Articles Posted in Trade Secrets

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).

The Defend Trade Secrets Act (DTSA), 18 U.S.C. section 1836, is the federal statute that provides a cause of action for misappropriation of trade secrets.  Under DTSA, “a court may” award (1) “damages for actual loss caused by the misapropriation of the trade secret,” (2) “damages for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss,” and (3) “if the trade secret is willfully and maliciously misappropriated, … exemplary damages in an amount not more than 2 times the amount of the damages awarded.”  Although there is no clearly articulated test for determining whether, upon a finding of willful and malicious misappropriation, an award of exemplary damages is proper, federal courts have considered several factors.  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.

For example, in examining whether exemplary damages are appropriate, the United States District Court for the Southern District of New York, in Syntel Sterling Best Shore Mauritius Ltd. v. TriZetto Group, Inc., 2021 WL 1553926 (S.D.N.Y. April 20, 2021), cited “the degree of reprehensibility associated with the wrongdoer’s actions.”  In AgroFresh Inc. v. Essentiv LLC, 2020 WL 7024867 (D.Del. November 30, 2020), the United States District Court for the District of Delaware cited two additional factors: “the duration of misappropriative conduct” and “the defendant’s consciousness of resulting injury and any efforts to cover up malfeasance.”  DiscoverOrg Data, LLC v. Vitnine Global, Inc., 2020 WL 6562333 (N.D. Cal. November 9, 2020), the federal district court considered “the need to deter similar misconduct in the future.”  The U.S. District Court for the Northern District of California, in Citron USA, LLC v. RiverPay, Inc., 2020 WL 5365980 (N.D. Cal. September 8, 2020), identified two additional factors: “the amount of compensatory damages awarded” and “the wealth of the particular defendant.”  All of these factors must be considered in the larger context of Supreme Court precedent concerning punitive damages in all litigation.  Precedent from the United States Supreme Court in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), discussed limits on punitive damages in all cases in the context of the United States Constitution’s requirement of Due Process.  The Supreme Court explained that “flagrancy of the misconduct is thought to be the primary consideration in determining the amount of punitive damages.”

Florida’s trade secret statute allows recovery of exemplary damages.  Under Florida Statutes section 688.004(2), “[i]f willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award” for compensatory damages for trade secret misappropriation.  In addition, Florida law (at Florida Statutes section 688.005) provides that “[i]f … willful and malicious misappropriation exists, the court may award reasonable attorney’s fees to the prevailing party.”  In Fin. Techs., LLC v. iControl Sys., USA, LLC, 21 F.4th 1267 (11th Cir. 2021), the United States Court of Appeals for the Eleventh Circuit interpreted Florida’s trade secret statute to allow an award of exemplary damages when “the defendant acts willfully, or with such gross negligence as to indicate a wanton disregard for the rights of others.”  In Perdue Farms Inc. v. Hook, 777 So.2d 1047 (Fla. 2d DCA 2001), Florida’s Second District Court of Appeal explained that the traditional standards for evaluating “willful and malicious” conduct in other contexts apply in the context of trade secret misappropriation under Florida law.  Applying Florida law as well as the DTSA to assess exemplary damages in a trade secret misappropriation case, the United States District Court for the Northern District of Florida, in Capital City Home Loans, LLC v. Darnell, 2023 WL 4169614 (N.D. Fla. May 11, 2023), stated in pertinent part: “Here, the admitted facts show that Darnell intentionally stole trade secrets…Her conduct exhibited a complete disregard for Capital City’s trade-secret rights, and it constituted at least gross negligence.  That is enough to show entitlement to exemplary damages and attorney’s fees under… [Florida’s trade secret statute] and the DTSA.  I therefore find, as a matter of discretion, that Capital City is entitled to such damages.”

Someone misappropriated your trade secrets and you can prove it. But how were you damaged? This is an important question you must ask before commencing a lawsuit because the answer could influence a significant portion of your litigation strategy. Below we provide insights into some of the categories of damages you may be entitled to recover along with some of the impediments to recovering those damages.  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.

Lost profits are a common form of trade secret misappropriation damages.  Under Florida Statutes 688.001(4), Florida’s trade secrets act permits recovery of damages “for the actual loss caused by misappropriation.”  These damages are calculated by determining the revenue the trade secret owner lost due to the defendant’s conduct less the costs the trade secret owner saved due to the defendant’s conduct.  An example could be a manufacturing plant that loses several customers and millions in revenue because a former employee stole the plant’s trade secret and started a competing business. The plant could recover its lost customer revenues minus the costs it saved by manufacturing less products due to the lost customers. However, determining which costs are deductible from revenue can be tricky and vary case by case.  A court may refuse to deduct fixed costs from the lost profit analysis because the plant would have incurred those fixed costs regardless of whether it retained all customers.  For example, in Fin. Info. Techs., LLC v. iControl Sys., USA, LLC, 21 F.4th 1267 (11th Cir. 2021), the United States Court of Appeals for the Eleventh Circuit agreed with the federal trial court’s decision that “the jury was not required to deduct Fintech’s fixed costs from its revenues to arrive at a proper ‘actual loss’ measure.”  See also N. Gregory Mankiw, Principles of Microeconomics 266–68 (6th ed. 2011) (defining fixed costs as those that do not directly vary based on output volume).  By contrast, courts may deduct marginal costs from the lost profit analysis because the plant saved money by producing less products.  See N. Gregory Mankiw, Principles of Microeconomics 266–68 (6th ed. 2011) (defining marginal costs as the measure of change in cost associated with a change in output).  In the iControl Sys., USA, LLC decision, the Eleventh Circuit assessed the plaintiff’s proof at trial vaguely articulated its marginal costs as “minimal” without specifying what were the actual marginal costs or that they were zero.  The Eleventh Circuit explained in pertinent part that, “[m]issing from the trial record is any evidence that Fintech’s marginal costs were actually zero. Had Fintech clearly presented that evidence, it might have been entitled to an award that didn’t account for those costs.”

Disgorgement is a lesser-known remedy in trade secret litigation.  Disgorgement in essence requires a defendant to give-up certain profits to the plaintiff as an equitable remedy for ill-gotten gains.  In Sensormatic Elecs. Corp. v. TAG Co. US, LLC, 632 F. Supp. 2d 1147 (S.D. Fla. 2008), the federal district court held that “[d]isgorgement of a defendant’s profits is an appropriate remedy where the disgorgement is limited to the amount of time it would have taken the defendant to independently develop its product without the benefit of the plaintiff’s trade secrets—in other words, the ‘head start’ period.”  The remedy is intended to prevent the defendant’s unjust enrichment and is measured by a defendant’s improper acquisition of money rather than the plaintiff’s losses. S.E.C. v. Monterosso, 756 F.3d 1326, 1337 (11th Cir. 2014).