Trade Secrets: The Growing Battlefront
Earlier this year, the most publicized trade secret case of our lifetimes played out in court between two giants, Waymo LLC (actually a subsidiary of Google’s parent company, Alphabet Inc.) and Uber Technologies, Inc. Both companies were developing self-driving car technology, a game-changer in transportation that may forever transform how we get from one place to another. It ultimately settled several days after trial commenced in front of a jury. Waymo’s recovery was substantial, but a mere fraction of its original $2.7 billion damage claim.
As technology evolves at an ever-increasing pace, disputes and lawsuits over proprietary information developed by companies has been growing in our courts. In part, modern information technology has made it easier for information to be taken by a high-level employee or executive to a competitor. The changing labor market in the last several decades away from longevity of employment with a single employer to a more migratory market to advance in one’s career has also contributed to improper transfer of proprietary information to competitors.
State common law and statutory law has developed along with the increasing incidents of misappropriation of trade secrets. California enacted its Uniform Trade Secrets Act in 1984, codified under Section 3426 to 3426.11 of the Civil Code (“CUTSA”). Notwithstanding that California and other states had laws enacted to protect trade secrets, Congress recently enacted its own body of law to stem the tide of misappropriation, passing the Defend Trade Secrets Act of 2016, codified at 18 U.S.C §1836 et seq. (“DTSA”).
What exactly is a trade secret? Unlike patents, copyrights or trademarks which can be defined in detail and registered with the United States Patent and Trademark Office, the value of trade secrets resides in no one outside its owner having the proprietary information. That reality translates to diametrically opposed ideas by the owner of the information and the recipient as to whether the information constitutes trade secrets. Often, the owner of the information itself is not clear which of its volume of business information qualifies as a trade secret, or the contours of the information beyond which it may not qualify.
The CUTSA defines a trade secret to mean “. . .information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
This definition, like those of other state and federal laws, has proved to be amorphous, highly dependent on a case-by-case analysis, finding competitors at loggerheads whether improperly taken information qualifies as a trade secret. Several courts have remarked that “a trade secret is one of the most elusive and difficult concepts in the law to define.”
Terms such as compilation, program, method, technique or process can mean different things in each industry or sub-industry. Equally challenging is the determination whether certain information has “independent economic value” because it is not public knowledge or commonly known in the industry. If everyone in the steel industry knows that the temperature at which a particular type of steel melts, no business can claim ownership to that information. But if one company finds through research and development that a unique 5-step process reduces the temperature at which steel melts, that could qualify as having “independent economic value.” Of course, for the information to be a “secret”, the owner has to undertake “efforts that are reasonable under the circumstances to maintain its secrecy.” What are reasonable efforts under the circumstances? Yet again, the statute leaves it to the courts to make that assessment when a trade secrets dispute arises.
Given the broadly-worded trade secrets statutes, the increase in trade secrets litigation we have seen has not been confined to obvious cases. It is not difficult to imagine that the recipe or formula for Coke constitutes a trade secret. Coke for over a century has developed a unique recipe that has made the company billions from the soft drink. Coke does not share the information with anyone and guards it in a highly secure vault, limiting access to two executives within the company. Coke calls it “the most guarded trade secret in the world.”
Today, more than ever there is trade secrets litigation over common categories of business information, such as manufacturer lists, vendor price lists, customer lists, and even internal financial information, such as employee salaries, operating expenses, revenue streams, and the like. Modern technology has expanded employees’ access to company information to 24/7, which many employers have not minded because that has translated to employees working from home or wherever outside the office they may be, responding to employer or customer demands immediately. But that has often led to company information residing on personal computers and in the case of the naïve or opportunistic departing employee, sharing or use of information at the place of new employment.
Invariably, some disgruntled former employers pursue legal action even though it remains to be proven whether information taken by a former employee truly constitutes a trade secret. For example, courts have long held that lists of customers in an open, competitive market, that is, where the customers are firms commonly known to the trade, do not constitute trade secrets. Unless the list contains unique information about the customers, for example that had taken months or years to develop, it will not constitute a trade secret. But that has not dissuaded many angry employers.
Some companies believe their own product price lists are a trade secret but learn too late that in freely sharing the list with not only active customers, but also prospective customers, without securing any understanding of confidentiality, they waived any claim that it constitutes a trade secret.
Likewise, companies often neglect to exercise prudent practices internally to maintain information confidential with restricted access to only those employees with a true need for the information for the purposes of discharging their functions and responsibilities. Lack of any demarcation as “confidential” with unrestricted access on a company server, for example, can doom any claim of trade secret qualification.
As the ease with which information is transmitted grows, employers who do not exercise best practices in maintaining their information confidential will continue to see it leave the confines of the company and to the hands of competitors or entrepreneurial employees who decide to embark on their own journey to a profitable business.