In prior posts we discussed how your company should respond when it first suspects it is the victim of trade secret misappropriation, and the strategic decisions it must make before filing a trade secret misappropriation lawsuit. Once you decide to file a lawsuit your focus shifts to the merits of the action: What does your company actually have to prove to establish trade secret misappropriation?
Trade secret misappropriation is the main legal claim companies use when a former employee, competitor, contractor, or other party improperly acquires, discloses, or uses protected business information. But a company does not establish that claim simply by showing that someone took confidential information from the business. It must first show that the information qualifies as a trade secret and then connect the defendant’s conduct to legally recognized misappropriation.
What Must Your Company Prove?
Although the precise formulation varies by jurisdiction, a trade secret misappropriation claim generally requires proof of two central points. First, the information at issue must qualify for legal protection as a trade secret. Second, the defendant must have acquired, disclosed, or used that trade secret through conduct the law recognizes as misappropriation.
If the company seeks damages, it must also establish a legally recognized basis for the damages, typically through expert testimony. Injunctive relief may also be available when the principal concern is stopping actual or threatened misuse and disclosure of the trade secret. In fact, a court’s decision to issue a temporary restraining order or permanent injunction prohibiting the further disclosure or use of the trade secret may completely alter the course of the lawsuit and bring it to swift end.
We will address those remedies in greater detail in future blogs.
What Information Qualifies as a Trade Secret?
Federal and state trade secret laws protect a broad range of business information, including formulas, methods, processes, software, customer information, pricing data, business strategies, technical information, and data compilations. The category of information, however, is not what makes it a trade secret.
Under the federal Defend Trade Secrets Act (DTSA), protected information generally must derive actual or potential independent economic value from not being generally known or readily ascertainable through proper means, and the owner must take reasonable measures to keep it secret. State laws based on the Uniform Trade Secrets Act (UTSA) apply similar rules.
California follows this framework through its Uniform Trade Secrets Act (CUTSA). Maryland and Washington D.C. also have statutory trade secret statutes based substantially on the model UTSA. The governing law matters. This is particularly true in multi-state disputes. Regardless of the statute, the central questions are often similar: Does the information have actual or potential independent economic value to your company as a result of being secret? Did the company take reasonable steps under the circumstances to maintain the secrecy of the information?
We’ve addressed the definition and protection of trade secrets in greater detail in prior blogs on trade secret protection strategies and the DTSA. In a misappropriation case, those concepts become elements your company must be prepared to prove to win its case.
Confidential Information May Not Be a Trade Secret
Information that is confidential is not necessarily a trade secret. Information that is publicly available, readily obtainable from legitimate sources, generally known within an industry, or easily recreated through lawful means fall outside the statutory definition of a trade secret even if your company considers it valuable.
A customer database helps illustrate the difference between a trade secret protected by statute and confidential information that is not. Though the latter may be protected by a contract. A list of customer names assembled from public sources will be difficult to protect as a trade secret because it provides the same value to your company as it provides the wider world. A proprietary database created by your company that contains the non-public names of your customers, key contacts, purchasing histories, negotiated pricing, renewal dates, each customer’s specific product needs and preferences, and internally developed sales information is the type of business intelligence that qualifies for trade secret protection.
If your company has developed information that qualifies as a trade secret, it must next show that it took reasonable measures to preserve the secrecy of that information. Relevant evidence to prove this point may include confidentiality agreements, access controls, password protection, role-based permissions, secure information systems, internal company policies, vendor restrictions, and procedures for recovering all such information from departing employees.
The law does not generally require perfect security. The key question is whether the company consistently used reasonable measures under the circumstances to protect the information from disclosure to those persons who have no legal rights to see it, use it or further disclose it.
Identifying the Trade Secret With Precision
Proving your company’s claims in a trade secret case requires you to move far beyond assigning broad labels to your information, like “customer information,” “pricing information,” or “proprietary processes.”
When you are in front of a court, the trade secrets you seek to protect generally must be identified with enough precision to distinguish them from public information, common industry knowledge, or an employee’s general knowledge and experience gained while working for your company. This is especially important in California, where certain provisions of the Civil Discovery Act (C.C.P. section 2019.210) require a plaintiff to identify the alleged trade secrets with reasonable particularity before commencing discovery relating to any of the claims you have brought in the case.
This procedural requirement, which is unique to California, reflects a larger issue that may arise in a trade secret case. If your company cannot clearly identify the information that has been stolen so that the defendants and court know what you’re talking about, you may never get the chance to prove the defendants stole the information.
What Conduct Constitutes Misappropriation?
Once your company establishes that a trade secret exists, it must prove the defendant misappropriated it through improper acquisition, disclosure or use. Under the federal DTSA and similar state laws, the analysis often turns on how the information was obtained and what the defendant knew, or had reason to know, about the circumstances of the acquisition, use or further disclosure.
Improper means may include theft, misrepresentation, breach or inducement of a duty to maintain secrecy, or electronic espionage. By contrast, lawful reverse engineering and independent development generally do not constitute misappropriation. This distinction is particularly important with former employees, who remain free to use the general skills, experience, and knowledge developed during their careers, including at your company.
The analysis changes when evidence shows that an employee copied restricted files, downloaded confidential data before leaving, forwarded documents to a personal account, transferred protected information to a new employer, or used the trade secrets to accelerate a competing business. Emails, access logs, cloud activity, file-transfer records, device data, and communications with a new employer is important information that collectively may help you establish how the information was unlawfully acquired, used or disclosed.
Acquisition, Disclosure, and Use Can Present Different Issues
Not every trade secret case involves the same misconduct. In some disputes the principal issue is improper acquisition. In others the key question is whether a defendant disclosed the trade secret to a competitor, customer, vendor or new employer. Still other cases center on use, such as incorporating protected pricing, technical information, source code, or customer intelligence into a competing product or strategy.
Connecting Misappropriation to Your Company’s Damages
Trade secret misappropriation can cause harm well beyond the loss of a file or database. Your company may lose customers, pricing advantages, market opportunities, development lead time, or the benefit of years of your company’s investments in technology and knowledge. A competitor may gain an unfair shortcut by obtaining information from you that it otherwise would have had to develop independently.
Depending on the facts and applicable law, a successful plaintiff can seek recover damages based on actual loss, unjust enrichment, or a reasonable royalty. Willful and malicious conduct by the defendants may support the recovery of punitive damages and attorneys’ fees and costs of suit. The key point to remember is to recover damages your company should be prepared to connect the alleged misappropriation to a real competitive or economic consequence.
In many cases, stopping the continued use or disclosure of the trade secret information may be far more important than recovering damages because the trade secrets are so valuable.
About Finkel Law Group
Finkel Law Group P.C., with offices in San Francisco, Oakland, and Washington D.C., has over 30 years of experience helping clients protect, license and enforce their trade secrets. When you need intelligent, insightful, conscientious, and cost-effective legal counsel to help your company protect or enforce its trade secrets, please contact us at (415) 252-9600, (510) 344-6601, or (771) 202-8801 to speak with one of our attorneys about your matter.
