Defenses to California and Federal Trade Secret Claims
January 21, 2021
The legal protection of trade secrets allows individuals and businesses to prevent disclosure of specific information, and to recover damages for the misuse of such information.
To meet the legal definition of a “trade secret,” the information at issue must have value based on its secrecy, and the owner of the information must have made efforts to keep it secret. Examples of trade secrets include unpatented inventions or processes, customer lists, confidential business or marketing plans, bid information, and recipes. Perhaps the most famous example is the recipe for Coca-Cola, which is not patented or copyrighted, but is instead a very closely guarded secret. Owners of trade secrets often require employees, contractors, and others to sign non-disclosure agreements (NDAs), which impose monetary penalties in case of a breach. California and federal laws protect trade secrets and allow owners to bring legal claims for misappropriation.
What Is Trade Secret Misappropriation?
Both the California Uniform Trade Secrets Act (UTSA) and the federal Defend Trade Secrets Act (DTSA) use the term “misappropriation” instead of “theft” with regard to trade secrets. This is partly because the dangers to trade secrets are often perceived as coming from within an organization. A disgruntled employee, for example, might try to sell proprietary information to a competitor.
Elements of a Trade Secret Misappropriation Claim
Misappropriation can occur with both the act of obtaining trade secret information and the act of disclosing it without permission. The legal definition of the term includes the use of “improper means” in acquiring or disclosing the information. This may include fraud, misrepresentation, or a violation of an NDA. The person accused of misappropriation must have known, or had reason to know, that what they were doing was “improper.”
Remedies for Trade Secret Misappropriation
Federal and state trade secret laws allow owners to obtain both equitable and monetary relief. This may include an injunction to prevent the unauthorized disclosure of information and monetary damages to compensate for a disclosure that has already occurred.
Defenses to Trade Secret Misappropriation Claims
A person, business, or organization claiming trade secret misappropriation has the burden of proving not only that the alleged acts occurred, but also that the information in question meets the legal definition of a trade secret. A defendant in a trade secret misappropriation lawsuit therefore has many potential options for challenging the plaintiff’s case.
A defendant can deny that a plaintiff can prove certain required elements of their claim. Perhaps their acquisition of the information was not “improper,” or they did not have reason to know of any impropriety.
Not a Trade Secret: Readily Ascertainable
The DTSA defines a trade secret as information that “derives independent economic value...from...not being readily ascertainable through proper means by” anyone who might also be able to obtain value from its use or disclosure. The UTSA limits the definition to information that is not “generally known to the public or to other persons” who would find it valuable. Information that people can learn through proper means is not subject to trade secret protection.
Not a Trade Secret: Independent Development
Similar to the defense that alleged trade secrets are readily ascertainable by others, a person who discovers this kind of information on their own, without the use of improper means, cannot be held liable for trade secret misappropriation.
Not a Trade Secret: Inadequate Protection by Owner
If a plaintiff cannot demonstrate that they made reasonable efforts to maintain the secrecy of the information, they cannot bring a claim for misappropriation. This includes failing to notify a defendant and other third parties that the information is to be treated as a trade secret.
The DTSA includes provisions that protect people from liability for disclosing trade secrets to an attorney or a government official, provided that they do so in confidence. This is meant to protect whistleblowers, meaning people who report illegal or unlawful activity by an employer, from liability for trade secret misappropriation. Since Congress enacted the DTSA in 2016, few courts have had an opportunity to rule on this defense.
A defendant in a trade secret misappropriation case can assert procedural objections to the claim, including:
- Statute of limitations: A plaintiff must bring a claim for misappropriation within the time period set by the DTSA or UTSA.
- Inadequate pleadings: A plaintiff must describe the trade secret with enough specificity for the court to evaluate their claim.
- Lack of standing: A plaintiff must be the owner of the trade secret in question in order to bring a claim.
- Trade Secret Disclosure Statement: For trade secret claims under California law, before discovery a trade-secret plaintiff must prepare a trade secret disclosure statement that identifies the trade secret with reasonable particularity.
Certain equitable defenses may also be available to a defendant in a trade secret misappropriation lawsuit:
- Laches: A plaintiff did not bring their claim in a reasonably timely manner, even if it is still within the statute of limitations.
- Estoppel: A plaintiff cannot bring their claim because a court has already made a final judgment on the claim or issue in a prior proceeding.
- Unclean hands: A plaintiff has engaged in misconduct or acted in bad faith in connection with the defendant’s alleged misappropriation.