Troy & Schwartz Attorneys-At-Law

Background & Current Issues.  Trade secrets have historically been an outlier in the area of intellectual property (IP) law because they have not been viewed as “real” IP.  Today they are being increasingly viewed as valuable IP assets.  Indeed Gene Quinn, one of the most influential IP thought leaders in the U.S., has predicted that trade secrets may pass patents in terms of valuation.

Nevertheless, trade secrets have their own unique challenges and characteristics.  The following lists some of the issues currently comprising the trade secret ecosystem.

1. A weakened patent system resulting from the America Invents Act and subsequent court decisions which have both invalidated patents and impacted the issuance of new patents. Trade secret protection either singularly or in connection with patents may be a viable way to reduce patent invalidation risk and and/or strengthen a patent’s commercial viability over the long term.
2. The explosion of AI and Large Language Models (LLMs). Here the issue pertains to controlling what can and cannot be shared. Where the possibility of divulging copyrighted, patented, or trade secrets as the result of generative AI exists, the resulting output could infringe on intellectual property rights, divulge valuable trade secrets, or breach confidentiality obligations (e.g., the need to protect personally identifiable information or to comply with obligations under an NDA).
3. Remote work and employee mobility. Today, more and more potentially valuable business information is “leaving” the office traveling through space so to speak to remote servers, computers, and the “cloud.”   The locked file cabinet with tightly controlled access of years past is fast becoming a relic, being replaced by systems subject to cybersecurity risks 24/7.   Trade secrets are often viewed as a potential liability by companies due to cyber threats and employee “movement”.
4. The move to eliminate non-competes. The Federal Trade Commission is attempting to regulate non-competes out of existence, and some states already have or are in the process of doing so.
5. A patent document, registered copyright certificate, or registered trademark certificate issued by a government agency provides proof that the associated IP rights actually exist. With trade secrets, however, no government agency is involved in establishing the IP right.  Instead, the trade secret owner is tasked with establishing that the confidential information indeed qualifies as a trade secret.  Proof that a trade secret actually exists is required by the courts in any trade secret misappropriation lawsuit.  Requiring proof of documentation establishing the existence of the trade secret is considered a reasonable measure by the court.
6. Trade secrets are protected under state law and federal law. Damages in a misappropriation case often exceed the damages in patent infringement case.  Europe has largely adapted the trade secret law of the United States and trade secret law is seeing global standardization.

Trade Secrets and Confidential Information. Referring to item #5 above, many still assume that confidential company information automatically qualifies as a trade secret.  Trade secrets of course constitute confidential information, but not all confidential information will qualify as a trade secret.  For example, Florida’s Uniform Trade Secrets Law, largely based on the Uniform Trade Secrets Act, defines “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: “Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means, by other person.”

The unauthorized use of a trade secret is known as misappropriation.  To prevail in a court of law on a trade secret misappropriation claim, the plaintiff must first establish that the misappropriated information is indeed a trade secret and has been handled as a trade secret by the plaintiffs.  Documentary proof is generally the standard required for meeting this requirement.  Contracts such as an employment handbook, NDAs, employee onboarding/exit documentation, trade secret assignment documents, an in-house trade secret policy, etc. are types of acceptable documentation.

Several years ago, the commentator was able to get a motion for summary judgment granted on behalf of the defendants because the plaintiff could provide no documentary proof that he indeed had a trade secret.  Even large companies one would think should know better have lost their trade secret misappropriation lawsuits because of the lack of documentation or poor documentation.  See e.g., California Healthcare Services v. Amgen and Bundy Baking Solutions v. Mallet.  Other helpful factors in establishing trade secrets to the satisfaction of a court include having conducted trade secret audits to evaluate the efficacy of a business’s procedures to protect its trade secrets, using robust cybersecurity efforts, etc.

Non-disclosure agreements (NDAs) can be confusing when it comes to trade secret protection because they are generally limited to protection of exchanged confidential information for a period of only 1 to 3 years following the NDAs’ termination. However, if trade secrets are to be divulged, it is important that any disclosed trade secrets be protected by the receiving party indefinitely and the NDA should state as such.  Otherwise, trade secret protection could be at risk.  Most receiving parties do not want the burden of protecting the disclosing party’s divulged trade secrets indefinitely.   Accordingly, the NDA’s disclosing party should think twice before disclosing a trade secret or insist on adequate provisions in the NDA to protect any divulged trade secrets.

Gearing Up for Trade Secret Protection. Any business, no matter how small, may have valuable trade secret assets which can enhance the business’s value.  A robust trade secret approach may also be attractive to potential venture capitalists and future buyers of the business.   If you aren’t sure is something could be a trade secret, ask yourself the $64,000 question:  What would be the consequences for my business if this confidential information became known by others?

How does one get started in identifying and protecting a trade secret?  Here are some questions to ask to get the process going.

What is the trade secret (e.g., software code, a special recipe, a customer list that the business has spent money and time on developing, certain steps of a manufacturing process requiring tight control, a raw material having “special” requirements, etc.)?

Who will have access to the trade secret (e.g., employee, independent contractor, business partner)?

What documentation should the business have in place to protect the trade secret asset (e.g., employee handbook, code of conduct, onboarding/exit documentation, IP assignment of any developed trade secrets to the business, NDAs, independent contractor agreements, trade secret policy documents, shareholder/partnership/operating agreements, etc.)?

How do we educate employees and independent contractors that it’s a trade secret which must be carefully and diligently protected (e.g., asset notice and acknowledgement documentation)?

How do we train those who require access to the trade secret to protect the trade secret (e.g., ensure they know it’s a trade secret)?

How do we monitor the interaction between those who have access and the frequency of interaction (e.g., by maintaining a privilege or access log which states the people who have access, how the access is provided, and have them document the dates on which they accessed the trade secret)?

Getting Started with a Legal Advisor.   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.   Contact Susan at Troy & Schwartz (305-279-4740) to request a complimentary copy of her trade secret implementation checklist and work with her to perform a trade secret audit, create appropriate documents, etc. or to represent you in trade secret misappropriation matters.  As an IP attorney who practices patent, trade secret, trademark, and copyright law, she is uniquely qualified to address best practices for procuring, monetizing, and enforcing IP rights.

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

The Eleventh Circuit’s reasoning in the case this blog summarizes is encouraging for any tech company that licenses access to its proprietary information or makes some part of it publicly available.  The decision holds that under Florida’s Uniform Trade Secret Law, these partial exposures of trade secrets to the public may not be fatal to a claim for trade secret misappropriation. 

There is no question that the law continues to evolve in response to new technological developments.   For example, corporate espionage has become easier in these days of computer hacking, thereby increasing the possibility of the theft of valuable proprietary information such as trade secrets.  Does Florida’s Uniform Trade Secrets Act (FUTSA) adequately protect the trade secret owner from “high tech” misappropriation of trade secrets?  The Eleventh Circuit Court of Appeals said yes in its 2020 decision in Compulife Software, Inc. v. Newman, et al., 959 F.3d 1288 (11th Cir. 2020).   The court held that the statute’s verbiage was indeed applicable to this “industrial espionage” case.  The court also solidified the FUTSA by clarifying the definition of misappropriation.

Plaintiff Compulife Software, Inc. sells access to its online databased of insurance premium information, which synthesizes publicly available insurers’ rate tables using its proprietary method and formula.  It also provides life insurance quotes sourced from its online database.  The data base is not static but consistently updates with current information about life insurer’s rate tables and allows for direct comparison across dozens of providers.  Compulife licenses access to the data to its customers who are primarily life insurance agents who in turn seek to provide reliable insurance rate estimate to policyholders.

Interestingly, the lawsuit originating in the Southern District of Florida, did not include alleged violations of the Computer Fraud and Abuse Act (“CFAA”), the most commonly applied federal law to web scraping. Indeed, plaintiff refrained from pursuing many of the common claims that often appear in web scraping litigation, such as trespass to chattels, conversion, tortious interference with a contract, and unjust enrichment.

The defendants and Compulife are in direct competition.  The lawsuit resulted from Compulife’s allegations that the defendants gained access to its database by falsely purporting to work for Compulife’s licensed customers, hiring a hacker to scrape data from Compulife’s database, and then using the scraped data to generate life insurance quotes on their own websites.  Not surprisingly, the court described the case as one involving high-tech corporate espionage.

Website scraping using software programs known has “bots” has been quite common and is often considered legitimate.  “Bad bots,” however, fetch content from a website with the intent of using it for purposes outside the site owner’s control.  “Bad bots make up 20 percent of all web traffic and are used to conduct a variety of harmful activities, such as denial of service attacks, competitive data mining, online fraud, account hijacking, data theft, stealing of intellectual property, unauthorized vulnerability scans, spam and digital ad fraud.”  See https://www.imperva.com/blog/is-web-scraping-illegal/.

The FUTSA requires the plaintiff to demonstrate that it: 1) possessed a trade secret; and 2) the secret was misappropriated.  The magistrate in the district court did find that Compulife’s database contributed a trade secret but that the trade secret had not been misappropriated. The magistrate’s reasoning?  Compulife had not identified what legal duty the defendants had violated.

The Eleventh Circuit found the magistrate’s reasoning erroneous.  Under the FUTSA, a trade secret can be misappropriated by either acquisition, disclosure, or use.  Compulife had alleged misappropriation by acquisition and use.   Relying on the FUTSA’s own wording, the court noted that there are several varieties of misappropriation by use that do not depend on the existence of any external legal duty.  Citing Fla. Stat. § 688.002(2)(b)1, 2a, and 3, the court explained that “[w]hen for instance, a defendant knows that his knowledge of a trade secret was acquired using ‘improper means,’ or that he has acquired knowledge of a trade secret ‘by accident or mistake’ and still uses it, such use is actionable misappropriation.”  “Improper” is defined by the statute as means including theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.  The court concluded that there was enough evidence that the database had been used by either improper means or accident or mistake and that these misappropriation theories must be determined before the court can dismiss a trade secret misappropriation claim.

The district court’s magistrate had also erred by finding that because the individual insurance quotes on Compulife’s website that the hacker scraped were publicly available, the database from which those quotes were sourced could not have been misappropriate by acquisition.  The Eleventh Circuit disagreed and reasoned that even if the publicly available individual quotes did not merit trade secret protection, “taking enough of them must amount to misappropriation of the underlying secret at some point.  Otherwise, there would be no substance to trade-secret protection for ‘compilations’ [of data] which the statute clearly provides.  See Fla. Stat. § 688.002(4).

The court also concluded that the method of acquisition could determine whether the taking of the publicly available quotes constituted misappropriation.  Here, the defendants did not merely manually access quotes from Compulife’s database wherein such manual copying would likely never constitute improper means.  Instead, the defendant’s usage of a bot to collect an otherwise infeasible amount of data may well constitute misappropriation – in the same way that using aerial photography may be improper when a secret is exposed to view from above.  Citing E.I. Dupont de Neumours & Co. v. Christopher, 431, F.2d 1012, 1014 (5th Cir. 1970), a case that had nothing to do with the difficult technical issues courts are asked to address today.  The court vacated the magistrate’s dismissal of the misappropriation by acquisition claim and remanded the case.

CONCLUSION

The case is expected to have ramifications in the area of trade secret law by allowing plaintiffs to claim that usage of their “website” publicly presented trade secret information comprises trade secret misappropriation.  Generally, publicly available information has not been deemed a trade secret.  This commentator opines that the decision will not defeat the need for a case-by-case factual analysis.  Relying on a 50-year-old non-tech case in support of their decision, the Compulife court clearly felt that that the defendants had “done the plaintiff wrong” and should be held accountable.  The reach of the decision remains to be seen.    It is therefore strongly recommended that any lawsuit involving trade secret misappropriation also includes counts such as those listed above in the event the claim for trade secret misappropriation fails.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR   INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE. 

Intellectual property law is a complex area of the law.  Contact us for a complimentary consultation on patents, trademarks, trade secrets, and copyrights.  Our mission is to serve innovators and creators in protecting the fruits of their hard work and ingenuity through our Client Creed:  Conscientious, Rigorous, Energic, Empathetic, and Diligent legal services which cover both transactional and litigation services.

Have a question specific to trade secrets?  Contact us for a complimentary trade secret checklist.

© 2021 by Troy & Schwartz, LLC

On Dec. 16, 2020 in Attia, et al.  v. Google, LLC, et al.,  the Ninth Circuit Court of Appeals held that a misappropriation claim under the Defend Trade Secrets Act of 2016, §18 U.S.C. 1836, et seq. (“DTSA”) may be brought for misappropriation that started prior to the DTSA’s enactment as long as the claim also arises from post-enactment misappropriation or from the continued use of the same trade secret.

The DTSA mirrors the Uniform Trade Secrets Act (“UTSA”) and also expands the Economic Espionage Act, which criminalizes misappropriation of certain trade secrets. Many states, including Florida, have based their trade secrets laws on the UTSA.  Until the enactment of the DTSA in 2016, trade secret misappropriation claims were generally brought under state statutes, e.g., Florida’s Uniform Trade Secret Act (“FUTSA”).

The DTSA allows plaintiffs to bring a federal claim for any trade secret misappropriation that occurred on or after May 11, 2016.   In Attiva v. Google, LLC, the Ninth Circuit decided that a claim under the DTSA can still be brought, even if the misappropriation actually started before the enactment of the DTSA, as long as the misappropriation continued through the DTSA’s enactment date (May 11, 2016) and involved the same trade secret.  In reaching its decision, the Ninth Circuit explained that the Uniform Trade Secrets Act (“UTSA”), includes an anti-continued use provision while the DTSA lacks a similar provision.  Noting that Congress was aware of the UTSA at the time the DTSA was enacted, the court concluded that the apparently deliberate omission of an anti-continued use provision indicated that the DTSA was not intended to be limited in this way.  In its reasoning, the Ninth Circuit pointed out that the DTSA language discussing “a continuing misappropriation constitutes a single claim of misappropriation” relates only to a statute of limitations argument and does not intrinsically prohibit DTSA misappropriations claim from being brought on the basis of continued use.

Although the DTSA is a relatively new statute and has not “seen” much litigation, the Attiva decision clearly expands the DTSA’s reach and is expected to be relied on by other federal courts asked to rule along the same lines.   Additionally, the decision represents a significant shift in trade secrets law which may cause more plaintiffs to commence trade secrets misappropriation actions in federal court because:

• it allows for claims of trade secrets misappropriation to be brought under the DTSA at least in district courts “under” the Ninth Circuit even if the misappropriation began before the 2016 enactment of the DTSA;
• it expands potential liability for defendants of trade secret claims under the DTSA;
• it provides plaintiffs with protection where state statutes following the UTSA may not.

WE THANK YOU FOR READING THIS BLOG AND HOPE YOU FOUND IT INFORMATIVE.  HOWEVER, THE CONTENT IS PROVIDED FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.  If you have any questions about trade secret misappropriation as either a potential plaintiff or defendant, contact us for a consultation.  Also contact us for a complimentary trade secret checklist to ensure you or your company are taking the appropriate steps to protect your trade secrets.

©2021

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

(305) 279-4740