Question

How do trade secret holders prove misappropriation through circumstantial evidence, and why is it usually difficult?

Answer 1

1.“Trade secret” means 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.

Examples of Trade Secrets
Trade secrets largely fall into two broad categories: technical information and business information. The lists below are not intended to be exhaustive or exclusive. Keep in mind that technical or business information falling under one of the classes listed below must still satisfy the other elements of a trade secret in order to meet the legal definition.

Technical Information
Trade secrets in this category may include:

• Plans, designs and patterns, such as those for specialized equipment
• Processes and formulas, such as those for the manufacture of drugs, foods, chemicals or other materials (e.g., the formula for Coca-Cola)
• Methods and techniques for manufacturing
• Engineering notebooks
• Negative information, e.g., the designs that didn’t work (the UTSA definition of a trade secret “includes information that has commercial value from a negative viewpoint, for example the results of lengthy and expensive research which proves that a certain process will not work could be of great value to a competitor”)
• Computer software (programs or source code)

Business Information
Trade secrets in this category may include:

• Financial information prior to public release
• Cost and pricing information
• Manufacturing information
• Internal market analyses or forecasts
• Customer lists
• Unannounced business relationships one is negotiating or has entered into
• Information about business opportunities, such as opportunities to acquire another company or product
• Marketing and advertising plans, both for existing and planned products
• Personnel information (e.g., who the key employees are, what are the compensation plans for key employees, who would be a good target to hire away because of his or her special knowledge, experience, receptivity to solicitation, and the like)

Misappropriation does not need to be a deliberate act; it can occur through negligence or even mistake. “Misappropriation” is a statutory term that defines what one may not do with trade secrets one does not own.
“Misappropriation” means:
(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(2) Disclosure or use of a trade secret of another without express or implied consent by a person who:
(A) Used improper means to acquire knowledge of the trade secret; or
(B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:

(i) Derived from or through a person who had utilized improper means to acquire it;
(ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
(iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

To prove misappropriation through circumstantial evidence is difficult. However since there might not be direct evidence available, court relies on circumstantial evidence.

Kewanee Oil Co. v. Bicron CorpCorp(1974). In response to this problem, courts have held that circumstantial evidence of “similarity” may be used to establish the misappropriation of a trade secret under the UTSA, similar to what has long been recognized under copyright law. For example in Stratienko v. Cordis Corp. (6th Cir. 2005). the court noted that misappropriation and misuse of a trade secret “can rarely be proved by convincing direct evidence.” “Thus, requiring direct evidence would foreclose most trade secret claims from reaching the jury because corporations rarely keep direct evidence of their use ready for another party to discover.” After reviewing opinions from other circuits that have considered “circumstantial evidence concerning similarity of design plus access to the design to imply use by a defendant of a trade secret,” the court determined that circumstantial evidence may be used to establish a violation.” Thus, once evidence of access and similarity is proffered, it is entirely reasonable for the jury to infer that the defendant used plaintiff’s trade secret.”

To prove misappropriation by wrongful use, a trade secret owner does not need to establish that the alleged misappropriator’s product is an element-for-element copy of the owner’s trade secret product or process. Proof of wrongful use is often made upon a finding of substantial similarity between the products or processes, or by inference. Example: at the end of its first month in business, Company A has only one customer that had not previously been a preferred customer of the trade secret owner, Company B. From this evidence, a court could infer that Company A did not acquire the names of B’s customers through its own labor or public sources but rather, used Company B’s trade secret customer list.

2.It is difficult to prove misappropriation of trade secret because:-

Loss of Trade Secret Status and Other Defenses Trade secret status may be lost over time. For example, new technology developed today may become generally known and quite common in a span of time as short as six months. If so, that information likely would no longer qualify as a trade secret. Similarly, after previously secret business information (such as bids, prices, or demand data) is released or otherwise becomes generally known, it loses any trade secret protection that it might have enjoyed.

Readily Ascertainable Information
The fact that information is “readily ascertainable” is an affirmative defense to misappropriation in California. In other words, if the trade secret owner presents evidence that the information at issue is not generally known, the defendant may show that the
alleged trade secret information is readily ascertainable by proper means, such as availability in trade journals, reference books, or published materials.
Other “proper means” of ascertaining allegedly trade secret information include:

• Discovery by independent invention. However, this must be actual independent discovery, and not the mere possibility of it.
• Discovery by “reverse engineering,” “decompiling” and/or “disassembly” (that is, by starting with the known product and working backward to find the method by which it was developed, provided, of course, that the acquisition of the known product was itself fair and honest, such as by purchase of the product on the open market). However, note that in cases where the reverse engineering is very time intensive and expensive, the information yielded is likely not to be considered “readily ascertainable” and would therefore still be a trade secret.
• Discovery under a license from the owner (assuming, of course, that the license does not include a confidentiality or nondisclosure agreement).
• Observation of the item in public use or on public display.
• Obtaining the information from published literature.
• Obtaining the information from one who is not under any obligation to keep it confidential (e.g., obtaining a competitor’s pricing from a mutual customer).

Failure to Keep Information Secret
A third defense is to show that the plaintiff did not take proper efforts to keep the information secret. For example, if the plaintiff gave the alleged secrets to someone who was not required to keep the information secret, or if the plaintiff allowed persons to get documents or on-line files with the information without restriction, it has not properly protected the information. Such information is no longer a trade secret of the plaintiff’s.

Companies lost trade secret cases for any number of reasons. Some companies included the information in patent applications that were later published. Others failed to instruct their employees to keep the information secret, and the employee shared it with persons outside the company. Still others sent the information in question to customers, suppliers, or co-developers without any confidentiality agreements. Confidentiality agreements are not always necessary, though, because sometimes there is a legal requirement to keep information secret just because of the relationship that a person or other company has with the owner of the information.