By Nicole D. Galli
Earlier this month, I spent two days at the Annual Meeting for the Sedona Conference Working Group (12) on Trade Secrets with other members of the trade secrets bar discussing a variety of “hot topics” in field. I am also a member of the Trade Secrets Working Group Steering Committee and currently co-lead the drafting team that is preparing a comprehensive set of model jury instructions under the Defend Trade Secrets Act (DTSA). At the meeting, my panel highlighted a variety of issues that have arisen from its drafting work and on which we sought feedback from the wider group. Other panels focused on topics such as sharing trade secrets with other organizations (always a risky endeavor), use of “clean rooms” (a good idea), use of confidentiality agreements (also a good idea), and the latest decisions on trade secrets damages, among others. As always, discussion was robust on a number of topics for which there are no easy or ready answers – my favorite kind of questions! Here, I highlight a few of the issues discussed and some of the insights shared at the meeting.
Is Retention of Another’s Trade Secrets, Without More, Misappropriation?
One of the big topics of discussion, including on our jury instruction panel, was the scope of “misappropriation” under the DTSA. Misappropriation can include, of course, improper acquisition, use, and disclosure. However, while these three types of misappropriation are easy to identify, there are issues that arise in their application. For example, one issue that was discussed – without consensus – is whether it is a misappropriation for a party (such as an employee) to simply retain a trade secret after the time during which the party had rightful access to it? A classic example is the departing employee, who retains a former employer’s trade secrets on a home computer, personal email or cloud drive account. Is that enough to constitute misappropriation? Depending on the court you are in, it could be; although additional facts are likely helpful. For example, one best practice would be for the company to ensure that its employment documents (e.g., employee manual, confidentiality policy and/or confidentiality agreements) require that employees return all confidential/trade secret information upon departure. Another best practice would be to ask for the return of such information either in an exit interview or by parting letter, or both. Under such circumstances, it is more feasible to argue, for example, that if an employee continues to retain the information after departure (or insists on doing so), that constitutes an improper acquisition and thus, by itself, a misappropriation. One thing we also discussed on this issue is why anyone cares about having a legal remedy in this situation if the employee is not using or disclosing what they keep (e.g., because they just like having a record of their achievements)? Putting aside the temptation of use in the future, one obvious answer is that if we don’t police a situation like this, then the company is at risk down the road of being found to have not taken “reasonable measures” to protect confidentiality.
What Constitutes Misappropriation of a Combination Trade Secret?
Another topic that generated much discussion is combination trade secrets, and in particular, how much of a combination trade secret must be used by a party to constitute misappropriation? Put another way, what is “use” when it comes to “combo” trade secrets? This is particularly challenging when the combination trade secret is either primarily or solely comprised of known elements (which is absolutely ok!). If this is not a case of misappropriation by replication or copying– where all or virtually all of the elements in the combination are being used – how much use is enough? Spoiler alert: NO ONE KNOWS. There is still very little law on this and reasonable minds can differ. This is also one of the areas in which I think the perspective of the attorney litigating the case can matter a great deal. Trade secrets are not like patent cases, where the exercise is essentially one of simply “checking the boxes” and comparing the elements of the combination against the accused use. That can be one way to show misappropriation, but it isn’t the only way. So, how much of a combination has to be used to constitute a misappropriation? Right now, there simply is no clear rule of law, and, what’s worse, I believe it can often be very fact dependent.
For that reason, in my experience, combination trade secrets cases are often very difficult (and expensive) for clients and their attorneys to litigate, although doing so can be super fun. Unlike patent cases, where there must be an identity of elements between the claimed invention and the accused one, trade secrets claims can arise from a much broader “use” of the trade secrets at issue. Consider the infamous “head start” advantage case where trade secret misappropriation can arise simply when one party uses their knowledge of another’s trade secrets to give them a “head start” on their own R&D – i.e., a competitive advantage that they otherwise would not have had if they didn’t know about it. In my experience such cases require a deep understanding of the trade secrets at issue, the overall technical field, and the facts – you have to really dive deeply into who knew what when, and what use was made of what information when. But combine this with an unclear legal standard that it is somewhat of a moving target? Very challenging (and fun!).
Is There a Difference Between Confidential Information and Trade Secrets?
Another issue that arose at the meeting, especially in the discussion of confidentiality agreements, is whether there exists confidential information that does not rise to the level of trade secrets? Of course, obvious categories are things like personal identifying information, bank account information, etc., but that’s not where the real issue lies. The question is: for other information – such as technical information – can there ever be information that is properly protectable as “confidential information” under a contract that is not also a trade secret? Personally, I think that such things are always one and the same. Others disagree, but I have yet to hear any persuasive argument to change my mind (with one caveat, discussed below).
One suggestion was that so-called very low value information might be confidential, but not rise to the level of a trade secret. n my opinion, the amount of value necessary for something to be a trade secret is low to begin with – it is something more than trivial, but does not have to be much more than that. So think for a minute on confidentiality agreements. By law, these are restrictive covenants, for which there has to be a “legitimate business purpose” to be enforceable. So, is there some measure of value too low to make something a trade secret but high enough to support a legitimate business purpose in protecting it as confidential? I think that’s a hard distinction to legitimately make. Other suggestions include information that fails the test of “reasonable measures” – i.e., what if a company did not take reasonable measures to protect the trade secret? Could it, nonetheless, be protectable? Again, this could have traction, in theory, but I submit that in reality, if you haven’t adequately protected the confidentiality of the information, you will likely run afoul of the typical contract provision that the information must actually be confidential. Feel free to try this exercise for yourself – and if you come up with something, let me know! I’d love to discuss it with you.
Personally, instead of trying to come up with some category of information that is confidential but not a trade secret, I prefer to focus on the benefits of having confidentiality agreements. The most obvious is reminding folks of their duties of confidentiality. Another is being used as evidence of reasonable measures. A third could be potentially providing additional remedies that might not be available under trade secret law (e.g., avoid costs under New York law). Another, as some of my trade secrets colleagues suggest, could be that proving a breach of contract claim requires a lower standard of proof than a trade secrets claim, although I am skeptical of this one, for the very reasons above.
These were only some of the many issues discussed at the meeting. A myriad of other open questions under the DTSA – and even under state trade secrets law – persist, which makes this both one of the most challenging and interesting areas of the law to practice – my favorite kind!