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Trade secret misappropriation happens when a trade secret has been wrongfully taken or disclosed without consent.
What’s a Trade Secret?
A trade secret is information that derives independent economic value from not being generally known and that’s been the subject of reasonable efforts to be kept a secret. A misappropriation of a trade secret can occur in the breach of a nondisclosure agreement, publication, theft, fraud, or bribery.
As a defense to trade secret misappropriation, a defendant may claim that it independently developed the trade secret. It may claim that it reverse engineered a trade secret through testing, or it may assert there wasn’t a trade secret to misappropriate—because the supposedly secret information wasn’t actually secret or because the owner of that information didn’t take adequate precautions to keep it secret.
What is the Federal Defend Trade Secrets Act (DTSA)?
The Defend Trade Secrets Act (DTSA) was signed into law in May 2016. The law creates a federal, private, civil cause of action for trade secret misappropriation in which an owner of a trade secret that’s misappropriated may bring a civil action if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.
The DTSA doesn’t preempt (override) existing state trade-secret laws; but it gives companies the option of bringing a lawsuit in federal court to enforce their intellectual property rights.
The DTSA provides uniform definitions for the critical terms “trade secret” and “misappropriation.” The DTSA’s definition of trade secret is broad, allowing a wide range of proprietary information to fall within the purview of trade-secret protection under the statute.
The DTSA defines a trade secret is defined as:
All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (i) the owner thereof has taken reasonable measures to keep such information secret; and (ii) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.
Accused parties often say that the protection of the information at issue as a trade secret was abandoned because the owners didn’t take “reasonable measures” to keep their information secret. Whether an owner’s measures to protect a trade secret are “reasonable” depends on the specific facts of the case. This can include the technology they used, the industry in which the trade secret is employed, and the sophistication of the parties.
Certain actions that constitute misappropriation are detailed in the DTSA. Misappropriation is defined as follows:
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
Disclosure or use of a trade secret of another without express or implied consent by a person who—
Used improper means to acquire knowledge of the trade secret;
At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—
derived from or through a person who had used improper means to acquire the trade secret;
acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
Before a material change of the position of the person, knew or had reason to know that—
the trade secret was a trade secret; and
knowledge of the trade secret had been acquired by accident or mistake.
What is California Trade Secret Misappropriation?
Under California law, a trade secret is misappropriated if a person—
Acquires a trade secret knowing or having reason to know that the trade secret has been acquired by “improper means”;
Discloses or uses a trade secret the person has acquired by ‘improper means’ or in violation of a nondisclosure obligation:
Discloses or uses a trade secret the person knew or should have known was derived from another who had acquired it by improper means or who had a nondisclosure obligation’ or
Discloses or uses a trade secret after learning that it is a trade secret but before a material change of position.
What Remedies are Available in a Trade Secret Action?
Courts have also consistently required plaintiffs to demonstrate the causal connection between the trade secrets misappropriated and the owner’s damages. Based on the facts of the case, a plaintiff may seek the following relief:
Compensatory damages. Plaintiffs can recover actual losses.
Disgorgement of profits. Plaintiffs can recover the defendant’s profits.
Unjust Enrichment. Plaintiffs can recover compensatory damages to the extent they’re not included in the plaintiff’s actual losses.
Permanent injunction: Plaintiffs can get a court order enjoining the wrongdoer from engaging in particular conduct of using the trade secret.
Payment of royalty. If a plaintiff can’t demonstrate actual damages or unjust enrichment that stems from the misappropriation of the trade secret, they may seek reasonable royalties that don’t exceed the life of the trade secret.
Punitive damages. Plaintiffs can also seek punitive damages to punish the defendant in cases where the misappropriation was willful and malicious.
Attorney fees. Plaintiffs can ask for attorney fees when the misappropriation was willful and malicious. Also, a defendant can recover attorney fees if the lawsuit was brought in bad faith.
What is the Statute of Limitations for Trade Secrets?
In California, a trade secret owner has three years in which to file a theft of a trade secret claim. This period begins when the misappropriation is discovered or if the exercise of reasonable diligence should have been discovered. While concerns and suspicions of misappropriation don’t set off the limitation period, a trade secret owner’s failure to timely investigate those beliefs may bar them from bringing an otherwise valid cause of action. If the defendant can show facts that would have led a reasonable person to investigate their suspicions of misappropriation — even if the actual plaintiff didn’t—the plaintiff will be said to had information available from that investigation and, as a consequence, have constructive notice of the misappropriation.
And when a defendant continues to misappropriate the trade secrets, the limitation period doesn’t continuously accrue. In other words, a subsequent misappropriation does extend the deadline. As a result, when the misappropriation initially happens, the limitation period is triggered.
Note that this three-year statute of limitations may be tolled (paused) in some situations. For example, this three-year deadline is tolled against a California resident defendant who’s temporarily out of state and a nonresident defendant who hasn’t entered the state. But this tolling doesn’t apply to California residents who’ve moved out of state.
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When a trade secret is misappropriated and broadly disseminated, it generally loses its status as a trade secret. As such, it’s no longer protected. Because of this, it’s vital that owners protect their trade secrets closely. Speak with Eanet Law for advice on ways that measures you can protect your company’s trade secrets.
If you are involved in a disagreement about the misappropriation of trade secrets, work with the experienced business litigation attorneys at Eanet Law.