Stephen M. Kramarsky ()
The formula for Coca-Cola is not patented. It is not protected by copyright or trademark or any other federal intellectual property statute. It is the canonical example of a trade secret—protected only by its own secrecy, and a constellation of contractual obligations, state statutes and common law rights known generally as “trade secret law.” Although there is no federal statute protecting trade secrets, 47 states have adopted some version of the Uniform Trade Secrets Act,1 which defines the elements and extent of trade secret protection. But New York has not. In fact, New York has no trade secret statute at all. New York courts have instead adopted the definition of trade secrets set out in the Restatement (First) of Torts §757: “‘any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.’”2
Under that broad definition, New York courts have applied trade secret protection to a wide range of business information—from customer lists to industrial processes—and that protection can be critical to a business. For example, an employer may need to give employees access to sensitive information for use in their jobs, but also want to prevent them from taking it to a competitor if they leave. A non-compete agreement can accomplish that, but New York courts will examine such agreements carefully to make sure they are tailored to provide legitimate protection.3 Similarly, collaborations between businesses may require the parties to share sensitive business information. Such collaborations may rely on common law trade secret protection, or supplement it with written non-disclosure agreements, but again those agreements must be carefully drafted to ensure that the parties are actually getting the protection they bargained for.
Despite the breadth of the Restatement definition, not all information important to a business qualifies as a trade secret. Again, lacking a statute, New York courts look to the factors set out in the Restatement:
(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.4
Naturally this is a highly fact-specific inquiry and that can make it very difficult for practitioners to advise clients who are relying on trade secret protection for their critical business interests. Any guidance from the courts is therefore welcome.
Recently, in Big Vision Private v. E.I. DuPont De Nemours & Co.,5 Judge Katherine Polk Failla wrote an extensive opinion examining the issues around trade secret protection. The court in Big Vision held that plaintiff had failed to adequately protect its purportedly secret industrial process and in the process provided an excellent road map of the potential difficulties awaiting any New York trade secret plaintiff.
Plaintiff in Big Vision was an Indian digital printing company that brought suit against defendant DuPont based on a joint venture to which a DuPont division was a potential supplier. In its complaint, Big Vision asserted that DuPont had violated various non-disclosure agreements, misappropriated its trade secrets relating to the creation of recyclable banners and committed acts constituting unfair competition. After a year of discovery and other proceedings, DuPont filed a motion for summary judgment, which the court granted in an opinion containing lengthy factual and legal analysis. Of particular interest are the court’s discussions of the requirement of “particularity” in the designation of a trade secret (both at the time it is shared and during the litigation) and its consideration of the factors relating to trade secret protection.
Factual Background. The facts set out in the Big Vision opinion are extremely lengthy and technical, but can be summarized relatively briefly. In 2007, Big Vision began a project to develop cost-competitive recyclable polymer banners. It retained a polymer expert (who executed a confidentiality agreement) and began conducting patent searches for patents related to recyclable banners. It also engaged another Indian company to begin creating sample banner materials for it, and though it provided specifications about how the materials should be made, it did not execute a non-disclosure agreement with that company. Throughout 2007 and 2008, Big Vision contacted several manufacturers in an effort to purchase machinery to manufacture the banners, and did not enter into confidentiality agreements with any of those manufacturers either, while continuing to disclose the details of its chemical polymer “recipe” to them.
Eventually, in 2008, Big Vision contracted with an equipment manufacturer, Davis-Standard, to manufacture its banner line. Again, the companies did not enter into a written confidentiality agreement, but Big Vision asserted that they had a “verbal” confidentiality agreement. Eventually, the two companies planned and conducted a series of three laboratory trials to test the banner machine and polymer recipe specifications. The trials took place between 2008 and 2009.6 Davis-Standard invited DuPont to join the project and provide expertise as a potential polymer supplier, and DuPont agreed. It attended the trials, provided information and worked with Big Vision and Davis-Standard, providing technical advice. Because other DuPont divisions were also in the business of making and selling banners, DuPont executed a written non-disclosure agreement (an NDA) with Big Vision soon after the first trial.
Throughout the trials, Davis-Standard continued to discuss the materials being tested with DuPont, including soliciting recommendations, and all of the parties worked together on formulations. These discussions took place over email and included Big Vision.7 At the third trial, a separate division of DuPont—the nonwoven fabrics division (NOW)— attended and executed its own non-disclosure agreement. Although NOW was a potential supplier for Big Vision, it was also a potential competitor (as a supplier to DuPont’s own banner business) and the evidence showed that, after the third trial, other potential business arrangements, with or without Big Vision, were being discussed among the DuPont divisions.8
During these trials, Big Vision did not limit its communication to Davis-Standard and DuPont. It contacted “at least 11 different third parties, and appeared to seek a new machine manufacturer.” In doing so, it disclosed its banner formulation in detail (at least in some cases) and did not enter into any written confidentiality agreements, although it again alleged that the confidentiality of the conversations was communicated orally. It also filed a public patent application in India in 2009 disclosing some of its purported trade secrets.9
Big Vision continued to conduct trials until 2011, when it settled on a desired banner formulation. As of January 2013, it had not entered into production of banners. DuPont subsequently created a recyclable banner line, but it did not sell well and was largely discontinued.
Big Vision’s Trade Secret Claims. Big Vision’s complaint alleged that DuPont had misappropriated its trade secrets by filing patent applications and creating products using confidential information DuPont had learned at the manufacturing trials. Or in other words: “DuPont, representing itself as a ‘mere resin supplier’ at the three Davis-Standard Trials, used those trials to gain access to Big Vision’s trade secret method for producing recyclable banners and then misappropriated that information for DuPont’s own gain.”10
The court rejected these claims for finding (among other things): (1) that Big Vision failed to describe its trade secret with particularity, both at the time of disclosure and during the litigation; and (2) that Big Vision’s purported “trade secret” was not, in fact, secret. These are common pitfalls in trade secret cases.
The Requirement of ‘Particularity’. Perhaps the most fundamental problem with Big Vision’s claims—one that the court identified as particularly troubling—was its failure, at all stages, to give the court and the defendants a clear definition of the trade secret it sought to protect. The opinion identifies five different articulations of the alleged trade secret in the complaint alone; it then notes that a totally different characterization emerged in discovery, still another on questioning from the court, and still another in plaintiff’s expert report. These characterizations varied from highly technical descriptions of polymer structures to far more general descriptions of business processes. In its expert report, plaintiff apparently settled on five elements that it alleged, in combination, encapsulated its “trade secret” business process, but the court held that even if it had properly identified these elements in its pleadings, there was no evidence it had identified them at the time of disclosure or made any effort to protect them. The court found this fatal to plaintiffs’ claim.11
The requirement of particularity in New York trade secret law is not entirely clear. The Second Circuit has held that at least some level of specificity is required at the time of disclosure, and that a passing reference to some element of a trade secret may be so “so vague and indefinite” that it cannot be the basis for an action,12 but there is very little guidance on exactly what that standard means. As Big Vision points out, “a defendant must know what constitutes a plaintiff’s trade secret, so that it does not infringe upon that trade secret and so that the defendant can defend itself at any trial,” but at the same time any obligation to designate trade secret materials in advance cuts against the generally broad nature of the protection. The court in Big Vision adopted a fairly strict view of particularly, based on an earlier Southern District opinion in Sit-Up Ltd. v. IAC/InterActiveCorp.,13 requiring that the trade secret be identified with “specificity” both at the time of disclosure and in any court proceeding. The Second Circuit has not yet adopted this standard, but the court in Big Vision notes that every other circuit court to consider the issue has done so.
In applying the standard, the court noted that Big Vision “made virtually no effort to identify its alleged trade secret with particularity at the time of disclosure, and did nothing to separate its alleged trade secret from DuPont’s own contributions to the trial or the latter company’s considerable prior knowledge.”14 Noting that Big Vision’s test documents “do not actually disclose the trade secret with any degree of particularity, much less the particularity required by law,” the court found that Big Vision did literally nothing to put DuPont on notice of the trade secrets it was allegedly receiving at the manufacturing trials, and that it similarly failed to pin down its purported trade secrets during the litigation. It found these problems to be fatal to Big Vision’s claims.
The Trade Secret Factors. The court also found that, even accepting the five-factor “trade secret” identified with specificity in Big Vision’s expert report, Big Vision failed to take the steps necessary to ensure the confidentiality of its purported intellectual property. For example, though Big Vision allegedly had verbal understandings of confidentiality with some potential vendors, it admitted it had no such agreements with others, and it also admitted that it permitted DuPont to attend the first trial without a signed NDA. In addition, the court noted that each of the five elements of the purported trade secret were disclosed in Big Vision’s public patent application.
The court noted that these factors—the first and third Restatement factors relating to the extent the information is know in the industry and the efforts made to safeguard it—are the heart of trade secret analysis. A trade secret is not entitled to protection if it is not actually secret. Thus, having found that Big Vision failed to protect the information it claimed as a secret, the court was not concerned that issues of fact might exist as to the other factors in the Restatement analysis. Having held that “no reasonable factfinder could find that Big Vision undertook reasonable efforts to maintain the secrecy of its alleged trade secret,” it granted summary judgment on that ground as well.15
Avoiding Big Vision
Big Vision presents a useful example of how not to do treat sensitive business information in multi-vendor environment, but unfortunately plaintiff’s conduct was so far from best practices that it provides relatively slim guidance for the hard cases. The clear trend in trade secret cases is that there is some requirement of specificity in disclosure, but Big Vision should not be read to require (or suggest) that businesses attempt to enumerate in detail every potential trade secret in writing for any employee or business partner who may come into contact with it. Rather, the best practice when sharing highly confidential information, whether with employees or business partners, is to provide something, prior to disclosure, that describes the general nature of the information being shared, the permissible use of that information and the fact that the information is, or may be, confidential. As the court in Big Vision points out, the bar is not high: You don’t have to use the words “trade secret” and you don’t have to “put forth the same degree of detail as would be appropriate in litigation,” but you have to do “something.”16
Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex commercial and intellectual property litigation. Joseph P. Mueller, an associate at the firm, provided substantial assistance with the preparation of this article.
1. Available at http://www.uniformlaws.org/Act.aspx?title=Trade Secrets Act.
2. Ashland Mgmt. v. Janien, 82 N.Y.2d 395, 407, 624 N.E.2d 1007, 1013 (1993), quoting Restatement (First) of Torts §757, comment (b).
3. See BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389, 712 N.E.2d 1220, 1223 (1999).
4. Ashland Mgmt., 82 N.Y.2d at 407, 624 N.E.2d at 1013 (brackets omitted).
5. 11 CIV. 8511 (KPF), 2014 WL 812820 (S.D.N.Y. March 3, 2014).
6. Id. at *3-5.
7. Id. at *8-9.
8. Id. at *12-15.
9. Id. at *11-12.
10. Id. at *23. The complaint also alleged breach of the NDAs, but the court found that Big Vision had failed to explicitly designate any information as “confidential,” which the NDAs required. It therefore granted summary judgment on that claim.
11. Id. at *18, *26-28.
12. Heyman v. AR. Winarick, 325 F.2d 584, 590 (2d Cir. 1963).
13. No. 05 Civ. 9191 (DLC), 2008 WL 463884 (S.D.N.Y. Feb. 20, 2008).
14. Id. at 26.
15. Id. at *33.
16. Id. at *27 (emphasis original).