Trade Secret and Trade Secret Protection: Knowing is Half the Battle

Waymo v. Uber.  Qualcomm v. Apple.  ZeniMax v. Oculus.  High-profile trade secret cases like these have become more prevalent in headlines over the past couple of years. However, intellectual property cases do not only arise in the context of well-known corporations.  The number of trade secret cases in general has risen exponentially. This is due in part to the increase in startups, small tech firms, and the mobility of employees.  Oftentimes, smaller businesses rely on trade secret protection for designs and processes to avoid the upfront expense of obtaining patents. Patents require public disclosure of the underlying science or process and typically only protect a set number of years.

According to an article by David W. Opderbeck in The Cybersecurity Lawyer, “DTSA Statistics,” in just the first year after Congress passed new federal trade secrets law in 2016, Colorado had the fifth highest number of federal trade secret lawsuits filed, which most frequently included claims for breach of contract, tortious interference, and breach of fiduciary duty.  California, unsurprisingly, had the most.  According to Jeffrey Mordaunt and Joshua Swedlow in “Why Trade Secret Litigation is on the Rise,” in the 26 years between 1990 and 2015, 69 percent of published or publicized outcomes in trade secret cases resolved in favor of the plaintiff.  These trends and statistics tell us that it is imperative to know what a trade secret is, how to protect it, and what damages may be available in the event someone steals it.

What is a Trade Secret?

Colorado’s Uniform Trade Secret Act (UTSA) defines “trade secret” as “[T]he whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.”

While there is no exhaustive list of trade secrets, common examples include:

• client lists
• proprietary pricing lists
• business processes
• manufacturing processes
• algorithms
• recipes
• and formulas

Not everything a business does, however, is a trade secret. And not all trade secrets are captured on a tangible piece of paper.  In some instances, a court has to determine whether a trade secret exists.

To make that determination, some of the factors Colorado courts look at are:

1)      the extent to which the information is known outside the business;

2)      the extent to which it is known to those inside the business, such as the employees;

3)      the precautions taken by the holder of the trade secret to guard the secrecy of the information;

4)      the savings effected and the value to the holder in having the information as against competitors;

5)      the amount of effort or money expended in obtaining and developing the information; and

6)      the amount of time and expense it would take for others to acquire and duplicate the information.

While states have their own trade secrets law, the U.S. Congress passed the Defend Trade Secrets Act (DTSA) in 2016, which also now provides a private right of action in federal court for any trade secret “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  Companies that conduct business over state lines or in other countries can look to the federal court system to protect their interests.

How Does a Company Protect a Trade Secret?

The UTSA states that, “to be a ‘trade secret’ the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.”  In other words, a company has to take reasonable efforts under the circumstances to maintain the confidentiality of the trade secret. However, extreme efforts and costs are not required.  Colorado courts have held that reasonable efforts include:

• advising employees of the existence of a trade secret
• limiting access to a trade secret on a “need to know” basis
• protecting information with usernames and passwords
• controlling access to company facilities and equipment.

In today’s market, employees are working remotely. They are more frequently moving from job to job, and communicating over email and text messaging.  The methods of protecting trade secrets certainly encompass the simplicity of “old school” tactics, such as keeping lists under lock and key, but the rise of technology also requires companies to be more savvy about cybersecurity, using password protection on servers and electronic devices, and creating explicit policies pertaining to use of mobile devices.  Additionally, businesses are always well-served including confidentiality and non-compete provisions in employment agreements to prevent the use of trade secrets by terminated employees.

What Damages May a Company Recover for Theft of a Trade Secret?

The legal name for theft of a trade secret is misappropriation.  “Misappropriation” is defined broadly by the UTSA to include the “acquisition” of a trade secret by someone who knows it was obtained by improper means; the “disclosure” or “use” of a trade secret without consent by anyone who acquired it improperly; the “disclosure” or “use” of a trade secret by someone who had reason to know that his/her knowledge of it came from someone else who got it improperly; or “disclosure” or “use” by someone who had a duty to keep it secret or limit its use.  The language of the statute boils down to the disclosure or use of a trade secret by someone who was required to keep it secret or by someone who obtained it improperly.

In Colorado, a plaintiff can recover damages for the actual loss caused by misappropriation and the defendant’s profits from the misappropriation that are not taken into account in computing actual loss.  Alternatively, a plaintiff can ask the court to impose a reasonable royalty related to the defendant’s improper disclosure or use of the trade secret.  In limited circumstances, a plaintiff may be entitled to punitive damages.

Awarding Damages Under the Federal DTSA

Similarly, under the federal DTSA, a court may award damages for the actual loss caused by the misappropriation of the trade secret and damages for any unjust enrichment (i.e. profits gained) from the misappropriation of the trade secret that a plaintiff has not otherwise included in computing damages for actual loss.  Alternatively, a plaintiff can ask the federal court to impose a reasonable royalty related to the misappropriated trade secret.  In addition to damages, the federal statute allows a court to issue an injunction to stop a party from using the trade secret.  And again, a plaintiff may also be entitled to punitive damages in limited circumstances.

Companies should determine what trade secrets they have and put measures in place early on to protect those trade secrets. They should do this to minimize the need for filing a lawsuit or to increase the chances of prevailing in the event an employee steals trade secrets. If the company’s trade secrets are misappropriated, Ogborn Mihm is available to help assess your rights and available remedies.