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What You Need to Know About Trade Secrets in 2021

“In May 2021, the Biden Administration surprised the international community when it joined in supporting the [TRIPS IP waiver proposal], apparently unaware of the central importance of secret know-how to the manufacture of vaccines by U.S. companies…. The government is now engaged in finding a face-saving way out of the corner it has painted itself into.”

https://depositphotos.com/72052625/stock-photo-folder-with-the-label-trade.htmlLast year at this time, we thought we had been through the worst of it and, with the new vaccines arriving, that life would return to normal in 2021. Hahaha, how naïve we were! But take heart; some things hold steady through the storm, such as the popular sport of trade secret litigation. Unlike most patent and copyright cases, every dispute is guaranteed to unfold as a morality play—a story of good guys and bad guys.

Let’s now look back on the year when remote work dug in to become a permanent fixture, and remind ourselves of the broad sweep of trade secret law by looking at some of the more instructive and interesting opinions issued by the courts – and one inexplicable decision by our government.

Secrecy

This is where it all starts. The information has to be a secret, meaning you can’t find it on the internet. The legal expression of this simple idea requires that the information not be generally known or “readily ascertainable” – that is, easy to discover – through “proper means.” In Life Spine, Inc. v. Aegis Spine, Inc., 8 F.4th 531 (7th Cir. 2021), the trade secret consisted of the exact dimensions of a patented spinal implant device for treating degenerative disc disease. Life Spine hired Aegis as a distributor under a contract that prohibited reverse engineering and required Aegis to remain with the device through surgery. Aegis designed a copy and defended itself by arguing that the information was known through the patent and by marketing. But the diagrams in the patent did not disclose precise measurements of the component parts, and prospective customers were only allowed to inspect the device under close supervision. The court held that the measurements remained a secret.

Perhaps ironically, secrets can be lost through the process of trying to protect them in litigation, because of the requirement that court proceedings be open to the public. The law makes provision for this kind of risk, but the parties have to pay close attention to implementation. In Bader Farms v. Monsanto Co., 2021 U.S. Dist. LEXIS 16308 (ED Mo), a pretrial order called for document-by-document review of confidentiality of trial exhibits, but the plaintiff waited until after the evidence had been received to raise the issue, and sealing was denied. In a more nuanced decision in HouseCanary, Inc. v. Title Source, 622 S.W.3d 254 (Tex), the Texas Supreme Court announced two interesting holdings: first, that the Uniform Trade Secrets Act provision requiring courts to protect alleged trade secrets does not displace state procedural rules; and second, that introducing exhibits at trial without sealing is only a factor in determining whether secrecy of the information has been lost.

Reasonable Efforts

Closely related to the concept of secrecy is the requirement that the trade secret owner exercise “reasonable efforts under the circumstances” to protect the information. In effect, courts will not step in to help if the owner has failed to help itself with security measures that match the business risk. In DePuy Synthes Prods. V. Veterinary Orthopedic Implants, Inc., 990 F.3d 1364 (Fed. Cir. 2021) the issue was whether to seal a court filing that contained confidential information about the identity of a manufacturer. There was no NDA or other contract establishing confidentiality. Instead, the litigant relied on proof that it had kept that information confidential through its own internal security policies and protocols; but this was held to be insufficient. Similarly, the plaintiff in ASC Engineered Sols., LLC v. Island Industries, Inc., 2021 U.S. Dist. LEXIS 117177 (WD Tenn) tried to have the court enter summary judgment that its efforts were reasonable, citing its policies and practice to inform employees about confidentiality, and its marking of emails and documents with secrecy legends. Such evidence, the court held, could be considered but was not decisive, because what is reasonable is a question of fact, and the company’s employees had denied seeing the security policies.

Ownership

The law generally recognizes anyone in lawful possession of secret information as an “owner” and entitled to sue for misappropriation, even if they hold it under a nonexclusive license. However, as explained in Zabit v. Brandometry, LLC, 2021 U.S. Dist. LEXIS 94234 (SDNY), the claimed right to possession of the information as a remedy for fraud or another tort does not give rise to “equitable title” in the trade secret sufficient for standing. And in Bio-Rad Labs., Inc. v. ITC, 996 F.3d 1317 (Fed.Cir. 2021), it was held that an employee’s undisclosed “idea” that contributed to a later invention by his colleagues at a subsequent job did not make the employee a co-inventor and the ex-employer a co-owner of the invention. On a related issue, the U.S. Supreme Court held, in Minerva Surgical, Inc. v. Hologic, Inc., 141 S.Ct. 2298 (2021), that the patent doctrine of assignor estoppel cannot be applied to the typical assignment by employees of future inventions, because their scope is inherently unpredictable. This ruling provides comfort to companies hiring from competitors, because the doctrine had been used as leverage in some departing employee cases involving trade secret and patent claims, to prevent the new employer from contesting validity of the patent.

Identification of Secrets

One of the unique aspects of trade secret law, in comparison to other forms of intellectual property, is that the boundaries of the right are not specified in a government-issued grant. As a result, a preliminary – and usually consequential – question in every trade secret case is: what exactly is the trade secret information that’s being claimed? Usually, companies have not made an inventory of their information assets, and even if they have, the specific data involved in any given dispute is unlikely to have been described with precision before litigation begins. As a result, identification of the subject matter – and when and how to do it – has become a frequent early battleground in trade secret litigation.

This past year, two opinions from the Third Circuit have provided guidance on this critical aspect of case management. In Oakwood Labs. LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021), the defendant challenged the plaintiff’s description of its trade secrets because it did not clearly state which secrets it claimed that the defendant had misappropriated. This argument was rejected as an “effort to blend together the identification-of-a-trade-secret element and the misappropriation element, when “only discovery will reveal exactly what the defendants are up to.” Mallet & Co. v. Lacayo, 2021 U.S. App. LEXIS 30894 (3d Cir.) involved technology for commercial baking release agents (that is, things like oil that keep bread from sticking to the pan). The District Court, apparently impressed by strong evidence of misappropriation by a departing employee, had issued a preliminary injunction prohibiting use of thirteen broad categories of the plaintiff’s “protected materials,” including internal discussions of “actual major problems,” “supply source for product ingredients,” “pricing and volume data,” and “information about [plaintiff’s] equipment.” The Court of Appeals reversed, finding that this lack of specificity prevented any meaningful review of whether the plaintiff was likely to prevail on the merits.

NDA Risks

Many trade secret disputes are caused by what we might call “NDA negligence,” either because the parties treat confidentiality agreements as mere forms instead of contracts, or because they don’t pay attention to some specific obligation or limitation of the NDA until it’s too late to fix. Two cases from this year illustrate the point. In EMC Outdoor, LLC v. Stuart, 2021 U.S. Dist. LEXIS 63438 (ED Pa), the defendant ex-employee had individually negotiated a provision in her nondisclosure agreement making the confidentiality provisions applicable post-employment only if she resigned. Because she was fired from the position, the court held, the contract language made it impossible to state a claim for misappropriation. Summary judgment was entered for the defendant. And in Bladeroom Group., Ltd. v. Emerson Elec. Co., 11 F.4th 1010 (9th Cir. 2021), parties to a potential merger had signed an NDA with a proviso that the agreement would terminate in two years, even though other aspects of the contract could be read to suggest continuing confidentiality. The District Court had prevented defendant from arguing that the two-year limit controlled because it was contrary to the parties’ intent and would lead to an absurd result. The Court of Appeals responded that it would be absurd to ignore the plain language of the proviso, and reversed a $60 million verdict.

Misappropriation

Because those who misappropriate trade secrets would like to keep their actions, well, secret, it’s often difficult to find direct evidence of theft, and plaintiffs must prove their case with circumstantial evidence. Also, misappropriation by direct copying is rare, and so liability is usually established by demonstrating “indirect use” of the purloined information. In Oakwood Labs. LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021), the court held that indirect use can be inferred from the timing of a competitive hire, coupled with deception in the employee’s departure, the new employer’s lack of experience in the relevant technology, unusually low financial investment, and unusually rapid success. In contrast, merely retaining a former employer’s confidential documents, without any proof of use, will normally be insufficient to state a claim for misappropriation. In Zurich Am. Life Ins. Co. v. Nagel, 2021 U.S. Dist. LEXIS 89781 (SDNY), the court held this remained true even when the employee deliberately kept the documents as leverage for settlement of other claims against the employer.

Remedies

Assuming misappropriation has occurred or is threatened, the question becomes what to do about it. If the plaintiff succeeds in securing a preliminary injunction, does that stop accrual of damages? No, said the court in ResMan, LLC v. Karya Prop. Mgmt., LLC, 2021 U.S. Dist. LEXIS 145462 (ED Tex); an injunction prohibiting use or disclosure of trade secrets does not break the chain of causation regarding defendant’s continuing benefit from the misappropriation. Oakwood Labs. LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021) considered the common situation in which the defendant has not yet launched a competing product, holding that harm is established merely by the act of misappropriation, because the plaintiff “has lost the exclusive use of trade secret information, which is a real and redressable harm.” And if it turns out that harm can’t be proved in any compensable way, explained the court in Elations Systems, Inc. v. Fenn Bridge LLC, 2021 Cal. App. LEXIS 975, the trial court should not dismiss the claim, but should instead award nominal damages.

Computer Fraud and Abuse Act

Sometimes in committing trade secret theft, a defendant gains unauthorized access to information stored on a computer system. If so, then a (criminal and/or civil) violation of the CFAA, 18 U.S.C. §1030, can be alleged along with the misappropriation. But what if the defendant was authorized to have access, but used it for an improper purpose? The circuit courts were split on that question until the decision in Van Buren v. United States, 141 S.Ct. 1648 (2021). A police sergeant had agreed to use his patrol-car computer to retrieve license plate information for a private party. Reversing his conviction, the Supreme Court explained that if the CFAA “criminalizes every violation of a computer-use policy, then millions of otherwise law-abiding citizens are criminals.”

A Diplomatic Flub with a Bright Side

Back in the mid-1990s, the U.S. government fought hard to get the World Trade Organization (WTO) to adopt global standards for IP protection, resulting in the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS). It wasn’t just about registered IP rights; TRIPS Article 39 also required member states to provide legal protection for “undisclosed information.” Its structure and content closely followed the Uniform Trade Secrets Act, and ever since has been the basic reference pattern for the trade secret laws of many foreign countries.

In response to the COVID pandemic, a group of developing countries – led by India, with its large generic pharmaceutical industry – proposed that WTO “suspend” selected parts of TRIPS, including Article 39, ostensibly to enable more effective global access to vaccines. In May 2021, the Biden Administration surprised the international community when it joined in supporting the Indian proposal, apparently unaware of the central importance of secret know-how to the manufacture of vaccines by U.S. companies. In effect, the intended waiver would force a transfer of privately-owned technology that under normal (i.e., voluntary) circumstances requires many months of collaborative effort, with no plausible near-term effect on the distribution of vaccines to the developing world. The government is now engaged in finding a face-saving way out of the corner it has painted itself into. However, the diplomatic debacle has at least drawn worldwide attention to the role that secrecy plays in incentivizing the development of new therapies; and as we face the prospect of future pandemics, this new appreciation for the benefits of trade secret law should benefit all of us.

Image Source: Deposit Photos
Author: designer491
Image ID:72052625 

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3 comments so far. Add my comment.

  • [Avatar for Anon]
    Anon
    December 14, 2021 05:12 pm

    While I will (on occasion) disagree with the thrust of Mr. Pooley’s views vis a vis Trade Secrets versus Patents (as a main proponent of IP policy), I have always admired the depth of knowledge that Mr. Pooley has.

    That being said, the mouthing of “The government is now engaged in finding a face-saving way out of the corner it has painted itself into.” appears to be more wishful thinking than substantive or factual assessment. As noted on another patent blog, Tillis has now asked for a fifth time — with the Executive Branch still not deigning to engage those questions.

    See https://www.patentdocs.org/2021/12/sen-tillis-writes-to-us-trade-representative-again-regarding-trips-waiver.html

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