How to Protect Your Business’s Trade Secrets

A recent federal court decision on trade secret law serves as a reminder of the importance of having an effective trade secret protection plan in place for your business.

Trade Secret Damages

In this case, the Federal Circuit mostly upheld damages awarded in a breach of contract and trade secret dispute.

In 2004, plaintiff ams-OSRAM USA Inc. and defendant Renesas Electronics America, Inc. had discussions about a possible merger. These discussions were covered by a confidentiality agreement (NDA) that expired June 3, 2007.

After merger discussions ended, said the court, the defendant “quickly began using some of the confidential information to develop its own competing products.”

In 2008, the plaintiff sued the defendant for alleged patent infringement, misappropriation of trade secrets, and breach of the confidentiality agreement.

The claims related to ambient-light sensors used in electronic products to adjust screen brightness in response to incident light, and asserted that the defendant had used information that the plaintiff had revealed to it in confidence.

The jury ruled in favor of the plaintiff in 2015. After a remand and additional proceedings, the plaintiff was awarded monetary damages representing the defendant’s sales of certain products, as a reasonable royalty, plus exemplary damages of double that amount.

The jury award included disgorgement of profits ($48,783,007) and exemplary damages ($10 million) on the trade-secret claim.

The plaintiff was also awarded prejudgment interest on both awards.

After years of litigation, the Federal Circuit upheld the lower court rulings but found that prejudgment interest should only run from the date that the plaintiff suffered actual financial injury – not from the date its lawsuit was filed.

One issue arose when the plaintiff’s trade secret became publicly available – i.e., it was no longer subject to trade secret protection.

The defendant argued that it was when it could have reverse-engineered the plaintiff’s product. The Federal Circuit agreed with the district court that “the relevant inquiry for proper accessibility is what the misappropriator did,” rather than “what the misappropriator or other parties could have done.”

As the court noted,

Under Texas law, information that is generally known or readily available by independent investigation is not secret for purposes of trade secrecy.” … “Information cannot be the subject of a trade secret if it is readily ascertainable without engaging in tortious behavior.” … Under those standards, instant discovery through naked-eye viewing is not required. The practical focus of the inquiry reflects the need to ensure that a trade secret remedy is tailored to preventing or negating the unfair advantage derived from improper acquisition.

Plaintiff’s former CEO explained that reverse-engineering a competitor’s product is so common that it has a name: “design by Polaroid.”

Designing a Trade Secret Protection Program

In the above case, the plaintiff was able to recover tens of millions of dollars for the theft of its trade secrets because it had protected them adequately in the first place: for example, it required the defendant to sign an NDA before granting it access to its trade secrets.

However, once the plaintiff’s product was on the market, and the “secrets” could be discovered via reverse engineering, they were no longer secret.

Many companies have sued to protect trade secrets, only to have their claims defeated because the courts found that they hadn’t taken adequate measures to protect the allegedly stolen information.

Trade secrets are protected under various laws, including state laws (as in the above case), the federal Defend Trade Secrets Act (18 U.S.C. § 1836), the U.S. Uniform Trade Secrets Act, as enacted by the various states, and the EU Trade Secrets Directive (EU 2016/943). Under the Economic Espionage Act (18 U.S.C. § 1833), it is also a federal crime in the United States to steal a company’s trade secrets.

In general, to be a trade secret under these various laws, the allegedly secret information must

1. have economic value;
2. because it is not generally known; and
3. the owner has taken “reasonable measures” to keep the information a secret.

Statistics compiled by Lex Machina on US trade secret cases from 2009 to the fall of 2018 showed that many of these cases (like lawsuits in general) settled.

However, when cases were contested, defendants prevailed in 54 percent of the contested cases from 2016 to the fall of 2018.

Defendants won many of these cases not because the plaintiffs failed to plead or prove theft, but because the plaintiffs were unable to demonstrate that the information met the definition of a trade secret.

Often, courts found that the information at issue was not a “trade secret” because the plaintiff:

• failed to identify the trade secret sufficiently,
• failed to protect the trade secret, or
• had publicly disclosed the purported trade secret.

In 11% of the contested cases, the court found that the plaintiff had failed to take sufficient measures to keep the information a secret.

But what are “sufficient measures”?

Courts have found that the lack of an NDA can show a lack of “sufficient measures.” However, an NDA alone may not be enough.

Courts have found failure to take “sufficient measures” in the following situations:

• Since departing employees are especially at risk of taking trade secrets, companies should take extraordinary measures, including:
  • Cutting off employee access to company data
  • Asking departing employees to delete company information from personal devices
  • Not allowing departing employees to take information with them

• Failing to put recipients on notice that information was a trade secret by marking it as a trade secret.

One federal court denied trade secret protection because the plaintiff had a policy requiring trade secret information to be marked, but had failed to mark the stolen information at issue.

In addition to NDAs (which all employees and contractors should sign), measures companies can take to protect their trade secrets include:

• Digital access controls to files that contain trade secrets
• Access on a “need to know” basis
• Encryption and password-protection
• Employee training, during onboarding and at regular intervals
• Monitoring visitor access
• Written and verbal reminders of confidentiality obligations when employees leave

While litigation to enforce an NDA can be effective in the long run, as in the case above, it can be time-consuming and expensive. Thus, companies should carefully consider whether and when it’s truly necessary to share trade secrets, both internally and – especially – with external parties.