Protect Your Company’s Trade Secrets

Intellectual Property (“IP”) is a general term used to describe diverse categories of intangible personal property that are subject to ownership and other legal rights under state and federal laws in the United States and most other jurisdictions throughout the world. These protections include trade secrets, patents, copyrights, mask works, and trademarks. (Learn more about when to use trade secret protection, patent protection, or both).

Trade secrets protect certain types of confidential information and know-how. This form of IP protection can provide the owner of such information with the most long lasting legal protections for intangible personal property available under the various legal regimes so long as the property meets the definition of a trade secret and the owner takes the necessary steps to protect its secrecy.

Trade secrets are protected in the United States at the federal level under the Economic Espionage Act, which was enacted in 1996 and substantially amended in May 2016 by the Defend Trade Secrets Act of 2016 (“DTSA”). At the state level, trade secrets are protected by state trade secret statutes and the common law. Until enactment of the DTSA, private enforcement of trade secrets was governed almost exclusively by state law. The DTSA supplements but does not preempt state trade secrets law. It has resulted in a substantial increase in trade secret cases being filed in federal district courts rather than state courts.

Except for New York, all states and the District of Columbia and U.S. Virgin Islands, have adopted a version of the Uniform Trade Secrets Act (“UTSA”). In most instances, states have adopted this model legislation with little or no changes.

California’s version of the UTSA is considerably different than the UTSA created by the National Conference of Commissioners on Uniform State Laws. In general, California’s UTSA provides broader protections for trade secrets, provides enhanced damages when misappropriation is proven, and allows for recovery of additional costs when a plaintiff brings a successful lawsuit to protect its trade secret rights. Importantly, California law does not recognize the inevitable disclosure doctrine. It requires a plaintiff to describe the trade secrets at issue in the case with enough specificity to allow the defendants to know what they’re defending against before discovery can begin.

Under both federal and state law, trade secret protections apply broadly to business, financial, and technical information – such as client lists, marketing plans, pricing and discount structures, production processes, chemical formulas, and software source code – that generally meets the following criteria:

• The information is not generally known or ascertainable outside of the owner’s organization and control.
• The owner derives independent economic value or business advantage from the information not being generally known.
• The owner makes reasonable efforts to preserve its secrecy.

A company may also seek to protect its data or databases as trade secrets. Certain trade secrets may have independent protection under copyright laws or can be the subject matter of patent applications. For example, computer source code, which can be protected as a trade secret, may also be protected by copyright and can embody a patentable invention. However, trade secret protection may be lost if a deposit and public disclosure of source code are made in connection with registration of the copyright in the source code and will be lost if a patent is issued on the software program or if the patent application is published. So before you consider registering trade secret information with the U.S. Copyright Office or seeking patent protection for that information with the U.S. Patent Office it’s important to understand your business objectives and consult with a knowledgeable attorney to ensure you’re taking the right steps to accomplish them.

No official registration procedure exists under federal or state law to protect your trade secrets. Trade secrets rights are secured and maintained solely by the owner making reasonable efforts to preserve the secrecy of the information:

• Within the owner’s organization, including employees and independent contractors.
• Among selected third parties that have a need to use or review the information, such as customers, suppliers, lenders, joint venturers and merger partners, and prospective acquirers.

This is typically accomplished by applying appropriate security measures at the owner’s facilities and computer networks, and through the use of written confidentiality agreements. Any number of confidentiality agreements can be used depending upon the context in which they are needed, including general commercial transactions, employer-employee relationships, merger and acquisition transactions, and finance and lending transactions.

No legal notice must be attached to trade secrets. It is advisable, however, to mark documents in whatever tangible or intangible format they appear as “secret” or “confidential,” both to demonstrate the owner’s efforts to preserve secrecy and to discourage misappropriation by giving actual notice.

Title in trade secrets can be transferred for value. An assignment of trade secrets takes the form of an agreement, preferably in writing, that obligates the assignor to disclose the trade secrets to the assignee, and to not use the trade secrets or disclose them to any other party after the transfer of ownership to the assignee. Trade secrets can also be used as collateral for a loan by granting a security interest in the trade secrets owned by the borrower to the lender. (Learn more about conducting effective IP due diligence).

Owners of a trade secret can bring claims for misappropriation of the trade secret to protect the property right and recover damages for the theft. Such misappropriation can occur, for example, by current or former employees’ misuse or improper disclosure of the information, physical or electronic theft of documents or data, or breach of a valid confidentiality agreement. Trade secret protection generally lasts until the subject matter of the trade secret becomes publicly available or until its owner no longer derives economic value from its secrecy.

The owner of a trade secret has a cause of action for misappropriation under both federal and state law based on facts that show the following:

• The defendant acquired the trade secret with knowledge or reason to know that it was acquired by improper means, which includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, and espionage through electronic or other means. In California, improper means does not include reverse engineering or independent derivation. The UTSA does not address reverse engineering or independent derivation so it’s important to check your own state’s trade secret act on this issue.
• The defendant disclosed or used the trade secret without the owner’s consent and, at the time of disclosure or use, knew or had reason to know the trade secret was derived from another person who used improper means to acquire it, acquired the trade secret under circumstances giving rise to a duty to maintain its secrecy or limit its use, or derived the information from another person who owed a duty to maintain its secrecy or limit its use.
• The defendant disclosed or used the trade secret without the owner’s consent and, before a material change of the defendant’s position, knew or had reason to know that the information was a trade secret, and his knowledge of the trade secret was acquired by accident or mistake.

Several defenses can be asserted in an action for misappropriation. The information was in the public domain (that is, not secret) when disclosed to the defendant. The information was not communicated in confidence or the plaintiff neglected to take reasonable efforts to keep the information confidential. The information was obtained from a third party without the defendant knowing or having reason to know the information was confidential.

Numerous remedies typically are available for misappropriation of trade secrets. They include an injunction against further use or disclosure, monetary damages, and attorneys’ fees for willful and malicious appropriation or a bad faith claim of misappropriation.

Additional resources re: enforcing your trade secrets:

• What to Do When an Employee Steals Company Trade Secrets
• How to Decide if You Should File a Lawsuit Against Your Former Employee for Trade Secret Theft

Trade secrets are often an employer’s most valuable assets. When an employee or former employee misappropriates an employer’s trade secrets, the employer frequently initiates litigation with several goals in mind, including preventing further unauthorized use or disclosure of its trade secrets, recovering the trade secrets, and obtaining damages.

A prompt and thorough investigation is critical to successful trade secrets litigation. One of the first steps is to determine what information among all of the employer’s supposedly confidential business information is truly secret and possesses real value to the company because of its secrecy.

Next, the employer must investigate what, if any, trade secret information the employee may have actually misappropriated. The investigation should consist of an in-depth forensic analysis of the employee’s e-mail accounts, computers (including indicia that USB memory devices have been plugged in), handheld electronic devices, cloud storage accounts, office files, calendar, computer and telephone logs, records of office access (particularly after-hours), and travel and expense records.

The investigation should be performed by an experienced electronic forensic analyst who not only can perform the investigation, but can later act as electronic forensic expert in support of the employer’s claims.

An investigation’s revelation that the employee misappropriated trade secret information is often sufficient to obtain a court order directing the employee to cease all use and disclosure of that information and return it to the employer. This result rests on the evidence or presumption that as a former employee, the defendant has no authorized or legitimate purpose for using or disclosing the employer’s trade secret information, and the employer will be competitively injured by the employee’s or the new employer’s use or disclosure of this information. An employer’s investigation into suspected trade secrets misappropriation also typically includes gathering information about the employee’s new employer and business.

Depending on the circumstances, a cease and desist letter can be a valuable preliminary step to litigation or a less expensive alternative. Such letters typically remind former employees of their contractual and other obligations to the employer, advise them to stop all conduct that violates their obligations, and, if appropriate, demand the return of the information, documents or data of the employer. Depending on the particular situation, an employer may decide to send a copy of the cease and desist letter or a similar letter to the employee’s new employer.

The former employer should investigate and be able to substantiate its allegations of trade secret misappropriation before sending any cease and desist letter because the failure to do so can expose the employer to a tortious interference claim by the employee or the employee’s new employer.

Federal and state laws also impose penalties for criminal trade secret theft. When an employer suspects criminal conduct, it may decide to contact law enforcement to investigate and prosecute trade secret theft, in addition to or instead of sending one or more cease and desist letters. Misappropriating trade secrets is a crime under various federal laws and under California law.

Under federal law, it is illegal to steal a trade secret or knowingly receive stolen trade secrets with the intent to benefit a foreign government or a foreign agent, misappropriate trade secrets related to a product or service used or intended for use in interstate or foreign commerce, transport in interstate or foreign commerce stolen property worth $5,000 or more, and use the mail or a wire transmission to steal trade secrets as part of a scheme to defraud.

Under California’s Penal Code, a person commits theft of a trade secret if he intends to deprive the owner of it or takes the trade secret for his own use. He also commits trade secret theft if he steals or uses it without permission, fraudulently takes the trade secret when it is entrusted to him, unlawfully obtains and makes a copy of it, or breaches a relationship of trust by making a copy of the trade secret.

Contacting law enforcement to report trade secret theft has its advantages. The mere threat of criminal prosecution and penalties may encourage employees to explain what happened. Prosecutions are public, and publicity may deter other employees who are contemplating similar acts. If an employee has misappropriated trade secrets and left the country, law enforcement can obtain evidence abroad and possibly hold foreign conspirators accountable for their involvement.

The main drawback of involving law enforcement is the potential for disclosing the employer’s trade secrets in connection with the prosecution. Law enforcement officials and judges typically try to avoid disclosing sensitive, confidential, or trade secret information unnecessarily. The risk still exists, however, that the employer’s trade secrets may be disclosed by overzealous prosecutors if it helps in them win the case.

Forum Selection and Choice of Law

Unless the employee and employer have signed an agreement with an enforceable and exclusive forum selection provision, the employer, as plaintiff, will decide where to file suit. Depending on the particular facts, an employer may have the option of filing a complaint in federal or state court. If an employer has evidence that an employee misappropriated or used its trade secrets, it may opt to bring a claim under the DTSA in federal court and join state law claims in the federal action under the court’s supplemental jurisdiction. Typically, the facts of each particular case will help the employer decide what forum is the best option.

Note that employers with businesses or employees in California are limited in their ability to impose forum selection clauses that require the parties to litigate outside of California or apply a law other than the law of California. For all contracts entered into or amended after January 1, 2017, involving any person who primarily resides or works in California, choice of law and choice of venue contract provisions are prohibited if they apply another state’s law or require adjudication in another state as a condition of employment, unless the employee was represented by counsel during the contract negotiations. Massachusetts has a similar law.

In the absence of a choice of law provision, the court will decide which state’s trade secrets law should be applied if the employer and employee are located in different states. Depending on the states and law involved, in seeking a desired venue an employer can argue the employee violated the trade secrets law of the state(s) where (1) the employer electronically stored the secrets, (2) the employee accessed the employer’s trade secrets to steal them, or (3) the employee used the employer’s secrets to harm it.

Deciding Whether to Include the New Employer in the Lawsuit

Before filing a lawsuit, an employer must decide which parties to name. In certain instances, an employer may be inclined to include the employee’s new employer. The old employer should consider naming the new employer if there is evidence that: (1) the former employee was acting under the new employer’s direction when he stole the former employer’s trade secrets; (2) the new employer has agreed to indemnify the former employee for any liability arising from the theft, or (3) the new employer gained a competitive benefit by the former employee’s theft of trade secrets.

Deciding Whether to Include Third Parties in the Lawsuit

In addition to naming former employees and their new employers, employers should consider naming any third parties. Those to potentially include are ones who procured or assisted in stealing the trade secrets or received the trade secrets. Naming third-party defendants in the lawsuit can help ensure the return of all copies or derivatives of the trade secrets. Employers may find it easier to obtain discovery from a party than seeking the information from a non-party through the subpoena process.

Plaintiff’s Common Causes of Action

The most common claim brought against former employees who use or disclose an employers’ confidential or proprietary information is trade secret misappropriation. Except for New York, the trade secret statutes in all states and the District of Columbia authorize this claim. The DTSA creates a private right of action for civil trade secret misappropriation under federal law. The statute supplements but does not preempt state law remedies for trade secret misappropriation. The DTSA applies to misappropriation occurring on or after the law’s May 11, 2016 effective date.

Under the DTSA, an owner of a trade secret that is misappropriated may bring a civil action if the trade secret is related to a product that is used in or intended for use in interstate or foreign commerce. The DTSA claim can be combined with any applicable state law claims under statutes or common law. A civil action under the DTSA is filed in a U.S. district court that can exercise personal jurisdiction over the defendants, wherever they may be located. A DTSA action must be brought no later than three years after the date the misappropriation was discovered or should have been discovered with reasonable diligence. As discussed below, the remedies under the DTSA are similar to those under states’ UTSA.

Employers investigating suspected trade secret misappropriation should consider several alternative causes of action that may apply. You may be able to obtain recover damages you’ve suffered by pleading alternative legal theories such as breach of contract, common law torts or violations of federal or state Computer Fraud and Abuse statutes. Because the burden of proof and available relief are not the same under each claim, you may want to plead each claim to maximize your chances of recovery. Additional claims may be available if an employer involves law enforcement, who can pursue claims of conspiracy, aiding and abetting, criminal trade secret theft, and mail or wire fraud.

Obtaining Relief for Trade Secret Misappropriation

Depending on the facts of the case, the jurisdiction, and the claims alleged, your complaint should include a prayer for relief seeking several different types of relief. First, seek injunctive relief in the form of a temporary restraining order and preliminary or permanent injunction. Second, seek a seizure order under the DTSA to seize all of the information stolen from company by your former employees. Third, request monetary damages, comprised of any combination of lost profits, the wrongdoer’s unjust enrichment caused by the misappropriation or a reasonable royalty, where damages are difficult to calculate. You should also request an award of pre and post-judgment interest for all compensatory damages given to you by the jury. Fourth, if you have evidence the misappropriation was willful and intentional you should request punitive damages under the DTSA or applicable state law. Finally, file a post-trial motion to recover your attorneys’ fees and costs of suit against the defendants if they are found liable for misappropriation.

Unlike the state trade secret statutes, the DTSA also permits the court to issue an ex parte seizure order. The DTSA includes protections designed to prevent abuse of this powerful remedy and only allows an ex parte seizure order under extraordinary circumstances. A party seeking such an order must demonstrate as a threshold matter that an order granting injunctive relief under Federal Rule of Civil Procedure 65 would be futile. The courts have set a high bar for making this showing.

When considering initiating litigation, employers should consider the possibility that their former employee and the employee’s new employer may file counterclaims. The universe of potential counterclaims is limited only by the imagination of former employees and their new employers. However, counterclaims can often include claims for unpaid wages or commissions, discrimination, retaliation, and, under the federal DTSA, damages caused by wrongful seizure of property. Cross-complainants may also assert tortious interference claims arising from cease and desist letters. To minimize the risk of a tortious interference claim, employers should avoid sending a cease and desist letter if the allegations of trade secret misappropriation may be found to be baseless. 

Companies that file a lawsuit to redress the theft of their trade secrets should take appropriate steps to prevent their trade secrets from being publicly exposed. The UTSA and many states’ trade secrets laws specifically authorize courts to take appropriate steps to protect alleged trade secrets. These protective measures frequently include issuing a protective order in connection with discovery proceedings, holding in camera hearings to determine the propriety of the alleged trade secrets, sealing the records of the lawsuit, and ordering the persons involved in the litigation not to disclose an alleged trade secret without prior court approval.

Typically, the plaintiff will seek to protect its trade secrets by requesting that the court enter a protective order. In general, courts are familiar with and typically willing to enter protective orders in trade secrets cases. Because they simply provide procedural protections and do not substantively affect the facts in dispute, protective orders are commonly submitted with the agreement of all parties. Many courts, however, have local rules that govern the drafting of protective orders. Therefore, counsel should review the local rules before requesting that the court enter a protective order.

The DTSA codifies the obligation to seal trade secrets in court proceedings, a benefit which may not be as readily available in state court. Where the court orders the civil seizure of property under the DTSA, the court may take appropriate action to protect the seized property from disclosure, protect persons against whom seizure is ordered from publicity, maintain the confidentiality of seized materials unrelated to the trade secret information that was ordered seized.

Additional resources:

• How to Resolve a Trade Secret Lawsuit by Entering a Standstill Agreement
• How to Manage Trade Secret Litigation Costs