Trade Secrets – the hidden asset, until it isn’t: Part Two
Article | December 30, 2022
Trade Secrets – the hidden asset, until it isn’t: Part Two
Trade Secrets – the hidden asset, until it isn’t: Part Two
This article is part two of our two-part series on trade secrets and focuses on enforcement of trade secrets. Part one provides an overview of trade secrets, their identification and why they are a human management problem. Part one can be viewed here.
Introduction
Unlike patents, trade marks, and designs which are enforced under the provisions of their respective Acts, trade secrets are not subject to their own Act. As outlined in part one, the flow or control of trade secrets is primarily through people, which is controlled through employment contracts and contracts between organisations. Accordingly, in Australia, trade secret protection largely sits within civil law under tort and contract law.
Trade secret misappropriation
A unique problem of pursuing trade secret misappropriation is that the plaintiff needs to outline what the trade secret is. This is easier said than done. For example, if only the defendant came into possession of the trade secret and the public was not aware of the trade secret, the plaintiff would not want to outline the trade secret during a public hearing. Doing so would result in public self-disclosure of the trade secret. As a result, trade secret misappropriation cases tend to begin without a detailed identification of the asserted trade secrets, unless the plaintiff can file its complaint under seal or particularise the asserted trade secrets in a separate document available to opposing counsel under a protective order or confidentiality agreement. It is also common for documents pertaining to trade secret information to be treated as for “lawyers’ eyes only”.
In general, a plaintiff needs to show that the trade secret is a secret, was reasonably protected, and has value. Conversely, the defendant needs to show that one or more of these requirements are not met to avoid a finding of misappropriation.
Trade secrets can also unintentionally be bought up during litigation of matters that at first instance are unrelated to a trade secret itself. For example, information about tenders, suppliers, and customer information may be made available during discovery proceedings for unrelated contractual disputes. Care needs to be taken that these trade secrets are not accidentally disclosed during discovery. Having good trade secret management systems in place can help to reduce the likelihood of this situation.
Examples of unauthorised trade secret acquisition
The public tends to learn about trade secrets only when parties head to court to resolve a trade secret misappropriation action. As a bystander, it is a great way to learn about, among others, technology, company structures, R&D programs, and contract clauses.
The decisions in the following cases were handed down in early 2021 but highlight the value trade secrets can bring to an organisation and the breadth of information that is protected using trade secrets.
Zest Labs Inc vs Walmart Inc
Zest developed technology related to tracking fresh produce from farms to stores to minimise fresh food waste and protected this information using trade secrets. Zest worked with Walmart until late 2017 during which time they shared trade secrets in confidence with Walmart. Zest then sued Walmart in early 2018 arguing that Walmart used and disclosed the trade secrets.
Walmart was found to have misappropriated Zest’s trade secrets, failed to comply with a written contract, and acted willfully and maliciously in misappropriating Zest’s trade secrets. Zest was awarded US$65 million in compensatory damages and an additional US$50 million in punitive damages.
The decision was critical of Walmart’s wilful conduct which resulted in the additional punitive damages. The lessen to be learnt from this case is that if an organisation comes into possession of a trade secret, they should take steps to stop the use of the trade secret. This can include notifying the owner of the third party.
ResMan LLC (Resman) vs Karya Property Management LLC (Karya)
Resman developed proprietary software used to manage apartment buildings and protected this software using trade secrets. Karya was a former customer of Resman. It was alleged that Karya provided its third-party software consultant, co-defendant Expedien, with unauthorized access to Resman’s trade secrets in order to help it develop a competing product. The jury agreed with Resman finding: Expedien and Karya both misappropriated Resman’s trade secrets; Karya breached its agreement with ResMan, which prohibited providing access to third parties; Expedien tortiously interfered with the Resman and Karya agreement by accessing Resman’s software and then using it to build a competing product. Resman was awarded US$152 million plus US$120 million in punitive damages.
Whether Expedien knew that the information provided to them by Karya was confidential or not, this case highlights how third parties can become involved in trade secret misappropriation actions.
BPA-free trade secret theft by Dr Shannon You
Dr You was employed as Principal Engineer for Global Research at Coca-Cola, which had agreements with numerous companies to conduct research and development, testing, analysis and review of various BPA-free technologies. Dr You was one of a limited number of Coca-Cola employees with access to BPA-free trade secrets belonging to Akzo-Nobel, BASF, Dow Chemical, PPG, Toyochem, and Sherwin Williams. Following her employment at Coca-Cola, Dr You was employed as a packaging application development manager for Eastman Chemical Company, where she was one of a limited number of employees with access to trade secrets belonging to Eastman.
Without going into several significant details of the case, Dr You was found to have stolen valuable trade secrets related to formulations for bisphenol-A-free (BPA-free) coatings for the inside of beverage cans during her employment at Coca-Cola and Eastman. The stolen trade secrets belonged to major chemical and coating companies including Akzo-Nobel, BASF, Dow Chemical, PPG, Toyochem, Sherwin Williams, and Eastman Chemical Company. It was determined that in total the stolen trade secrets cost nearly US$120 million to develop. In addition to trade secret misappropriation, Dr You was also found to have committed conspiracy to commit economic espionage, possession of stolen trade secrets, economic espionage, and wire fraud. She is currently awaiting sentencing.
The interesting thing about this case is that the following two simple actions would have helped to stop, or at least severely limit, Dr You’s ability to steal the trade secrets:
- Real-time alerts and processes designed to prevent the removal of sensitive and protected data.
- Prohibiting personal and non-authorised electronic devices, including smartphones, from proximity to trade secrets or sensitive installations.
As the above cases demonstrate, the enforcement of trade secrets can often lead to significant awards of damages to aggrieved companies. In each case, it was vital for the organisations to demonstrate the three elements of trade secrets mentioned in part one: secrecy, reasonable protection measures, and value.
While trade secrets might seem like something only appropriate for protecting mythical recipes from companies like Coca Cola or KFC, in reality they have a much wider application. The protection of any individual’s or organisation’s IP is typically done through a variety of mechanisms and trade secrets are a key part of that.
