A foundational element of proving the existence of a trade secret — and trade secret misappropriation — under the Defend Trade Secrets Act or state law, or at the U.S. International Trade Commission, is whether the claimant has taken reasonable measures to maintain the secrecy of the trade secret.1
Since a trade secret can effectively be any commercially valuable information, the measures required to maintain its secrecy are necessarily fact-specific. Nevertheless, a review of recent decisions from the federal courts and the ITC reveals a trend recognizing the importance of contracts and confidentiality provisions as evidence of reasonable measures to maintain secrecy, and thus the existence of a protected trade secret.
Password Protection Is Not Enough
One through line in recent cases across jurisdictions is that technical measures to limit access to trade secrets, like password protection and two-factor authentication, are not enough to satisfy the reasonable measures requirement. Confidentiality agreements and notice of confidentiality policies are necessary for all employees or contractors with access to companies' trade secrets.
In Taylor Made Express Inc. v. Kidd, decided Jan. 18, the U.S. District Court for the Northern District of Illinois dismissed the plaintiff's trade secret misappropriation claims on summary judgment, despite the plaintiff's use of an employee handbook prohibiting disclosure of confidential information and keeping trade secrets password-protected.2
The court criticized the employee handbook as it did not "define confidential information, and there [was] no record of the [plaintiff] ever identifying the information at issue as confidential or trade secrets to its employees."3 The court found that the plaintiff had not taken reasonable measures to maintain secrecy because it had not required restrictive covenants or confidentiality agreements for all employees or independent contractors accessing the trade secrets.4
Based on these findings, the Northern District of Illinois concluded that the plaintiff's "efforts constituted a 'laissez-faire approach to data security' that is inconsistent with trade secret protection."5
Likewise, in Koch Acton Inc. v. Koller, decided March 13, the U.S. District Court for the District of Massachusetts determined that the plaintiff had not taken reasonable measures to maintain its purported trade secrets because it had not required its employees to execute confidentiality agreements, and employees had not been apprised of any confidentiality policies.6
While acknowledging that the trade secret information had been maintained in cloud-based electronic storage that was password-protected, the District of Massachusetts explained that "failure to enter into nondisclosure or confidentiality agreements often dooms trade secret claims," and held "password protection, absent other secrecy measures, is generally insufficient to satisfy the standard."7
In Freedom Capital Group LLC v. Blue Metric Group LLC, decided July 8, the U.S. District Court for the Middle District of Tennessee's analysis was the same.8 Notably, in this case, the plaintiff had used sophisticated technical measures to limit access, including hosting the purported trade secrets on cloud-based servers, using individualized credentials with two-factor authentication and tracking database access.9 The company did not, however, label the purported trade secrets as confidential, require a nondisclosure agreement or provide any training regarding the confidentiality of the information.10
Focusing on the fact that the "plaintiff gave access to (in addition to certain employees) independent contractors who were not bound by any agreement — or, for that matter the duty of loyalty owed by an employee to an employer under Tennessee law," the Middle District of Tennessee concluded that the plaintiff was unlikely to succeed in showing it had taken reasonable measures to protect its trade secrets.11
Collectively, these decisions underscore the need for trade secret owners to establish confidentiality policies and uniformly require confidentiality agreements for all individuals with access to trade secrets. Secondary to the existence of confidentiality agreements, the decisions also considered whether the purported trade secret was specifically identified as a trade secret or labeled confidential, but that issue was not persuasive in those cases.
Similarly, in other recent decisions where confidentiality agreements existed, there was no further analysis of whether the purported trade secret had been identified with sufficient specificity in those agreements in order to find that reasonable measures had been taken by the trade secret owner.12
Disclosure of Trade Secrets to Third Parties, Including Customers
Another area of interest in recent cases is the disclosure to third parties of confidential information that may constitute a trade secret or part of a trade secret.
It is axiomatic that a trade secret must be kept secret from third parties, and tribunals have continued to recognize the importance of confidentiality agreements with third parties to protect confidential information.
As an example, the Oct. 3 initial determination in the ITC investigation In the Matter of Certain Selective Thyroid Hormone Receptor-Beta Agonists, Processes for Manufacturing or Relating to the Same, and Products Containing Same discussed the steps that complainant Viking Therapeutics Inc. took to maintain secrecy of its trade secrets when disclosing them to third-party development partners and vendors.13
The ITC administrative law judge concluded that Viking had taken reasonable and necessary secrecy measures when sharing its confidential information because it vetted potential partners, required an executed confidential disclosure agreement before sharing its confidential information and shared only the minimal amount of confidential information necessary to accomplish the purpose of the partnership.14
In evaluating the disclosure of trade secret information to third parties, recent decisions have identified the presence of nondisclosure agreements as the most significant factor in proving reasonable measures to maintain secrecy, or lack thereof.15
For example, in Jacam Chemical Company 2013 LLC v. Shepard, decided May 17, the U.S. Court of Appeals for the Eighth Circuit affirmed a U.S. District Court for the District of North Dakota decision that granted summary judgment of no trade secret misappropriation based on an analysis of the individual agreements between the plaintiff and its customers.16 Specifically, the Eighth Circuit determined that the customer agreements either contained no confidentiality provisions or included only a "a blanket Confidential Information requirement" that did not apply to the customer.17
However, certain decisions in 2024 suggested ways that a claimant could potentially establish reasonable measures to maintain secrecy even without confidentiality agreements binding third-party recipients of trade secret information.
First, in Jacam, the claimant raised the possibility that an industry practice of maintaining confidentiality with respect to certain categories of information could contribute to establishing reasonable measures.18 Specifically, plaintiff Jacam argued that it had taken reasonable measures because "customers usually do not share [price] proposal information [the purported trade secret] with competitors."19
The Eighth Circuit rejected that argument because "[the claimant] produced no testimony showing the industry standard is to maintain the confidentiality of pricing information, only that price sharing is uncommon," but left open the possibility that in other cases there could be "an implied obligation within the industry to keep information secret," which could alter the result.20
Second, in My Fav Electronics Inc. v. Currie, decided Oct. 18 in the Northern District of Illinois, the nature of the purported trade secret — compilations of bids and pricing models, rather than individual bids or pricing models — influenced the outcome of the court's analysis of reasonable measures.21
In this case, the plaintiff had submitted bids, including pricing models, to various potential school district customers, without any confidentiality agreements, and the bids were ultimately made public at the time of the award.22 The court granted a preliminary injunction, dismissing the public disclosure of individual bids and explaining that "the operative question in this analysis is ... whether the compilations of [the plaintiff's] bid contents were reasonably well-guarded."23
Conclusion
Overall, recent decisions evaluating evidence of reasonable measures do not represent a significant departure from the common law. Courts look at a combination of factors to determine whether reasonable measures have been taken, with a special emphasis on the existence of confidentiality or nondisclosure agreements for all individuals with access to companies' trade secrets and limiting the amount of information provided.
Trade secret owners should keep this in mind when considering how to protect their confidential information and disclose confidential information to third parties.
Footnotes
1. 18 U.S.C. §§1836-39. The definition of a "trade secret" protected under the DTSA requires that "the owner [of the trade secret] has taken reasonable measures to keep such information secret." 18 U.S.C. §1839(3)(A). Trade secret misappropriation can give rise to remedy under common law, but all states except New York have also enacted into law a version of the model Uniform Trade Secrets Act, or UTSA. While the text and application of the law differ from state to state, all include some version of the UTSA's requirement that the trade secret "is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." UTSA § 1(4); see e.g., Massachusetts Uniform Trade Secrets Act (M. G. L. c. 93, § 42-42G), which requires that
at the time of the alleged misappropriation was the subject of efforts that were reasonable under the circumstances, which may include reasonable notice, to protect against it being acquired, disclosed or used without the consent of the person properly asserting rights therein or such person's predecessor in interest.
At the ITC, the commission considers six factors in determining whether a trade secret exists, including "the extent of measures taken by complainant to guard the secrecy of the information." In the Matter of Certain Botulinum Toxin Products, Processes for Manufacturing or Relating to Same and Certain Products Containing Same, Inv. No. 337-TA-1145, Comm'n Op. at 10-11 (Jan. 13, 2021).
2. Taylor Made Express Inc. v. Kidd, No. 21 C 2903, 2024 WL 197231, at *5-6 (N.D. Ill. Jan. 18, 2024).
3. Id. at *5.
4. Id. at *6.
5. Id.
6. Koch Acton Inc. v. Koller, No. CV 21-10374-FDS, 2024 WL 1093001 (D. Mass. Mar. 13, 2024) (granting defendants' motion for summary judgment and dismissing claims of trade secret misappropriation under DTSA and the Massachusetts Uniform Trade Secrets Act).
7. Id. at *9.
8. Freedom Capital Group LLC v. Blue Metric Group, LLC, No. 3:24-CV-00369, 2024 WL 3331641 (M.D. Tenn. July 8, 2024) (denying motion for preliminary injunction and finding that the plaintiff was unlikely to succeed on its trade secret misappropriation claims).
9. Id. at *8.
10. Id. at *9.
11. Id. at *8.
12. See, e.g., Legend Biotech USA Inc. v. Liu, No. 2:23-CV-02965-BRM-LDW, 2024 WL 919082 (D.N.J. Mar. 4, 2024) (granting motion for preliminary injunction and finding that "contractual controls on [the plaintiff's] employees to limit their use and authorization to use Plaintiff's information" were sufficient to show reasonable measures to keep information secret).
13. In the Matter of Certain Selective Thyroid Hormone Receptor-Beta Agonists, Processes for Manufacturing or Relating to the Same, and Products Containing Same, Inv. No. 337-TA-1352, Initial Det. at 70 (Oct. 3, 2024).
14. Id.
15. See, e.g., Stand. Nutrition Co. v. Smith, No. 8:22CV46, 2024 WL 1162052, at *5 (D. Neb. Feb. 16, 2024) (finding that the plaintiff "failed to undertake reasonable measures to protect the alleged trade secrets due to their availability to third parties," none of whom was contractually obligated to keep the information secret).
16. Jacam Chem. Co. 2013, LLC v. Shepard, 101 F.4th 954, 965 (8th Cir. 2024)
17. Id.
18. Id.
19. Id. at 965.
20. Id. at 965-66.
21. My Fav Electronics Inc. v. Currie, No. 24 C 1959, 2024 WL 4528330 at *9-10 (N.D. Ill. Oct. 18, 2024)
22. Id. at *10.
23. Id.
Originally published by Law360
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