Articles Posted in Trade Secrets

The federal Defend Trade Secrets Act, at 18 U.S.C. sections 1829(3) and (5), broadly defines trade secret misappropriation to include cases of improper use, disclosure, or acquisition of a trade secret.  Under the federal trade secret statute, at 18 U.S.C. section 1839(3)(B), states that trade secret information “derives [its] independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by improper means by, another person who can obtain economic value from [that information’s] disclosure or use[.]”  The United States Court of Appeals for the Third Circuit, in Oakwood Laboratories LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021), explained that “[t]he 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.”  Similarly, in Storagecraft Tech. Corp v. Kirby, 744 F.3d 1183 (10th Cir. 2014), the federal appellate court discussed damage remedies in a trade secret misappropriation decision and stated in pertinent part: “When someone steals a trade secret an discloses it to a competitor he effectively assumes for himself an unrestricted license in the trade secret.  And that bears its cost.  After all, what value does a trade secret hold when it’s no longer a secret from the trade?”  Federal and state appellate decisions frequently rely on the legal principles that exclusive use of a trade secret confers economic value and misappropriation of the trade secret will destroy the competitive advantage of the trade secret owner.  In this regard, precedent from the United States Supreme Court, in Ruckelhaus v. Monsanto Co., 467 U.S. 986 ( 1984), explained that, “[t]he economic value of that property right lies in the competitive advantage over others that [the plaintiff] enjoys by virtue of its exclusive access to the data, and disclosure or use by others of the data would destroy that competitive edge.”  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

The Defend Trade Secrets Act provides a variety of remedies, at 18 U.S.C. section 1836(b)(3)(B), including damages for actual loss, unjust enrichment caused by the misappropriation, or damages measured by the imposition of liability for a reasonably royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.  The Supreme Court’s Ruckelhaus precedent explained that, “[w]ith respect to a trade secret, the right to exclude others is central to the very definition of the property interest.  Once the data that constitute a trade secret are disclosed to others, or others are allowed to use those data, the holder of the trade secret has lost his property interest in the data.”

The Defend Trade Secrets Act provides legal and equitable remedies beyond only the plaintiff trade secret owner’s “loss of exclusivity” in the trade secret.  The federal statute and case law recognize that there can be other, if not fully realized, injuries.  For example, the Oakwood Laboratories LLC decision stated in pertinent part: “Aurobindo’s rapid market entry into a sector of the pharmaceutical industry with few competitors may well deprive Oakwood of market share.  Utilizing Oakwood’s trade secrets provides Aurobindo a jumpstart in an industry it would otherwise not have competitively joined for another decade.  Aurobindo will avoid substantial research and development costs that Oakwood has already invested in its own product development.  Those are competitive harms recognized in” the federal statute.   Because the federal statute followed many years after the state-law enacted Uniform Trade Secrets Act (which has been adopted my most states in the U.S.) federal courts often find persuasive state law on the issue of damages.  For example, in Rohm & Haas Co. v. Adco Chem. Co., 689 F.2d 424 (3d Cir. 1982), the federal appellate court explained that: “New Jersey law states that a company misappropriating a trade secret may lose the benefits of future independent experiments because of the difficulty of determining how much of the improvement is attributable to those independent efforts and how much to the information gained by the wrongdoing…In trying to segregate honest efforts and ill-acquired knowledge, [e]very doubt must be resolved against the parties to a fraudulent act.”  Similarly, the United States Court of Appeals for the Fifth Circuit in Bohnsack. v. Varco, L.P., 668 F.3d 262 (5th Cir. 2012), interpreted state trade secret law and explained that: “Damages in misappropriation cases can take several forms: the value that a reasonably prudent investor would have paid for the trade secret; the development costs the defendant avoided incurring through the misappropriation; and a reasonable royalty.  This variety of approaches demonstrates the ‘flexible’ approach used to calculate damages for claims of misappropriation of trade secrets.”

Proving the existence of a trade secret in a court of law is no easy feat. The trade secret’s proponent has the burden of establishing the specific information he or she seeks to protect. Am. Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407 (11th Cir. 1998) (“In a trade secret action, the plaintiff bears the burden of demonstrating both that the specific information it seeks to protect is secret and that it has taken reasonable steps to protect this secrecy.”). The proponent must prove it has a “a formula, pattern, compilation, program, device, method, technique, or process that” derives independent economic value from not being generally known to other persons and is the subject of reasonable secrecy efforts. Fla. Stat. § 688.002. In this article, we explore circumstances where the trade secret proponent has, and has not, met its burden of proof. Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

Premier Lab Supply, Inc. v. Chemplex Indus., Inc., 10 So. 3d 202 (Fla. 4th DCA 2009), is an example of the trade secret proponent satisfying its burden of proof. Id. (“Based on his testimony concerning the unique and specialized nature of the machine’s design, the jury could have found that the design of Chemplex’s machine derived an economic benefit from not being generally known to or readily ascertainable by others.”). In Premier Lab Supply, Inc., the proponent presented evidence that the trade secret machine was unique and not readily ascertainable by others because it was invented by the proponent and his father. Id. The machine was not readily ascertainable by others because it used intricate calculations and a timing chain with a counter. Id. The proponent demonstrated the value of the machine by explaining the difficulty he faced in experimenting with the precise measurements and ratios to obtain the desired result. Id. The proponent further explained that competitor machines are inferior because users cannot obtain desired measurements. Id.

Contrast Premier Lab Supply, Inc. with RX Sols., Inc. v. Express Pharmacy Services, Inc., 746 So. 2d 475 (Fla. 2d DCA 1999) and Yellowfin Yachts, Inc. v. Barker Boatworks, LLC, 898 F.3d 1279 (11th Cir. 2018). In RX Sols., Inc., the plaintiff claimed it developed a cardless online claims system. RX Sols., Inc., 746 So. 2d 475. However, the evidence demonstrated the system was not unique to the plaintiff because the program was developed by a South Carolina company and incorporated within the plaintiff’s online system. Id. In Yellowfin Yachts, Inc., the plaintiff claimed its customer list was a trade secret. Yellowfin Yachts, Inc., 898 F.3d 1279. The Court rejected this claim for two reasons. First, the central components of the customer list were publicly available because the customers were boaters required by statute to register their vessels. Id. The state’s Public Records Act required the state to openly provide registration information such as the registrants’ name and address to those who inquired. Id. A person could then use the Internet or White Pages to find the remainder of the customers’ contact information. Id. Second, the customer information was not confidential because the plaintiff failed to protect it. Id. The plaintiff encouraged its employees to save the customer information to their personal laptops and smartphones thereby destroying any potential for secrecy. Id.

Under Florida law, a trade secret means information not commonly known by or available to the public, which derives economic value from not being generally known to or ascertainable by proper means by others who can obtain economic value from the information, and that was subject to reasonable efforts to maintain its secrecy.  Florida’s trade secret statute, at Florida Statutes section 688.002(2), states that a defendant “misappropriates” a trade secret when, among other things, it discloses or uses “a trade secret of another without express or implied consent” knowing at the time of the disclosure or use that the trade secret was “[a]cquired under circumstances giving rise to maintain secrecy or limit its use.”  To prove the trade secret was acquired in a manner that imposed a duty of secrecy on the receiving party, businesses often use confidentiality or non-disclosure agreements to clarify, in writing, the obligations of the receiving party.  The United States Court of Appeals for the Eleventh Circuit, in Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284 (11th Cir. 2003), explained that a non-disclosure agreement can be the basis for imposing a duty not to disclose a trade secret.  The Penalty Kick decision explained that “a defendant is liable for misappropriation of a trade secret only if the plaintiff can show that the defendant (1) disclosed information that enabled a third party to learn the trade secret or (2) used a ‘substantial portion’ of the plaintiff’s trade secret to create an improvement or modification that is ‘substantially derived’ from the plaintiff’s trade secret.”  By contrast, if the defendant independently created the allegedly misappropriated item with only “slight” contribution from the plaintiff’s trade secret, then the defendant is not liable for misappropriation.  Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The Restatement (Third) of Unfair Competition, section 40, at Comment c (1995), summarizes a well-established body of law concerning a defendant’s liability for trade secret misappropriation based on substantial derivation from the original trade secret.  The Restatement explains in pertinent part: “As a general matter, 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’…. Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, [and] relying on the trade secret to assist or accelerate research or development … all constitute ‘use.’  The unauthorized use need not extend to every aspect or feature of the trade secret; use of any substantial portion of the secret is sufficient to subject the actor to liability…. [A]n actor is liable for using the trade secret with independently created improvements or modifications if the result is substantially derived from the trade secret…. However, if the contribution made by the trade secret is so slight that the actor’s product or process can be said to derive from other sources of information or from independent creation, the trade secret has not been “used” for purposes of imposing liability under the rules.”

Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.

Federal courts distinguish between “direct” and “indirect” claims of trade secret misappropriation.  The United States District Court for the Northern District of California, in Heller v. Cepia, L.L.C., 2012 WL 13572 (N.D. Cal. Jan. 4, 2012), explained that the difference depends on whether a plaintiff alleges the defendant obtained the trade secrets directly from the plaintiff or indirectly “from someone other than plaintiff.”  Proving a claim of direct trade secret misappropriation is generally more simple than one asserting indirect misappropriation.  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm  Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

To state a claim for direct trade secret misappropriation under the Defend Trade Secrets Act, “a plaintiff must allege (1) that it is the owner of a trade secret; (2) that the defendant misappropriated the trade secret; and (3) that it was damaged by the defendant’s actions.”  Alta Devices, Inc. v. LG Elecs., Inc., 343 F.Supp.3d 868 (N.D. Cal. 2018).

By contrast, the United States District Court for the Northern District of California, in Cal. Police Activities League v. Cal. Police Youth Charities, Inc., 2009 WL 537091 (N.D. Cal. Mar. 3, 2009), explained that claims of indirect trade secret misappropriation must set forth facts showing that a defendant: “(a) knew or had reason to know before the use or disclosure that the information was a trade secret and knew or had reason to know that the disclosing party had acquired it through improper means or was breaching a duty of confidentiality by disclosing it; or (b) knew or had reason to know it was a trade secret and that the disclosure was a mistake.”  The knowledge element places a much higher burden on the plaintiff.

A trade secret plaintiff may have to divulge its claimed trade secret with reasonable particularity to the defendant before engaging in discovery because a growing number of courts require trade secret plaintiffs to do so. This rule places the plaintiff in a “Catch-22.” See DeRubeis v. Witten Techs., Inc., 244 F.R.D. 676 (N.D. Ga. 2007) (acknowledging that the plaintiff may be placed in a “Catch-22”, but nonetheless requiring the plaintiff to disclose its trade secrets with reasonable particularity). If the plaintiff limits disclosure to the portion of the trade secret it believes the defendant misappropriated and later discovers the defendant misappropriated the entire trade secret, the plaintiff may be precluded from fully recovering for the defendant’s misappropriation. Conversely, if the plaintiff discloses its entire trade secret and later discovers the defendant only misappropriated limited portions thereof, the plaintiff will have voluntarily disclosed its entire secret unnecessarily to an adverse party. Both situations are problematic.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

Parties are normally free to engage in discovery once the complaint is served or after conducting a preliminary discovery conference. See, e.g., Fla. R. Civ. P. 1.280 (e) (The “fact that a party is conducting discovery,… shall not delay any other party’s discovery.”); Fed. R. Civ. P. 26(a)(1)(C) (“A party must make the initial disclosures at or within 14 days after the parties’ Rule 26(f) conference….”). This is generally true even when the defendant moves to stay discovery due to a pending motion to dismiss the complaint. See Montoya v. PNC Bank, N.A., 14-20474-CIV, 2014 WL 2807617 (S.D. Fla. June 20, 2014) (“[D]iscovery stay motions are generally denied except where a specific showing of prejudice or burdensomeness is made or where a statute dictates that a stay is appropriate or mandatory.”). However, a growing number of courts throughout the United States require trade secret plaintiffs to disclose their trade secrets with reasonable particularity before discovery commences to prevent meritless claims. See, e.g., Kalencom Corp. v. Shulman, 2018 WL 1806037 (E.D. La. Apr. 17, 2018) (“[C]ourts routinely require ‘pre-discovery identification’ of [a plaintiff’s] trade secrets to discourage meritless trade secrets claims and abusive discovery into the trade secrets of a competitor.”). This rule is gaining consensus throughout many jurisdictions. See StoneEagle Servs., Inc. v. Valentine, 2013 WL 9554563 (N.D. Tex. June 5, 2013) (citing several cases) (The “growing consensus seems to be in favor of requiring” the plaintiffs “to identify, with reasonable particularity, the alleged trade secrets at issue.”).

Uniformity on the issue does not exist. In Florida for example, state courts tend to agree with the modern trend. See AAR Mfg., Inc. v. Matrix Composites, Inc., 98 So. 3d 186 (Fla. 5th DCA 2012) (A “plaintiff is required to identify with reasonable particularity the trade secrets at issue before proceeding with discovery.”). But Florida federal courts take a different approach. A Florida federal trade secret plaintiff is only required to (1) plausibly show a trade secret was involved and (2) notify the defendant about the material constituting the trade secret at issue. DynCorp Int’l v. AAR Airlift Group, Inc., 664 Fed. Appx. 844 (11th Cir. 2016) (At “the dismissal stage in federal court, the plaintiff need only allege sufficient facts to plausibly show a trade secret was involved and to give the defendant notice of the material it claims constituted a trade secret.”). Therefore, courts within the same state can take different positions on this issue.

Florida law has a statutory privilege concerning disclosure of trade secrets in a lawsuit.  Florida Statutes Section 90.506 states in pertinent part: “A person has a privilege to refuse to disclose, and to prevent other persons from disclosing, a trade secret owned by that person if the allowance of the privilege will not conceal fraud or otherwise work injustice. When the court directs disclosure, it shall take the protective measures that the interests of the holder of the privilege, the interests of the parties, and the furtherance of justice require. The privilege may be claimed by the person or the person’s agent or employee.”  In American Expres Travel Related Svcs., Inc. v. Cruz, 761 So.2d 1206 (Fla. 4th DCA 2000), Florida’s Fourth District Court of Appeal explained that “[w]hen trade secret privilege is asserted as the basis for resisting production, the trial court must determine whether the requested production constitutes a trade secret; if so, the court must require the party seeking production to show reasonable necessity for the requested materials.  The burden is on the party resisting discovery to show “good cause” for protecting or limiting discovery by demonstrating that the information sought is a trade secret or confidential business information and that disclosure may be harmful…If production is then ordered, the court must set forth its findings.”  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm  Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

This determination will usually require that the trial court conduct an in camera inspection, i.e., the trial Judge reviews the subject documents to determine whether they contain trade secrets, and sometimes an evidentiary hearing.  The issue of in camera review is an important procedural safeguard.  A great deal of appellate litigation has occurred when trial courts did not review the allegedly “trade secret” documents before allowing the opposing party to review them.  For example, in Salick Health Care, Inc. v. Spunberg, 722 So.2d 944 (Fla. 4th DCA 1998), the appellate court determined that the trial court departed from the essential requirements of law when it compelled production of documents alleged to be proprietary and confidential trade secret information, without first conducting an in camera hearing and inspection and making specific findings of fact concerning the trade secret objections.  Trade secret litigation often involves highly technical information in the context of head-to-head competitors, making it essential for the trial court to conduct either in camera review or hold an evidentiary.  In Beck v. Dumas, 709 So.2d 501 (Fla. 4th DCA 1998), the appellate court addressed whether certiorari review should lie when a lower court, upon a motion to compel production, required production of a source code, design documentation, and other technical information alleged to be computer trade secrets, without first conducting an in camera inspection or evidentiary hearing.  The Beck decision explained: “The question before us is whether the court departed from the essential requirements of law by ordering [Petitioner] to disclose its trade secret without first conducting either an in camera inspection or an evidentiary hearing. We think so, given the sophisticated and highly technical nature of the requested materials. The broad judicial discretion which the trial court enjoys in ruling on discovery matters of this type cannot properly be exercised in a vacuum or on a mere whim. The court needs sufficient insight into the relevant factors which must be weighed before deciding the competing interests of the respective parties. Conceivably, on a matter with which the court is familiar and which is not the subject of a genuine factual dispute, argument of counsel might well suffice. But here the matters were of a highly technical nature, and the court candidly acknowledged its lack of familiarity with the requested materials. Under the circumstances, and given the inherent nature of advocacy, the court needed more than the argument of [Respondent’s]’ counsel that he “needed” the materials upon which to base its decision to override [Petitioner’s] statutory privilege against disclosure.”

The plaintiff in a trade secret misappropriation case must prove it has a trade secret and the defendant misappropriated the trade secret. Humphreys & Associates, Inc. v. Cressman, 2015 WL 12698428 (C.D. Cal. Aug. 31, 2015) (“To succeed on a claim of trade secret misappropriation, the plaintiff must establish that (1) the plaintiff owned a trade secret, (2) the defendant acquired, disclosed, or used the plaintiff’s trade secret through improper means….). Defendants usually misappropriate a trade secret by using the same secret they stole from the plaintiff. See, e.g., WHIC LLC v. NextGen Labs., Inc., 341 F. Supp. 3d 1147 (D. Haw. 2018) (enjoining the defendant because it used the plaintiff’s trade secret customer list to contact the plaintiff’s customers and generate business). However, misappropriation is not limited in this respect. Defendants may misappropriate a trade secret by using the secret to test a product or create a derivative product.  Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

Trade secret statutes typically define misappropriation as disclosure or use of a trade secret without consent. See 18 U.S.C.A. § 1839. But this begs the question – what constitutes use? Mere possession of a trade secret without more probably does not satisfy the use requirement. However, use is not limited to implementing or selling the exact same trade secret stolen from the plaintiff. Derivative uses of the plaintiff’s trade secret can constitute use, and therefore, misappropriation. For example, a defendant that experiments with the plaintiff’s trade secret uses that trade secret even if the experiments do not yield a commercial product. See 02 Micro Intern. Ltd. v. Monolithic Power Sys., Inc., 399 F. Supp. 2d 1064 (N.D. Cal. 2005) (“Based on the California and federal cases presented by the parties, the Court concludes that internal experimentation with trade secret information not resulting in a market product can constitute use.”). Defendants also misappropriate trade secrets when they use a substantial portion of the trade secret even if the defendants independently improved that trade secret. BladeRoom Group Ltd. v. Emerson Elec. Co., 331 F. Supp. 3d 977 (N.D. Cal. 2018), vacated and remanded on other grounds, 11 F.4th 1010 (9th Cir. 2021), and vacated and remanded on other grounds, 20 F.4th 1231 (9th Cir. 2021) (holding that “use of any substantial portion of the secret is sufficient to subject the actor to liability” and an “actor is liable for using the trade secret with independently created improvements or modifications if [they]… derived from the trade secret.”).

Courts broadly interpret use to protect trade secrets and effectuate trade secret law. “If trade secret law were not flexible enough to encompass modified or even new products that are substantially derived from the trade secret of another, the protections that law provides would be hollow indeed.” Dev. Corp. v. Nat’l Chem. Co., Inc., 87 F.3d 937, 944 (7th Cir. 1996). In fact, a strong impetus for enjoining defendants in trade secret actions results from the desire to prevent unfair head starts. Lamb–Weston, Inc. v. McCain Foods, Ltd., 941 F.2d 970, 974 (9th Cir. 1991) (noting that a trade secret injunction “seeks to protect the secrecy of misappropriated information and to eliminate any unfair head start the defendant may have gained”). Courts prevent defendants from selling products that are inextricably connected with the plaintiff’s trade secrets because the defendant cannot unlearn or abandon the misappropriated technology. See 02 Micro Intern. Ltd., 399 F. Supp. 2d 1064 (citing General Electric Co. v. Sung, 843 F. Supp. 776 (D. Mass. 1994)). Therefore, defendants cannot evade trade secret liability by incorporating the plaintiff’s trade secret into a new or different product. See, e.g., Speech Tech. Assocs. v. Adaptive Commc’n Sys., 1994 WL 449032  (N.D. Cal. Aug. 16, 1994) (finding misappropriation where some of the technology used in the offending new products was different from that claimed in the trade secret, but most of the functional aspects of the trade secret technology were incorporated).