Milton Springut ()
Trade secrets are a fickle form of intellectual property. They can be invaluable in protecting a company’s assets, and potentially can last forever. Coca-Cola famously has maintained its formula as a trade secret for well over a century. On the other hand, trade secret rights can be easily lost. Unlike a patent or copyright, there is no general right to exclude third parties from using the trade secret. Instead, trade secret law focuses on the means of obtaining access to the protected information. To illustrate, a competitor who buys the trade secret owner’s product off the shelf and reverse engineers it can use whatever it learns in its business, even in competing with the trade secret owner.
On March 3 the Southern District of New York granted summary judgment in favor of the defendant in a trade secret case, Big Vision Pvt. Ltd. v. E.I. du Pont de Nemours & Co., 2014 WL 812820, S.D.N.Y., No. 1:11-cv-08511-KPF-AJP. The decision highlights the difficulty of maintaining and enforcing trade secrets. District Judge Katherine Polk Failla’s 94-page opinion is a primer for counsel seeking to advise trade secret holders.
Background and Decision
Plaintiff Big Vision Private Ltd. is an Indian company based in Mumbai that specializes in digital printing, including advertising banners and billboards. Around 2007, it began developing an idea for recyclable banners that would be economically competitive with the more standard, non-recyclable versions. Big Vision entered into a partnership with an equipment manufacturer, Davis-Standard.
Defendant E.I. du Pont de Nemours & Co. of Wilmington, Del., is a well-known multinational chemical and materials developer and manufacturer. Among other things, DuPont manufactures materials used in the banners, including the substrate, pigments and resins.
In 2008 and 2009, Big Vision and Davis-Standard invited DuPont to review several trials to demonstrate the banner-printing methods it had developed. The parties entered into two nearly identical non-disclosure agreements (NDAs). Yet by 2010, DuPont had introduced its own recyclable banner products in the market, and had even filed several patent applications supposedly disclosing Big Vision’s secret methods.
Big Vision sued for breach of contract (the NDAs) and trade secret misappropriation. Following completion of discovery, DuPont moved for summary judgment on all claims, which Judge Failla granted. On the contract claim (decided under Singapore law), she found that Big Vision had failed to designate the information as confidential in the manner required by the NDAs. On the trade secret claims (decided under New York law), she ruled, among other things, that Big Vision had failed to properly specify what its trade secrets were (both at the time of disclosure and during litigation), had failed to show wrongful means of appropriating the information, had failed to maintain confidentiality and lost any trade secret rights it might have had when it published the information in an Indian patent application.
A review of the opinion is instructive in counseling clients about maintaining and enforcing trade secret rights:
Lesson 1: Follow the terms of the confidentiality agreement. Under the terms of the NDAs, information became “confidential” if it was disclosed (i) “in writing, or in other tangible form, and designated confidential in writing at the time of disclosure”; or (ii) “orally or visually, summarized and confirmed confidential in writing within thirty (30) days.” But, Big Vision completely failed to follow the terms of the NDA: It failed to designate any information as confidential during the three trial runs, and it failed to follow up with any confidentiality designations.
Instead, Big Vision attempted to rely on two emails sent after the second and third trials. The first email merely contained a boiler-plate confidentiality footer. The second one contained a catch-all sentence that “all our communications” were to be “dealt with confidentially.” These emails, the district court held, were too little and too late—too little because they did not specify what was confidential, too late because they were sent long after the required dates in the NDAs.
The Lesson: Negotiate an NDA that you can follow, and follow it. As the district court chastised: “[i]f the alleged trade secret were as valuable and novel as Big Vision now claims, it should have gone to the trouble of designating its alleged trade secret as Confidential in its entirety.”
Lesson 2: Define your trade secret clearly at disclosure. Judge Failla dismissed the trade secret claim on several grounds. One was that Big Vision had failed to describe its trade secret with particularity. Relying on a 50-year old Second Circuit decision, Heyman v. AR Winick, 325 F.2d 584 (2d Cir. 1963), the court held that, at the time of disclosure, the trade-secret owner must identify the trade secret with particularity “for the simple reason that 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.”1
The opinion reviewed the documentation provided during the three trials, and none of them identified the supposed trade secrets with any particularity. Simply figuring out what was tested at the first trial required cross-referencing of four separate documents! And, because so many variations were tested, there was no way that DuPont could know which exactly were claimed to be trade secrets. Moreover, much of the documentation provided—which disclosed as many as nine different formulations—was not even marked confidential! “[Big Vision's] disclosure was so ‘vague and indefinite’ that, as a matter of law, DuPont could not have been on notice of Big Vision’s alleged trade secret.”
The lack of particularity was exacerbated by the fact that DuPont was itself expert and itself had invented and commercialized technology in the same field. Big Vision claimed that it told a DuPont employee that the trials and everything in them were confidential. The court conceded that such might have sufficed for disclosure to a layperson. “But DuPont had developed advertising banners for decades, held numerous patents in the space, and had at least two divisions in North America alone that were developing and testing these products.” DuPont’s great expertise meant that Big Vision was required to do much more, because otherwise Big Vision’s belated attempt at blanket confidentiality designation would have prevented DuPont from using its own developed technology!
The Lesson: If you have a trade secret, you need to be very clear when disclosing it subject to confidentiality what exactly it is that is confidential. This is especially true where it is being disclosed to a potential business partner, like DuPont, that already has substantial experience in the field.
Lesson 3: Define your trade secret clearly and consistently during litigation. Another serious problem that Big Vision had was defining its trade secret in the litigation. First, its own descriptions of the trade secret “changed dramatically” from its complaint, to its responses to interrogatories, to service of its expert report. Furthermore, even when it finally settled on the definition set forth in its expert report—an assertedly “novel” combination of five elements—its definition was “notable for its imprecision.” A review of the five elements shows why:
i. a “[s]uitably strong polyolefin central layer;”
ii. “high pigment levels, including CaCO3;”
iii. “a layered structure made by coextrusion or a lamination of a predominantly LDPE structure;”
iv. “minimal use of Entira or other expensive resins;” and
v. “surface treatment.”
Many of the terms were found far too vague. For example what is a “suitably strong” polyoelfin layer? Numerous different types of layers were tested in the various tests, and it was unclear which, if any, were “suitably strong” or what that even meant as to other materials a company like DuPont might use. Other terms like “high,” “predominantly,” “minimal” and “expensive” were likewise found to be too vague to give any guidance about what was being claimed as the trade secret.
The Lesson: Before filing suit, define your trade secret with sufficient precision that the court and your adversary know what you are complaining about and what the defendant needs to avoid. This exercise is analogous to drafting claims for a patent, but because trade secrets are common-law rights that have no administrative review like the Patent Office, counsel must do so before bringing suit. While the complexity of this description will vary according to the complexity of the trade secret—a customer list, for example, will be fairly simple to describe—there must be sufficient precision to satisfy the court or the right will be lost.
Lesson 4: Make sure confidentiality is maintained with all players. The court also rejected the trade secret claim because Big Vision had made substantial disclosures to other manufacturers without securing confidentiality through agreements. Although Big Vision claimed that there was a general understanding in the industry that such disclosures were to be maintained as confidential, the court rejected that in light of the broad disclosures made to several different parties.
The Lesson: Keep your trade secrets a secret. If they need to be disclosed to a potential business partner or investor, make sure that confidentiality is well-secured by agreement. And, make sure that, even internally, confidentiality is maintained—such as by restricting access to certain employees, ensuring that key employees have signed confidentiality agreements, and using technical security measures (e.g., password protected computer files) to maintain the “secret” status.
Lesson 5: Don’t make public disclosures (such as in patent applications). The court also noted that in 2009, Big Vision applied for a patent in India, and the disclosures of that patent were more detailed and precise than what had been made in the litigation and to DuPont. The whole basis of a patent system is public disclosure in exchange for a limited monopoly for qualified inventions; disclosures in patent application have thus long been held to destroy trade secret status.
The Lesson: Decide what you want to patent and what you want to maintain as a trade secret. Generally, one form of protection excludes the other. (There are some limited exceptions to this. In some cases, parties have been able to obtain patents on technology while retaining certain “know-how” of operating the technology as a trade secret. Furthermore, the current U.S. practice is that patent applications are not published for 18 months, so that the trade secret status of the information can be maintained at least for that time. In some industries where “lead time” is important in commercial exploitation of the technology, trade secret law could protect the disclosures up to the time of publication.)
Lesson 6: Know what differentiates the trade secret from the prior art. All five elements of Big Vision’s trade secret were well-known in the industry in which it operated. Big Vision claimed, however, that the combination of the five elements constituted a trade secret. True, a secret and commercially valuable combination of known elements can be protected as a trade secret (just as a novel, non-obvious combination of known elements might be protectable under patent law). The problem, however, is that even the combination Big Vision claimed was “very nearly” disclosed in two patents owned by DuPont—one of which combined four out of the five elements, the other had a combination of four different elements.
Thus, Big Vision’s trade secret was merely a minor variation that could be reached by combining the teachings of the two patents. Although even that might have been found protectable as a trade secret, Big Vision would have to show that “the way in which the publicly-available components fit together is unique and not publicly known.” Given the vagueness in its defined terms, it simply could not meet that standard: “[h]aving failed to describe even the components of its claimed trade secret with particularity, Plaintiff has similarly failed to assert a unified process, design, and operation; as such, its trade secret claim must fail.”
The Lesson: Before suit, analyze what the trade secret adds to the body of knowledge known in the industry. In some fields, just as in a patent case, this may require study of patents and other “prior art” to ascertain whether the claimed trade secret differs in some “unique and not publicly known way” from what the rest of the industry does.
Indeed, in trade secret cases, this inquiry might require a broader inquiry, not only into “prior art” but also “later art.” While patents can only be invalidated by what was known in the art at the time of filing, in sharp contrast, a trade secret that becomes public knowledge loses its trade secret status regardless of when the disclosure happened, even if made after the trade secret owner created and began exploiting the trade secret.
Lesson 7: Consider what your theory of misappropriation is. As discussed above, trade secret law focuses on how the defendant acquired access to the trade secret, not merely using or copying it. Under New York law, a party asserting a trade secret claim must show that “the defendants used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means.” The Big Vision court had already ruled that DuPont did not breach the NDAs, so the first prong was not available.
Instead, Big Vision claimed that DuPont used “improper means,” which, following the Restatement of Torts, the court defined as “fraudulent misrepresentations to induce disclosure, tapping of telephone wires, eavesdropping or other espionage. . . In general they are means which fall below the generally accepted standards of commercial morality and reasonable conduct.” Big Vision asserted that DuPont misrepresented itself as a “mere resin supplier” to gain access to the three trials it held. But, the district court noted that DuPont had been invited to the trials. “Simply accepting an invitation to participate in a potential customer’s laboratory trials does not constitute ‘improper means.”
The Lesson: Before litigation, formulate a legally valid theory of “misappropriation.” Unlike patents and copyrights, trade secrets are not “infringed,” they are “misappropriated.”
Like all intellectual property rights, trade secret rights require due diligence to secure, maintain, enforce and litigate those rights. But because trade secret rights are a creature of the common law, and there are no administrative agencies like the Patent and Trademark Office or the Copyright Office that oversee its administration, the potential pitfalls before litigation are greater. For some businesses, trade secrets are their “crown jewels,” and such businesses and their counsel have to take care at every step to ensure that these rights are not lost.
Milton Springut is a partner at Springut Law. Tal S. Benschar, a partner at the firm, assisted in the preparation of this article.
1. This requirement echoes similar requirements in cases involving other forms of intellectual property. See Yurman Design v. Paj, 262 F.3d 101, 116-17 (2d Cir. 2001) (trade dress claimant must provide “an articulation of the specific elements” which comprise its mark.); 35 U.S.C. §112(b) (Patent applicant must include “claims particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention.”)