PROTECTING TRADE SECRETS IN THE CURRENT ECONOMY

BY:KIRBY DRAKE

Trade Secrets

• Protection extends to confidential information that gives a company a competitive edge

• No formal registration requirement• Balancing test

Trade Secrets

• Disclosure may destroy protection• Trade secrets usually endure as long as

the information is kept secret

Trade Secrets

Commercial Life of Product

Reverse Engineering

Independent Development

Tipping Off Competitors

Type of Subject Matter/Industry

Ease of Keeping Secret

Time Needed to Obtain Patent

Economic Effects

Trade Secrets Considerations

• Non-exclusive rights• Independent development not

actionable• Must breach non-disclosure obligation

or obtain trade secret via improper means to be actionable

Trade Secrets Considerations

• Commercial life of product• Economic considerations

• Patents may give a signal that IP was created – good for future investments, competitive positioning

• Less upfront investment to maintain as trade secret but loss may be financially devastating

The Overlap – Patents and Trade Secrets

• Innovations protectable with patents or trade secrets

• Cannot usually protect same innovation by both patents and trade secrets

Patent?

Trade Secret?

Both?

Neither?

What Is Protectable as a Trade Secret?

• Manufacturing processes• Ideas• Manufacturing drawings• Software• Chemical formulae and processes

Examples of Possible Trade Secrets

Customer Lists Know-How

Pricing Information Negative Know-How

Product Technical Specs

Computer Hardware

Marketing Plans Computer Software

Business Methods Chemical Formulae

Effects of Trade Secret Disclosure

• Claim for Trade Secret Misappropriation• Preliminary Injunction• Reassignment of Patent• Destruction of Trade Secret Protection

Remedies

• Injunctive relief• Monetary damages (royalty)• Attorneys’ fees• Punitive damages

Damages Remedies for Misappropriation of Trade Secrets

• Remedies are state-specific (whether in federal or state court), though most have some version of the UTSA and include:

1. Actual loss by plaintiff• Lost profits• Out-of-pocket expenses• Loss-in-value of business or trade

secrets• Other losses (consequential)

Damages for Trade Secret Misappropriation

2.Alternatively, or in addition, to actual loss • Unjust enrichment by the defendant

• Defendant’s profits• Market value of misappropriated trade secrets• Cost savings or value of “head start” benefit

gained by defendant

3.Alternatively…• Reasonable royalty for use of trade secrets• Use of patent damages construct

Damages MatrixAmount

High $1,606,784

Low $580,806

Plaintiff's Salary Adjustments $55,365

Individual Defendants': Plaintiff's Partial Salary $216,670

Lost Plaintiff Training Investment $52,720

Lost Plaintiff Business Development Investment $221,661

Loss in Value $1,606,784

Reasonable Royalty $779,090

Defendant's Unjust Enrichment: Profits $1,446,106

Individual Defendants' Profits: Defendant's Salary $690,939

Defendant's Avoided Cost: Training Expense $63,833

Defendant's Avoided Cost: Business Development Expense $484,121

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Plaintiff's Lost Profits

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Damages MatrixClaim 1 - Breach of Contract

Claim 2 - Tortious

InterferenceClaim 3 -

Conversion

Claim 4 - Misappropriation

of Conf Info & Trade Secrets

Claim 5 - Unauthorized Possession of

Computer InfoPlaintiff's Lost Profits 6,934,721$ 6,934,721$ 6,934,721$ Defendant's Profits 2,243,044$ 2,243,044$ Individual Defs' Profits: Salary @ Def 363,114$ 363,114$ Individual Defs' Profits: Salary @ Pl 110,159$ Actual Loss: Software Costs 1,790,444$ 1,790,444$ 1,790,444$ Loss/Avoided Cost: R&D Expense 324,342$ 324,342$ 324,342$ Loss/Avoided Cost: Marketing Expense 281,468$ 281,468$ 281,468$ Actual Loss: Training Investment Cost 550,413$ 550,413$ Actual Loss: New Employee Cost 154,879$ Reasonable Royalty @ 10% 2,425,746$

Co-defendant employees with various NDA, non-compete, and non-solicit agreements went to work for a competitor B and used their former employer A’s proprietary customer database with B’s consent to sell business to A’s customers

DuPont, Competitor, and Employees

• DuPont lawsuit against former employee• DuPont lawsuit against Invista• Invista lawsuit against DuPont partner• DuPont lawsuit against Kolon Industries

Coca-Cola and Pepsi

• Coca-Cola sued former employee for trade secret misappropriation (formula for Coke)

• Former employee had offered knowledge of formula to Pepsi but Pepsi did not use

The New Economy – Trade Secrets

• Opting for trade secret protection in lieu of other forms of intellectual property protection

• Rise of trade secret audits• Increased enforcement of non-competes

and NDAs• Modifications to damages model in

litigation• Other considerations?