Unlike a patent, registered copyright, or registered trademark, all of which are the result of a formal grant by a government agency such as the United States Patent & Trademark Office, a trade secret has no such formal governmental recognition. Instead, the trade secret owner must take proactive steps to both establish and protect its trade secrets. To prevail in a trademark misappropriation lawsuit, the trade secret claimant must be able to define the trade secret, explain why it’s a trade secret, and demonstrate the steps it has taken to protect the trade secret from dissemination.
A common mistake in the world of trade secret IP is that many think that simply designating a document as confidential will automatically confer trade secret status on that document and its underlying content. As discussed in our Nov. 21, 2023 blog entitled “Boosting Enterprise Value Through Trade Secrets,” this understanding is incorrect.
Consider a recent 2023 case out of Texas where the jury concluded that a telecom company acted in bad faith by filing a $23 million trade secret misappropriation lawsuit against a competitor; the court found that the underlying technology was not a trade secret. Telegistics, Inc. v. Advanced Personal Computing, Inc. d/b/a/ Liquid Networx, no. 2019-15000 in the 190th District Court of Harris County, Texas. Telegistics alleged that its former employee obtained a copy of Teligistic’s internal Request for Proposal (“RFP”) and used it as the basis for tweaking his new employer’s (Liquid Networx) internal RFP. That is, the former employee altered the RFP so that it could be used by his new employer. As such, Liquid Nerworx did not itself spend time and resources developing its own RFP.
Telegistics had made its RFP available to on-line to bidders who were invited to submit responses for Telegistics’ products and services. The document included a confidentiality notice and information that permitted bidders to submit responses for Telegistic’s telecom products and services. Telegistics claimed that the RFP was a trade secret.
Defendant Liquid Networx challenged the existence of Teligistic’s alleged trade secrets, claiming the plaintiff had not clearly defined its trade secrets. Liquid Networx argued that while the source code of Telegistic’s platform, for example, could qualify as a trade secret, the actual output generated by the platform, such as the RFP, was not entitled to trade secret protection just because a confidentiality label was affixed to it. Unfortunately for it, Telegistics was also unable to demonstrate any reasonable efforts it had made to keep the information it received from bidders confidential once received.
The jury agreed. Interestingly, the jury went a step further and additionally found that Teligistics acted in bad faith by filing its lawsuit. Networx is now seeking its attorneys’ fees as a result.
As our earlier blog emphasized, the plaintiff in a trade secret misappropriation lawsuit must at the get-go establish that it does indeed have protectable, definable trade secrets. Telegistics did not meet this threshold. Texas, as with almost all of the other fifty states, including Florida, has adopted the Uniform Trade Secrets Act as its statutory trade secret law. Accordingly, it is highly likely that the same decision would have been reached no matter what jurisdiction the Telegistics case had been brought, namely, that the RFP was not a trade secret.
Take-Home Points.
The “confidential” labelling of a document, without more, will likely be insufficient for converting the confidential document into a trade secret. Moreover, documents generated automatically by a software program that itself qualifies as a trade secret (e.g., source code and/or object code) may not qualify as a trade secret if other factors are not present. For example, what steps has the trade secret claimant made to limit the dissemination of the collected information within the organization?
Here are some tips for consideration.
- Consider the nature of the document. Is it a general information form or something highly unique to be used in generating a potential economic benefit, e.g., a manufacturing document containing trade secret raw material specifications and which has limited access within the company.
- What is the purpose of the document? Does it contain information about a trade secret (e.g., generally unknown information about a critical raw material component) where the development of the underlying trade secret involved creativity, considerable time, and considerable resources from human resources to financial resources (e.g., R&D spending)?
- Is the “confidential” document more of a general information form or a specially developed form?
- Is there an economic value that comes from maintaining the document’s confidence?
- What steps are taken to keep it from third parties and to limit access to the document within the company?
- If it is to be disseminated to third parties, what safeguards are in place to limit the dissemination of the document?
- When hiring an employee who has worked for a competitor, consider having the employee sign a document stating that, if he had any access to his/her former employer’s trade secrets, that he/she will not use any such trade secrets in the course of his new employment. Such a document may help the new employer, if ever accused of trade secret misappropriation, establish that it took reasonable precautions to prevent the “entrance” of any trade secret information belonging to the trade secret claimant into new employer’s business. This approach could help reduce the amount of any damages award.
In conclusion, every business, no matter how small, should be looking into trade secrets as a valuable asset, meaning one which can be monetized and form a part of an IP portfolio. However, claiming something is a trade secret in a trade secret misappropriation lawsuit does not necessarily make it so as the Telegistics case demonstrates. Any attorney who commences a trade secret lawsuit on behalf of a client needs to honestly assess whether the alleged trade secret will actually qualify as a trade secret under state statues and case law. The same also applies where federal trade secret theft claims are involved as under, e.g., the Defend Trade Secrets Act. Contact Susan at Troy & Schwartz (305-279-4740) to request a complimentary copy of her trade secret implementation checklist and work with her to conduct a trade secret audit, create appropriate protection systems, etc. or to represent you in trade secret misappropriation matter.
THANK YOU FOR YOUR INTEREST IN THIS BLOG. AS USUAL, THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.
© 2023 by Troy & Schwartz, LLC
