Absence of Competitive Advantage – The First Line of Defense to Trade Secret Lawsuits

• The touchstone of a trade secret is that it provides the owner of the information with a competitive advantage in their market.

• Courts look at the cost of development, the difficulty in duplicating  and measurable benefits to ascertain whether a bona fide trade secret exists.

• The first step in the defense of a trade secret is to examine whether there is real economic value to keeping the information secret.

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Trade secret laws, much like other types of intellectual property law, always have the potential to limit competition and restrict employee mobility.  The result is that trade secret law can be used as a means to try to carve out a market space.  Those cases, however, may involve benign information that is difficult to classify as a trade secret.

The first issue in the defense of any claim for misappropriation of a trade secret is to figure out if there is really a trade secret at issue, whether the claim is brought under the federal Defend Trade Secrets Act (DTSA), a state Uniform Trade Secrets Act (UTSA) (from which the DTSA was derived) or state common law.

The UTSA has now been enacted every state except New York and Virginia, as well as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.

Uniform Trade Secrets Act Definition of Trade Secret

The UTSA provides  a simple definition of what is trade secret and what constitutes misappropriation.  This post looks at the critical threshold issue, namely whether that trade secret actually competitive information that should be protected from disclosure?

Under UTSA, a trade secret is information that:

1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, 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.

The DTSA, a federal law that creates a federal cause of action, uses a substantially identical definition.  There are three lines of defense to consider in a case under either law: that the information is not a trade secret because it is not competitive, the information is not secret, or because the information was not misappropriated.

The focus here is on the first element.  Is the information proprietary?  In other words, does it have real commercial value to the owner, and does the owner depends on secrecy to protect that information.

How Courts Assess Competitive Advantage from Information

Determining whether a company derives independent economic value  generally requires a case-by-case analysis. Here are some factors that may need to be considered:

• Competitive Advantage from the Trade Secret. An indicator of independent economic value is whether the information gives the company a competitive advantage. Here the question is whether public disclosure will harm the company’s competitive position.
• Effort and Cost to Develop Information Claimed as Trade Secret. The inquiry here is the amount of time, money, and resources the company invested in developing this information. Where the investment is significant, it creates an inference of independent commercial value.
• Potential or Actual Profitability by Use of the Proprietary Information. When the company uses the information to increase profits, either now or at some time in the future, it may be competitive.
• Reverse Engineering Legally is Difficult. If the information cannot be readily duplicated legally, it is more likely to have independent commercial value that makes it a trade secret.
• Knowledge of the Trade Secret is Limited. Is the information known only within the company? Is is available only on a “need to know” basis?  Competitive information is usually guarded by its owners.
• Business Procedures. The way a company processes information internally may speak directly to its value. A company requires its employees to sign a non-disclosure agreement likely believes the information has independent commercial value.

Some examples of how this plays out in key cases include:

Bayer Corp v. Roche Molecular Systems, Inc, This case involved a patented method for testing blood donations for the presence of HIV. The court concluded that the company’s decision to patent the process rather than keep it as a trade secret showed that the information would not gain independent commercial value from non-disclosure, one of UTSA’s key requirements for trade secrets.

Whyte v. Schlage Lock Co. The California Court of Appeals ruled here that information must provide a company with a “substantial commercial advantage” to qualify as a trade secret. The court also found that common business practices and knowledge, even if valuable, did not meet this standard because they did not provide a significant advantage over competitors.

Inteum Company LLC v. National University of Singapore.  When  a plaintiff asserted a trade secret in the manner in which he stored code in a database, the claim failed because it a process that was not unique and provided no competitive advantage.

Polite temperature. Serv., Inc. v. Camacho: In this case, the Arizona Court of Appeals found that the provisional list of applicants may have been a trade secret because it gave plaintiffs a competitive advantage even though the identities of the applicants were not secret.

Other cases that we have seen in the office include generic marketing plans, customer liss that were available to everyone in a business or information compiled from public sources.  These types of cases should bbe compared to those cases that may involve processes or data that are truly competitive and secret.