Trade Secrets: How to Protect Them; What Constitutes Misappropriation; and What to do If you Find Yourself Defending a Claim for Misappropriation
The Defend Trade Secrets Act was passed in 2016 and, ever since, misappropriation of trade secrets has been a hot topic for legal scholars and commentators. The DTSA works in conjunction with traditional trade secrets claims brought under state law. The DTSA’s definitions of what constitutes a trade secret and how a trade secret is misappropriated track the Uniform Trade Secrets Act, which has been adopted, in some form, by 48 states (New York and Massachusetts are the only two states to retain common law standards). Under both federal (DTSA) and state law, employing measures to keep information secret is critical to any claim seeking to protect trade secrets.
Both the DTSA and the UTSA define a trade secret as information that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. In New York and Massachusetts, whether something is a trade secret is decided by the application of a six-factor balancing test, as follows: (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. In New York, secrecy is the most important factor that courts consider.
There are several steps all companies should take to protect trade secrets. The easiest and most important step is to require anyone with access to trade secrets to sign a non-disclosure agreement (NDA). Failure to do so may derail a trade secrets claim, as courts are hesitant to enforce express restrictions on competition, and are even less likely to do so when there is no contract between a former employer and employee. NDAs are generally enforceable, easy to require, and may often be the difference between a successful trade secrets claim and an unsuccessful one.
Other things that companies should do to protect trade secrets include: Limiting access to information within the company; using standard electronic security features like passwords, encryption and two-factor authentication; locking doors and limiting access to areas where outsiders might have access to confidential information; training employees to keep confidential information secret; and labeling confidential information to alert viewers that such information is not to be shared. This is not meant to be an exhaustive list of steps that companies can or should take to protect trade secrets as every company must analyze its individual situation and determine reasonable steps to protect its confidential information; however, these actions will generally help to prove that the information was protected.
For those who find themselves defending a claim of misappropriating trade secrets, it is important to note that even if a company has trade secrets and even if the defendant or the defendant’s agent had access to those trade secrets, misappropriation does not necessarily follow. Under all trade secrets laws, simply possessing the trade secrets of another does not constitute misappropriation. Every jurisdiction requires that, to prove misappropriation, the plaintiff show that trade secrets were acquired though some sort of improper means or under circumstances that would give rise to a duty of confidentiality for misappropriation to apply. There are several possible defenses to a misappropriation of trade secrets claim, including: (1) the information at issue is not a trade secret (possibly because the company failed to properly protect the information); (2) the trade secret was properly acquired and there was no duty of confidentiality; and (3) the trade secret has not been improperly used or disclosed.
Trade secrets law can be very different depending on in which state a claim is brought. Because trade secrets claims are heavily fact-specific, it is crucial for companies and employees to understand the nuanced differences between the DTSA/UTSA and common law trade secrets analyses so that trade secrets are properly protected.