The Trade Secret Office, Inc. - How Trade Secret Lawsuits Fail

How Trade Secret Lawsuits Fail

Unlike patent, trademark and copyright infringement suits, trade secret lawsuits require the plaintiff to prove the existence of a trade secret, and that he has ownership rights to it. Additionally, the plaintiff must prove the defendant had access to the information and further that the defendant had a responsibility to keep the information confidential. There are therefore six proofs required to prevail as plaintiff in a trade secret lawsuit:

1 - Existence. The trade secret must be proved to exist. The courts will make this determination with a consideration of the six factors of a trade secret as set forth in Section 757 of the First Restatement of Torts.

2 - Ownership. It must be proved that the plaintiff had ownership rights to the trade secret information.

3 - Access. It must be proved that the defendant had access to the trade secret information.

4 - Notice. It must be proved that the defendant knew or should have known that the information was a trade secret of the plaintiff.

5 - Use. It must be proved that the trade secret information was actually used by the defendant.

6 - Damages. It must be proved that a remedy exists within the power of the court to apply.

These six conjoint requirements on plaintiff naturally form the six areas of attack by defendant. Failure on any of these six proofs will result in a finding against plaintiff. Defendant's case will be structured along these lines:

1 - The information doesn't qualify as a trade secret, and even if it did

2 – Plaintiff had no ownership rights in the information, and even if he did

3 - We had no access to the information, and even if we did

4 - We were not aware that the information was a trade secret, and even if we were

5 - We made no use of the trade secret information anyway, and even if we did

6 - There is no remedy within the power of the court to apply.

The intellectual property bar is well versed in the proof of use and damages, which also apply to patent, trademark and copyright cases. Additionally, use and damages apply to the defendant's infringing actions, and are specific to the case at hand. Existence, ownership, access and notice apply to the plaintiff's actions, and, importantly, apply to plaintiff's actions prior to the infringement.

This then is where many trade secret lawsuits fail.

The court may find that no trade secret exists, because the six factors are insufficiently present. The security factor - consideration of the measures plaintiff took prior to the infringement to secure the information - is especially vulnerable to attack. It is the plaintiff's responsibility to take appropriate measures to secure his trade secret information. The courts will not apply trade secret protected status after the fact to information that the information owner himself took insufficient measures to protect in the first instance.

The court may find that the plaintiff lacked protectable ownership rights in the trade secret information. This is particularly possible in cases in which the trade secret information was developed by a contract employee or contracted vendor. The contract must specify the ownership of trade secret information, or specify that all information is a work made for hire. Further, while W-2 employees are bound by the work for hire doctrine with regard to copyright, the work for hire doctrine does not apply to trade secret content. Absent an employment contract specifying that ownership of trade secret information developed by the employee belongs to the company, the company may find during litigation that it retains only a shop right to the information. Ownership of the trade secret information, developed with company equipment at the company’s location and on the company’s time, belongs to its creator, the employee.

The court may find that access to the information is insufficiently documented to support a finding of infringement. For patents, trademarks and copyrights, disclosure is part of the application process, and access to the information is assumed. In addition, patent, trademark and copyright holders have exclusive use of the intellectual property for the specified term. Trade secrets, however, can be independently developed and independently used by multiple entities. It is up to the plaintiff to prove that defendant's possession of the trade secret information did not result from independent development, but resulted from access to the information.

Finally, the court may find that defendant was insufficiently noticed of the trade secret status of the information. Defendant must know, or a reasonable man in defendant's position should know, prior to the infringement, that the information owner considers the information a trade secret. The courts have also found that all information in a company's possession cannot be designated to have trade secret status. Failure to differentiate will result in a finding that none of the information has trade secret status.

It is important to note again that these four proofs result from actions plaintiff took before defendant's infringement. While after the fact documentation of the necessary actions is possible, the courts are naturally skeptical of such efforts. The courts will protect former employees and their new employers from legal harassment by their former employers, and documentation of trade secret information after the alleged infringement makes it easier for defendant to successfully argue such harassment. Only by taking the necessary steps, and documenting them, prior to the infringement can trade secret litigation provide the full protection of trade secret information anticipated under the law.

Trade Secret Lawsuit Strategy