Investigation prior to filing a trade secret misappropriation complaint: EONA evidence
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Aug 17, 2021 – To succeed in a trade secret misappropriation lawsuit, the plaintiff must present probative evidence of existence, ownership, notification and access – the EONA evidence.
This compelling evidence must be determined and investigated by the trade secret holder for each alleged trade secret before the trade secret misappropriation lawsuit is filed.
Failure to investigate EONA evidence should be grounds for finding “bad faith” under the UTSA (Uniform Trade Secrets Act) and DTSA (Defend Trade Secrets Act). Too often, defendants are faced with allegations of trade secret misappropriation that are not well founded in fact or in law and must incur hundreds of thousands of dollars in legal costs to defend themselves against allegations of trade secret misappropriation which would never have been filed if there had been an investigation prior to the good faith filing of the EONA proofs.
Courts of first instance should require applicants for trade secrets to provide the required EONA evidence at the start of litigation for each alleged trade secret. If the plaintiff is unsuccessful, the allegedly defective trade secrets should be rejected and the defendant should be awarded legal fees and costs as the winning party.
There is no exact definition of a trade secret due to the wide range of information that can qualify as a trade secret. And the wide range of factual circumstances that could be determinative or fatal for the classification of a piece of information as a trade secret contributes to the malleable definition of a trade secret.
The statutory provisions defining a “trade secret” in UTSA and DTSA focus on the secrecy and value of information and on the reasonable efforts made by the owner of the trade secret to maintain secrecy and confidentiality. But these legal requirements are not evidence, and they do not eliminate the factual factors to be considered in determining whether a trade secret exists.
The litmus test in trade secret law is the six-factor test identified by the American Law Institute in 1939 after a review of over 100 years of 19th century jurisprudence. The six factors are:
(1) The extent to which the information is known outside the company.
(2) The extent to which the information is known to employees and others involved in the business.
(3) The extent of the measures taken by the company to protect the confidentiality of information.
(4) The value of the information to the business and to competitors.
(5) The time, effort and money spent by the business to develop the information.
(6) The ease or difficulty with which the information could be correctly acquired or duplicated by others.
Today, the six-factor test has been adopted by virtually every state and federal court in the United States.
The appeal of the six-factor test is its ability to assess any potential trade secrets under any set of circumstances. It is extraordinarily versatile and compatible with modern trade secret law.
The pre-filing investigation of an allegation of trade secret misuse should include an assessment of the alleged trade secret, including evidentiary evidence under the six-factor litmus test. A trade secret misappropriation lawsuit should not be filed without a careful review of this six-factor evidence.
Proof of “ownership” requires the trade secret holder to provide proof of ownership. The existence of a trade secret precedes the possession of a trade secret. If a piece of information is generally known in the trade, or is easily verifiable by appropriate means, ownership becomes moot because anyone can disclose or use the piece of information. The world “owns” it.
There is no definition of “owner” in UTSA. However, the DTSA defines the “owner” of a trade secret as “the person or entity in or in which the legitimate or fair title to the trade secret is deposited. Therefore, there may be simultaneous (and multiple) owners of the same trade secret.
The distribution of ownership between employers and employees emanates from the law of agents. There is no “work for pay” doctrine in trade secret law or patent law. Unless otherwise agreed or assigned, the law usually attributes property to the inventor of the invention or trade secret. Employees can also retain ownership of information including their general knowledge, skills and experience.
The only exception is the “recruited to invent” doctrine. If an employee is “hired to invent” something and later invents it, the employer owns it based on the “hired to invent” doctrine. But in all other circumstances, ownership reverts to the employee as the creator of the trade secret or invention.
Courts also apply the “shopping rights” doctrine to trade secrets. If an employee invention involves the employer’s time, personnel, facilities, or equipment, the employer retains a “right of the store” – an irrevocable, non-exclusive, royalty-free license to practice the invention and associated trade secrets.
The owner of the trade secret must prove that the alleged hijacker had actual, implied or implied notice of the alleged trade secret. The notice requires the identification of the alleged trade secret with precision. A purported trade secret must be described in sufficient detail that when a description of what is generally known in the industry is placed side by side with the description of the purported trade secret, a comparison can be made between the purported trade secret and what is already generally known in the trade.
The requirement of notice is a reasonable measure required to protect the secrecy of the piece of information allegedly characterized as a trade secret. It is inappropriate to claim the existence of a trade secret after the fact. To maintain the secrecy of a putative trade secret, the employer must inform the employee of the trade secret status of the matters the employee is working on. The traditional way to place an employee “on notice” is to require the employee to sign a confidentiality agreement or a nondisclosure agreement.
It is a fundamental principle of trade secret law that an unprotected disclosure of confidential information to the receiving party vitiates the status of the information as a trade secret. It is like a “pin pricking a balloon” – the status of the information as a protectable trade secret is lost.
The “notice” requirement in trade secrets law is the keystone in imposing liability on the alleged trade secret hijacker. There is no liability if there is no notice of the confidentiality of the disclosure. If A discloses the secret to B despite B’s protest that he does not wish to keep the secret confidential and will not keep it if it is disclosed, there is no breach of trust and no liability.
The notification can be proved by direct or indirect evidence: one knows the facts when he knows them or when he should know them. He should know whether, from the information available to him, a reasonable person would infer those facts, or whether, in the circumstances, a reasonable person would be investigated and an investigation conducted with reasonable intelligence and diligence would reveal the facts.
Assuming the existence of at least one trade secret, there are three forms of embezzlement under UTSA and DTSA: unauthorized acquisition, unauthorized disclosure, and unauthorized use.
There must be proof of “access”. This is a typical fact pattern:
(1) An employee acquires trade secret X from the existing employer.
(2) The employee resigns and joins a direct competitor (new employer).
(3) The former employee brings trade secret X to the new employer.
(4) Former employee discloses trade secret X to the new employer.
(5) The new employer and the former employee are prosecuted for misappropriation of trade secrets.
The entire fact model is triggered by the employee’s initial acquisition of trade secret X. Without access and acquisition, there can be no liability for trade secret misappropriation.
Acquiring a trade secret by improper means is illegal. Acquiring a trade secret by appropriate means is legal. Whether by “appropriate” or “improper” means, there must be evidence of the respondent’s “access” to the trade secret. Otherwise, the trade secret owner cannot establish a prima facie case for trade secret misappropriation. Unlike the owner of a patent, the owner of a trade secret has no recourse against another person who independently discovers the trade secret or legally acquires the trade secret through reverse engineering or other appropriate means.
Investigation prior to filing a trade secret misappropriation complaint requires probative proof of existence, ownership, notification and access – EONA evidence.
These requirements should be strictly enforced to discourage “bad faith” lawsuits for the misappropriation of trade secrets. Once again, EONA evidence must be determined and investigated by the putative trade secret holder for each alleged trade secret before the trade secret misappropriation lawsuit is filed.
Failure to investigate EONA evidence should be grounds for finding “bad faith” under UTSA and DTSA. Too often, defendants are faced with allegations of trade secret misappropriation that are not well founded in fact or in law and must incur hundreds of thousands of dollars in legal costs to defend themselves against allegations of trade secret misappropriation that would never have been filed if there had been an investigation prior to the good faith filing of the EONA proofs.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
R. Mark Halligan
R. Mark Halligan is a partner at FisherBroyles, LLP and is based in Chicago. He focuses his practice on intellectual property litigation and is recognized as a leading practitioner in the development of automated blockchain trade secret asset management systems. He has taught advanced trade secret law in the UIC John Marshall Law School LLM program for the past 26 years and is the lead author of the Defend Trade Secrets Act Handbook, 3rd Edition, which comes to be published by Wolters Kluwer. He can be reached at [email protected]