreign theft of trade secrets. And since it was codified as part of the Economic Espionage Act of 1996, 18 U.S.C. §§ 1830-1839, plaintiffs could potentially rely on that law’s extraterritoriality provision in § 1837. But that section was expressed in typically criminal terms, with references to the “offender” and an “act in furtherance of the offence.” No matter, said the District Court in Motorola v. Hytera, 436 F.Supp.3d 1150 (N.D. Ill. 2020), ruling that the statute did apply where at least one act in furtherance of the misappropriation occurred in the United States That ruling was affirmed in Motorola v. Hytera, 108 F.4th 458, 487-488 (7th Cir. 2024), and its effect was reinforced in Beijing Meishe v. TikTok, 2024 U.S. Dist. Lexis 130213 at *34 (N.D. Cal. July 23, 2024), where the court held that an “act in furtherance” can consist of use in the United States, even when the misappropriation happened entirely outside the country.
One of the unique aspects of trade secret law, relative 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 information that’s being claimed as a trade secret? Often companies don’t maintain a thorough 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.
While a general consensus has formed that categorical descriptions are sufficient for publicly-filed pleadings, the level of precision required to set the bounds of discovery, and later to prevail on a motion for summary judgment, can seem idiosyncratic. But the variations in outcomes can reveal opportunities for the plaintiff to draft its descriptions in ways that meet the reasonable expectations of most courts. For example, in Ho-Ho-Kus v. Shucharski, 2023 U.S. Dist. Lexis 201393 at *18 (D.N.J. Nov. 9, 2023), the court noted that “properly demarcated lists of categories of information meet the pleading standard [which is] one of notice, not of detail . . . . particularly if these lists are linked to the circumstances by which the information is stolen . . . .” See also Beijing Meishe v. TikTok, 2024 U.S. Dist. Lexis 130213 at *37 (N.D. Cal. July 23, 2024), approving of the complaint’s reference to “voluminous” source code listings contained in two specific documents.
The question of whether secrets are adequately described can in theory be revisited at any point in the litigation. For an extreme example of this risk, consider Zunum Aero v. Boeing, 2024 U.S. Dist. Lexis 144978 at *45-46 (W.D. Wash. Aug. 14, 2024), vacating a jury award based on insufficient identification, even though the plaintiff’s description had been approved for purposes of discovery and at summary judgment.
“Misappropriation” has to be defined broadly, in order to capture the myriad ways in which a plaintiff’s exclusive control over its sensitive information can be compromised. Therefore, the DTSA and UTSA extend to behaviors such as acquisition by “improper means,” violation of a duty of confidence, and misuse of information disclosed for a limited purpose. And “use” does not have to be comprehensive or direct; as the Restatement (Third) of Unfair Competition § 40, comment c instructs, “any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant is a ‘use’. . . .”
This generous meaning of “use” can be vexing to defendants who are accused of misappropriating a “combination” or “compilation” trade secret, which as noted above can include elements that are generally known. While it may not be possible to assert such a combination in which the only act of misappropriation pertains to an element in the public domain, liability can attach to a defendant who merely uses the secret compilation as a reference in pursuing its own development. Crabar/Gbf, Inc. v. Wright, 2023 U.S. Dist. Lexis 976 at *14 (D. Neb. Sep. 19, 2023).
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. Generally speaking, employees who merely “retain” such information will not be liable. However, if an employee in anticipation of an imminent departure downloads a large amount of confidential information, that behavior – particularly if the employee removes it from the workplace – can constitute “acquisition by improper means,” since the information has been moved to an insecure location. Allergan v. Revance, 2024 U.S. Dist. Lexis 976 at *22-23 (M.D. Tenn. Jan. 3, 2024). Another example of improper acquisition arises when a public-facing website is scraped through deception, to discover the logic hidden behind it. Compulife Software v. Newman, 111 F.4th 1147, 1162-1163 (11th Cir. 2024).
Sometimes defendants make it easy to establish misappropriation, by deliberate spoliation of relevant evidence. See Ecolab v. Anthony Ridley, 2024 U.S. Dist. Lexis 94904 at *42-44 (E.D. Tenn. Mar. 12, 2024) (individual employee and new employer wiped devices).
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 plaintiff fails to point to “concrete evidence” showing that monetary relief would be insufficient, it is proper to deny the request. Tribal Sols. v. Valandra, 2023 U.S. App. Lexis 29539 at *7 (5th Cir. Nov. 6, 2023). Indeed, the requirements for this remedy are so exacting that a trial court’s failure to provide a robust analysis of the evidence can lead to reversal on appeal. Insulet Corp. v. EOFlow, 104 F.4th 873, 881 (2024). Relatedly, it may be appropriate to deny a permanent injunction for lack of proof following trial in which the jury has awarded significant damages, as in trade secret law there is no presumption of irreparable harm. Versata Software v. Ford Motor Co., 2023 U.S. Dist. Lexis 188219 at *11 (E.D. Mich. Oct. 19, 2023).
Where a jury finds that misappropriation has occurred but declines to award damages because the plaintiff has not suffered harm, the court may grant a permanent injunction and also award fees to the plaintiff, because harm to the trade secret owner is not an element of the claim. Applied Medical Distribution v. Jarrells, 100 Cal.App. 5th 566, 570 (Cal.App. 2024) (applying California version of the UTSA).
Because trade secret law has traditionally been viewed through a tort lens, the tendency is to be “flexible and creative” in fashioning monetary remedies. However, damage claims must be based on admissible evidence and reliable analysis, so summary judgment may be entered where the plaintiff’s lost profits theory is based on “two layers of speculation.” TransPerfect v. Lionbridge, 2024 U.S. App. Lexis 1053 at *9-10 (2nd Cir. Jan. 17, 2024) (unpublished).
As with all other elements necessary to the claim, the burden of proof on damages remains with the plaintiff throughout, and that includes proximate causation, such as that the defendant’s sales were “attributable to the trade secrets;” therefore it is improper to require the defendant to demonstrate what portion of its proven sales were not so attributable. Pegasystems v. Appian, 2024 Va.App. Lexis 438 at *54-56 (Va. July 30, 2024).
A different kind of apportionment was the focus of Echospan v. Medallia, 2024 U.S. Dist. Lexis 127259 at *23-25 (N.D. Cal. July 2, 2024), where the plaintiff’s asserted multiple trade secrets but failed to apportion its damage claim among them. Therefore, when the jury found misappropriation as to only some of the enumerated secrets, the resulting verdict was set aside as without foundation. This case illustrates a basic tension between the imperative to identify alleged secrets with particularity and the need to provide a rational path to a verdict when only some have been misappropriated.
It may not surprise the reader to learn that the World Intellectual Property Organization (WIPO) offers a major resource about trade secret law and management. But this new online “WIPO Guide to Trade Secrets and Innovation”—introduced this past summer—was a long time coming. In part this lag was due to the agency’s primary mission, which is to implement and manage international treaties affecting registered IP rights: patents, copyrights, trademarks and designs. In many corners of the IP community, trade secrets don’t even qualify as “intellectual property,” in spite of the TRIPS Agreement, which declares otherwise and requires all member states (through Article 39) to provide enforcement of rights in “undisclosed information.”
When I arrived at WIPO in late 2009, I learned more about why trade secrets had received so little attention relative to the rest of the IP landscape. Why didn’t we have robust programs dealing with this obviously important asset? In the first place, I was told, the diplomats in Geneva didn’t really understand what trade secrets were, but they presumed that secrecy must conflict with the notion of transparency in government, a principle which they all valued, at least in the abstract. Second, to the extent that anyone knew what trade secrets were, they thought immediately of Article 39(3) of TRIPS, which was designed to protect clinical data owned by drug companies, an industry that unfortunately many loved to hate.
I learned that this negative view was reinforced by another misunderstanding, that trade secrets encouraged and enabled hoarding of knowledge. That the opposite was true seemed confounding to many, until of course one considered how tech transfer works, and how sharing in an information-based economy is made safe only by the existence of legal frameworks to enforce expectations of confidentiality. In spite of the confusion and wrong assumptions, it seemed clear to anyone engaged in business that secrets were important. After all, the promised “knowledge transfer” to the developing world that had been promoted as the payoff for agreeing to TRIPS hadn’t materialized. Even though everyone could read published patents, without the relevant know-how it was often impossible to build the infrastructure to practice the patented inventions. So this was the conundrum: trade secrets seemed to be both essential and mysterious at the same time.
It wasn’t that the subject was entirely ignored. We had a division focused on helping small and medium enterprises (SMEs), universities and research institutions with practical application of IP, and trade secret education was a part of that effort. But it wasn’t in the spotlight. That started to change in 2016, following a wave of attention from the business community reflected in the near-simultaneous passage in the U.S. of the Defend Trade Secrets Act and the EU’s issuance of its Trade Secrets Directive. In 2019 WIPO sponsored a Symposium on Trade Secrets and Innovation, an event that was repeated in 2022. Along the way, it published articles promoting secrecy as an intellectual property right and explaining why trade secrets are the most popular form of IP protection for SMEs.
The symposia were designed and carried out under the leadership of Tomoko Miyamoto, Head of the Patent Law Section at WIPO, whose keen interest in trade secrets was the primary force behind those events. When the idea for publishing a comprehensive treatise emerged in 2022, she also led that project. It bears emphasis, however, that the finished work, like many WIPO publications, was authored by many individuals from all around the globe. This approach has the advantage of bringing multiple points of view and experience to a multinational resource; but it also creates a serious editorial burden, finding ways to harmonize forms of expression while retaining helpful comparisons among jurisdictional frameworks of individual countries. I had the privilege of working with Tomoko to bring the final version to print, and it was released in June 2024.
As the title suggests, this 145-page (plus appendices) volume is intended to “guide” the reader. A great deal of effort went in to making it accessible as well as comprehensive, to meet the needs of two major constituencies: (1) businesses, particularly SMEs, and (2) policymakers in a position to influence the development of legal frameworks, particularly in developing countries. Of course, WIPO also intends the Guide to be educational, providing the public with easy-to understand explanations and examples. It is practical, not academic, designed to meet the varied needs of the small shop owner, the fast-growing online business, as well as the established company seeking cross-border collaborations. Therefore, it can be a valuable resource for any organization anywhere in the world, providing insights and tips, presented in a global context not present in most other reference works.
The Guide is organized logically, beginning (after the introduction) with the strategic role of trade secrets in an information-based economy. Recognizing that the idea may seem counterintuitive, the Guide emphasizes that secrecy enables the sharing and dissemination of information, by providing enforceable guarantees of confidentiality and trust. And because certain types of innovations are not suitable for patent protection (for example, process technology deployed in private where infringement cannot be detected), the public interest in trade secret enforcement aligns with the patent system, as each encourages innovation in different ways. We can only hope that this sort of clarification will help to overcome the widespread suspicion of trade secret laws and lead to meaningful efforts to harmonize global frameworks.
The next section (Part III) provides a primer on trade secrets, including a basic definition “in 150 words,” a description of the kinds of information that can qualify for protection, and the common elements of most countries’ laws and procedures for enforcement. Similar to WIPO’s treatment of other forms of IP, the Guide includes a section on “exceptions and limitations” to the right (for example, whistleblowers). It also includes a discussion contrasting patents and secrets, while emphasizing that commercialization of innovation usually relies on both forms of protection pursued through a complementary strategy.
One of the most practical and useful sections (Part IV) addresses management of trade secret assets, directed at the twin goals of preventing loss and proving that the owner took “reasonable steps” (an element of the TRIPS formulation) to protect the integrity of its secrets. The Guide includes instructions on how to identify and assess secrets and related risks, as well as how to design and implement a trade secret protection program. It focuses not only on preservation of assets but also on how to deploy them in the business to increase enterprise value. Defensive strategies are also included, directed at avoiding contamination, for example in hiring high-level talent from competitors, or controlling exposure in the course of third-party relationships.
Part V deals with litigation, including investigations, offensive and defensive strategies, and finding ways to resolve disputes that are often driven by emotions. The Guide surveys various remedies (including extraterritorial reach), and deals with ways in which judges can maintain the secrecy of information that has to be submitted as part of court proceedings. Although not all jurisdictions allow criminal prosecution for trade secret theft, given the risks involved in cross-border transactions, the discussion of criminal exposure is clearly helpful.
As if to drive home the point that trade secret laws encourage knowledge-sharing in the pursuit of innovation, the Guide includes an extensive discussion of collaborations. The commercial aspects are described through the timeline of most relationships, beginning with establishing contracts and trust, through management of the development process, and eventually sorting out the resulting rights. A similar but distinctive treatment is given to academic collaborations.
Finally, the Guide takes a look at special issues involving the increasingly critical asset class represented by “digital data” in its various forms, including raw data, analytics and code. For many companies whose business model has been transformed by the value of data they collect in the ordinary course, this section (VII) will be illuminating and helpful.
It hasn’t been that long since trade secrets were barely whispered about at WIPO. With the WIPO Guide to Trade Secrets and Innovation, the organization has made a major contribution to completing the “IP stack” of modern business.
The Big Apple’s reliance on trade secrets ‘common law’—and some surprising rulings in its courts—have left it an unfavourable choice for claimants, says James Pooley.
Most people see New York as a global leader in finance and business. Much less known—except perhaps among trade secret lawyers—is the state’s reputation as an outlier, anchored in outmoded jurisprudence.
The model Uniform Trade Secrets Act (UTSA) was first released in 1979, with an updated version in 1985. But New York stands alone among the states in refusing so far to adopt the statute. Instead, it continues to rely on the ‘common law’ of trade secrets as described in the 1939 Restatement of Torts §§ 757–759, a cramped summary that requires information to be ‘in continuous use’ in the business and that doesn’t apply to so-called ‘negative secrets’, such as experiments showing what doesn’t work, or ‘ephemeral events’ such as secret bids, unannounced products, or financial information.
The US Supreme Court has identified two policies supporting the common law of trade secrets: the “maintenance of standards of commercial ethics and the encouragement of invention”. Kewanee Oil v Bicron, 416 US 470, 481 (1974).
The first principle focuses on preventing bad behaviour, and it informed a general consensus among common law courts that damage awards should not only compensate the plaintiff for the defendant’s bad acts but also provide a disincentive for those who might be inclined to misappropriate.
As a result, calculation of damages has traditionally included not only harm to the plaintiff but also any ‘unjust enrichment’ enjoyed by the defendant. In effect, trade secret damage awards have always been intentionally generous, directed at deterrence as well as full compensation.
This double-tracked approach to remedies has since been codified in statutes, first in the UTSA, and then in 2016 with the passage of the federal Defend Trade Secrets Act (DTSA). Both of these laws use exactly the same damage measure, expressed in the conjunctive: a plaintiff may recover for its “actual loss . . . and damages for any unjust enrichment” so long as there is no double counting.
Typically, the unjust enrichment has been calculated by referring to the plaintiff’s cost to develop the trade secret, and this ‘avoided cost’ theory has become very popular among plaintiffs, who usually find it difficult to prove actual damages from misappropriation.
New York courts ‘less hospitable’
But the US operates as a federal system, and interpretation of each state’s law is controlled by its own courts. As already noted, New York remains rooted in a narrow representation of the common law. Even so, it surprised many when in 2018 the highest court of New York held that a defendant’s avoided costs may not be awarded to a plaintiff unless there is proof of a “causal relation . . . between the gains of the aggressor and those diverted from his or her victim”. EJ Brooks v Cambridge Sec Seals, 31 NY3d 441 (NY 2018).
In other words, actual loss and unjust enrichment were linked in a way that made it hard to establish the latter without proving the former. Given the inherent difficulty of proving any direct harm from misappropriation, with this new rule New York state courts suddenly became much less hospitable to trade secret claimants.
Unsurprisingly, following the EJ Brooks decision, New York plaintiffs filed mainly in federal court, asserting the DTSA (with its presumably clear and reliable damage guidelines) while avoiding any claims based on New York common law. And because federal courts of appeals in six of the 12 regional circuits had ruled that the UTSA damage provisions allow recovery of avoided development costs independently of any proof of harm to the plaintiff, it was generally accepted that all federal courts would interpret the same language of the DTSA in the same way.
That assumption was upended by the opinion in Syntel Sterling v Trizetto, 68 F4th 792 (2nd Cir 2023), in which the Second Circuit Court of Appeals—importantly, the one that sits in New York—reversed a jury award of $285 million against Syntel, a competitor of Trizetto who used stolen secrets to divert business from a common customer.
Departing from the rulings in the earlier UTSA cases, the Second Circuit held that any claim for unjust enrichment damages must take into account the nature and extent of the direct harm to the plaintiff. In this case, the judges pointed out, Trizetto had lost profits only for the one customer (amounting to $8.5 million), and the trial court had entered a permanent injunction that prohibited any further use of the purloined information.
As a result, the court reasoned, Trizetto still had control over its trade secrets, and the avoided cost award (which represented about half of what it had cost Trizetto to develop the information) appeared in effect to be punitive rather than compensatory.
To get to this result, the Court of Appeals rejected the reasoning of the other courts that had construed the identical damage framework from the UTSA. It did not directly confront the fact that the plain language of the DTSA and UTSA allowed the plaintiff to recover for any harm to itself ‘and’ any benefit conferred on the defendant.
Instead, it relied on a passage from a 1995 version of the Restatement of Unfair Competition purporting to construe the common law (ie, not the statutes) and observing that an unjust enrichment award required a ‘comparative appraisal’ of factors such as the nature and extent of the theft, the damage suffered by the plaintiff, and “the relative adequacy to the plaintiff of other remedies”.
Applying such an appraisal to the facts of this case, it concluded that the trial court’s injunction adequately cabined the risk to Trizetto’s trade secrets, which after all had only been misused in connection with a single customer.
If the court was concerned by the size and ‘punitive’ effect of the jury’s award, it is difficult to understand why it did not simply remand the case so that the trial judge could reassess the size of the monetary award in view of the permanent injunction.
Perhaps aware that it was stepping outside the normal boundaries of statutory interpretation by relying on a common law commentary, the court repeatedly emphasised that its decision was driven by the unique facts of the particular case. However, a substantial risk remains that other courts will accept this new, non-statutory gloss on trade secret damage claims.
Strategies following Syntel
Indeed, in a recent decision by the Seventh Circuit Court of Appeals, Motorola v Hytera, 108 F4th 458 (7th Cir 2024), the court seemed to embrace at least a part of the Syntel court’s reasoning, albeit in dictum explaining why a punitive damage award of over $270 million was not excessive under constitutional standards.
The court observed that damages for avoided R&D costs can differ from one case to another, depending on “how defendants used and profited from the stolen trade secrets”. For this it directly referenced the Second Circuit’s suggestion of a ‘comparative appraisal’ based on the common law Restatement of Unfair Competition. 108 F.4th at 501.
Importantly, the discussion was focused not on the availability of avoided cost damages, but on the due process implications of a large punitive damage award. As a result, it is too early to tell if the Second Circuit decision in Syntel will lead to a general narrowing of available damage theories for trade secret plaintiffs.
Still, at the moment there are lessons to be drawn and strategies to employ. First, plaintiffs can argue that Syntel was wrongly decided, or should be limited to its facts, as the court itself suggested. Second—and more reliably—counsel can closely examine and analyse the ways in which the alleged misappropriation has caused harm to the plaintiff, so that the damage expert can plausibly connect the defendant’s advantage with impact on the plaintiff.
In this regard, one might consider this observation from the Third Circuit in Oakwood Laboratories v Thanoo, 999 F3d 892, 913 (3d Cir 2021): “By statutory definition, trade secret misappropriation is harm. The trade secret’s economic value depreciates or is eliminated altogether upon its loss of secrecy when a competitor obtains and uses that information without the owner’s consent”.
In the meantime, when possible plaintiffs should choose a court outside of New York to file their misappropriation claim.
“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.
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.