Since the enactment of the Defend Trade Secrets Act of 2016 (DTSA), trade secret cases have increased by 30 percent, but courts have dismissed about 14 percent of those cases on the pleadings or through summary judgment. In many cases, trade-secret owners lost because they failed to show they used reasonable efforts to protect the confidentiality of their secrets.
Whether a trade secret owner’s measures to protect its secrets are reasonable depends on the facts of each case, making it impossible to identify specific actions that will ensure a company’s trade secret rights will survive dismissals, but recent cases have highlighted some pitfalls to avoid.
A complaint need only state a plausible claim to raise an implication that a plaintiff is entitled to relief. Courts do not require a complaint to allege any particular protection measure to survive a motion to dismiss, but such complaints should allege some actions to maintain confidentiality.
In Measured Wealth Private Client Group v Foster, a July 2020 decision from the US District Court for the Southern District of Florida, the court denied the law required a trade-secret claim to include a confidentiality agreement to be viable.
In that case, Measured Wealth alleged it distributed policies to keep confidential information private, restricted access through a username and password, and required employees to comply with company policies when accessing the information. The court considered those allegations to be sufficient, despite the lack of a confidentiality agreement.
Courts have also rejected attempts to require confidentiality markings on items with trade secrets, especially where the complaint included other measures showing protection (Southern Field Maintenance & Fabrication v Killough, 2019), or to require allegations of safeguards beyond those implemented for other confidential information (Corporate Synergies Group v Andrews, 2019).
A trade-secret owner, however, must at least allege it has taken measures to protect its secrets, and may later have to provide evidentiary support. Some courts have dismissed trade secret claims where the complaint contains no allegations of treating an alleged trade secret as private and valuable.
“General assertions, or simply telling employees that certain information is important, are probably insufficient.”
Robert Yoches and Michelle Rice, Finnegan
In Temurian v Piccolo (2019), the US District Court for the Southern District of Florida dismissed the plaintiff’s claim for failing to sufficiently allege reasonable protection because the plaintiff conceded it gave the defendants access to the alleged trade secrets without making any provisions to maintain confidentiality.
General assertions, or simply telling employees that certain information is important, are probably insufficient. In Charles Ramsey v Fabtech-NY, 2020 the US District Court for the Northern District of New York dismissed the trade secret claim because the complaint stated that the plaintiff informed its employees the alleged secret methods were important and included sensitive information, but never described the “great pains” it took to protect its alleged secrets.
Defendants have moved for summary judgment on the ground that no facts show a trade-secret owner protected its alleged trade secret. To survive summary judgment, a trade secret owner must respond with specific facts demonstrating the measures it took to protect its secrets to show a factual dispute about the sufficiency of those measures.
Courts have granted summary judgment motions where a trade-secret owner cited no evidence it acted to protect its secrets. In Iskander v Laugh Factory, the US District Court for the Central District of California in March 2020 granted summary judgment against a trade secret counterclaim because the defendants offered no evidence of reasonable steps to maintain confidentiality.
Even if a trade secret owner asserts it has taken measures to protect its secrets, courts will examine the efficacy of those measures, such as determining whether security policies are followed, whether a confidentiality agreement has sufficient coverage, or whether employees received adequate instructions on how to handle confidential information.
In Bison Advisors v Kessler (2016), the US District Court for the District of Minnesota found the mere existence of a confidentiality agreement signed by the defendants to be insufficient because there was no evidence that all personnel accessing the confidential data had signed an agreement.
Other conduct of a trade secret owner may compromise the efficacy of its security measures. In Yellowfin Yachts v Barker Boatworks, which came before the US Court of Appeals for the Eleventh Circuit in 2018, the plaintiff provided evidence it limited employee access to the confidential information and password-protected computers hosting that information.
Unfortunately, the plaintiff also encouraged the defendant, a former employee, to store confidential information on his personal laptop and phone without instructing him to secure that information, and did not ask the defendant to return or delete the information from those devices when he left.
In addition, the defendant refused to sign the employment agreement containing confidentiality provisions, and the plaintiff did not mark its information as confidential. The court affirmed the summary judgment rejecting the plaintiff’s trade secret claim for lack of reasonable protection.
A preliminary injunction can stop disclosure and use of misappropriated confidential information quickly, but when seeking this relief, a trade secret owner must establish a substantial likelihood that it will succeed on the merits, which includes a clear evidentiary showing of reasonable efforts to safeguard an alleged trade secret.
In Revzip v McDonnell, a 2019 case at the US District Court for the Western District of Pennsylvania, the plaintiff did not require employees to sign a confidentiality agreement, or prohibit employees familiar with the alleged secret recipes from leaving for another sandwich shop.
It also posted the recipes in the store, so they were visible to all employees and vendors. The court denied the plaintiff’s request for a preliminary injunction because the record lacked evidence showing it took reasonable steps to keep the recipes secret.
In 2019’s Abrasic 90 v Weldcote Metals decision, the US District Court for the Northern District of Illinois denied the plaintiff’s request for a preliminary injunction because of its “almost total failure to adopt even fundamental and routine safeguards” for its alleged trade secret.
On the other hand, in TGG Management v Petraglia (2020), the plaintiff provided evidence to the US District Court for the District of Southern California that it allowed only certain employees access to the confidential information, and encrypted its computers.
The plaintiff also required its employees to agree in writing to maintain the information in confidence, and provided files to clients in a PDF format after removing the confidential information. The court found these measures reasonable and granted the plaintiff’s request for an injunction.
- 30%: the increase in trade secrets cases since the enactment of the Defend Trade Secrets Act of 2016
- 14%: the percentage of trade secrets cases dismissed by the courts on the pleadings or through summary judgment, since the enactment of the Defend Trade Secrets Act of 2016
When litigating “reasonableness”, a trade secret owner should be mindful of presenting evidence demonstrating its security measures, even at the pleading stage. General assertions without factual support may not survive court scrutiny.
“Reasonableness” depends in the facts of each case, but common indicators are confidentiality agreements, control of access to the secrets by employees, and restrictions imposed on non-employees.
The measures cannot be superficial. They must provide actual effective protection. Not all confidentiality agreements protect secrets. Not all access controls restrict employees’ access, and not all restrictions on non-employees are enforced.
What matters to courts is the reality of the protection, not the trappings.
Companies should document their security measures to ensure they are followed and provide proof of actual use. In addition to keeping copies of employment and confidentiality agreements, companies should document trainings and instructions they provide to employees, keep logs showing who took confidential information outside the company and when, and mark confidential information appropriately.
These measures will reduce unintentional breaches and increase the chance of prevailing in court if there has been a breach.
The wrong time to worry about protecting trade secrets is after the fact. The time to worry is now.
Robert Yoches is a partner at Finnegan. He can be contacted at: email@example.com
Michelle Rice is an associate at Finnegan. She can be contacted at: firstname.lastname@example.org
Images (from top): shutterstock.com / tugol, B-D-S Piotr Marcinski