The Trade Secret Dance: Lessons From The Litigation Trenches

By Steve McDaniel, JD, PhD, Technology Litigators & Paul Stanfield, JD, Stanfield Hiserodt, PLLC | May 15, 2012

Queen’s Counsel: You have testified to this Court that you personally handed any bloke who walked into my client’s front office the computer code that contains its trade secrets, no questions asked. Is that right, Mr. Smythe?

Witness: Whenever anyone came into the Australian office and asked for it, I would hand them the code.

Queen’s Counsel: You yourself handed them the code?

Witness:  Yes, no questions asked.

Queen’s Counsel: What does computer code look like, Mr. Smythe?

Witness:  Well, it’s computer stuff, you know, I don’t know.

Queen’s Counsel: What about source code?

Witness:  I don’t know. I was just the receptionist.

Queen’s Counsel: What is machine code, Mr. Smythe?

Witness:  I don’t know.

Queen’s Counsel: Binary code? Any clue, what binary code is?

Witness:  “Binary”…what?

Queen’s Counsel: Isn’t it true, Mr. Smythe, that you would not know computer code of any kind even if it were to jump up and bite you on the arse?

Mr. Smythe: Uhhhmmm, yes, yes sir, that’s true.

Queen’s Counsel: No further questions. I pass the witness.

While not an exact transcript of the actual cross-examination, it’s close. It was one of the most amazing feats of lawyering your authors ever witnessed in trade secret litigation. And it highlights the thrust of what we want to discuss—the trade secret litigation dance—since despite your best efforts to protect them, you may have occasion to aggressively “catch a thief.” This comes from our personal experiences in the trenches advising people about the steps needed to have an effective trade secret program, assisting them to routinely audit these assets and representing them when their secrets have been stolen.

The very first scoundrel’s defense that will come without fail from the accused trade secret thief is, “Unh-uh! It ain’t a trade secret.” That is precisely what was going on in the cross-examination of the chief witness of the thieves shown above—one Mr. Smythe, the former receptionist of the Australian branch of our client, a large software developer.

Like clockwork, the departing employees that stole the code of our client asserted that the code was not a trade secret. And, chiefly upon the testimony of receptionist Smythe, they aimed to show that it was routinely passed out like candy to anyone who walked in the front door of its Sydney offices.

Anecdotally, what made this cross examination so amazing was that our Australian colleague, a Queen’s Counsel in Australia, arrived severely jet-lagged the morning of the testimony of Mr. Smythe, deposed the receptionist for less than half an hour before the judge gaveled the proceedings open, and immediately proceeded to summarily slice his countryman into little chunks in cross examination lasting at most a minute-and-a-half, then promptly left the trial to catch a plane back Down Under. All this, as the opposing counsel hid behind their hands from his Honor’s steely, disapproving glare! Sweet. One of those trial moments we lawyers dream about. 

So, be as ready as you can to immediately dispatch this automatic defense. Before you can protect something as slippery as a trade secret though, you do have to know what it is. Generally, a trade secret is defined as some bit of information that is important to your business, gives you a competitive advantage and that is generally not known in your industry. But, the thief will claim it is not. Let’s examine each of these elements with the thief’s voice echoing in the background that they are not trade secrets. (“To catch a thief, ya gotta think like a thief, boys!” – Sergeant Friday, Dragnet).

Unlike patents or copyrights, a trade secret does not need to be non-obvious or original. It can be the most mundane of items such as a customer list or supplier information. It can be a copy of a publicly available document. It can also be very esoteric, such as the formula for a soft drink, the formulation for a polymer, or the schematic for a particle accelerator. The point is, it can be anything if it is important to your business and gives you a competitive advantage. It also must not be known outside your entity in a general manner.

In another case one of us litigated, this one involving flash cards for training mystery shoppers, the bad guy’s only defense was “there ain’t no stinking trade secrets” in these training materials, they are just general sales techniques that everyone uses. To the chagrin of his attorney at his deposition, he was handed a trade journal where he was quoted as saying to the interviewer, “I can tell you generally what the benefits of this mystery shopping training involves, but the details are strictly a trade secret.” Oops.

Each of these elements is essential and the failure of any one can be fatal to your characterization of such information as a trade secret. One method of identifying the information in your company that qualifies as trade secrets is to do a trade secret audit. This can be done internally by your company but is best done by experts in the field that can talk to the right people and ask the right questions. Audits done by outside experts are not cheap but if a trade secret is identified and protected as a result, the audit will seem cheap for the results that it provides. And, it will add significantly to the weight of your arguments that you take reasonable steps to protect your trade secret assets.

It may be that you already know, at least partially, that you want to protect the crown jewels of your company as a trade secret. Advantages of trade secret protection are that it is not limited in time like patents, it does not cost much to additionally create and protect (since you have to do it anyway), and you do not have to make a filing with anybody. Disadvantages are that you can lose the protection in an instant if you don’t do the trade secret dance, including filing suit if absolutely necessary, and that you observe some “rules”.

How do you keep them safe? One of the rules mentioned above is that in order to claim something is a trade secret, you have to treat it yourself, like it is a trade secret. That means you have to take reasonable steps to protect its secrecy. Hence the name, trade secret. If you don’t treat it like the secret that it is and leave it lying out in the rain or be lax in some other area, a court will not treat it any better than you do. But, this also certainly means that you cannot allow it to be stolen.

Does this mean that such information can never be shown to anyone except those in the inner sanctum for fear of losing trade secret protection? No, but if it is shared with anyone, including employees of the company owning the trade secret, it is essential that all such people be contractually or ethically bound to keep the information confidential. This can be done with employee confidentiality agreements, non-disclosure agreements with third parties or reliance on the attorney-client relationship where that exists.

Take the case we mentioned above. The source code for many massive mainframe software programs are protected as trade secrets and is distributed to licensees pursuant to license agreements that require the licensee to keep the source code confidential, not to divulge it to any employee unless such employee is contractually bound to confidentiality and not to distribute it to third parties (e.g. contract programmers) unless such third party is approved by the licensor and has signed a non-disclosure agreement with the licensor and the licensee. This is part of the trade secret dance that is required but greatly frustrates many participants.

Another thing that courts look at when determining if a trade secret has been treated with the proper reverence is the presence of a thoughtful and written trade secret protection program. Such program can be formulated with the help of experts and will contain a lot of the elements we discuss in this diatribe and should be part of the company’s employee handbook, an employee’s orientation and subject to ongoing educational processes, audits and reviews.

You should also plainly mark documents containing your trade secrets so that no one can complain that they did not know. This should be uniform and contained in your trade secret written policies. The wording of the warning is not magic but it should be prominent (capital letters, different color) and unambiguous. The creation of a method to stamp documents or reproduce the notice in your word processing system automatically would be useful. Such a notice should be included in all appropriate computer files and on the splash screens of programs that you protect as trade secrets.

How do you protect your trade secrets when you are convinced that someone is misappropriating them?

One of us once worked for a company that had a market-dominating computer program that almost blocked all competitors in its particular field. That company had obtained the rights to such program by buying a company started by the original creator of the program. Sound familiar? The original creator and the company disagreed on the development plan and direction the company should be following for the program in question. Still sound familiar? To remedy this, the creator took all his ideas and code (while still an employee of the company) to a competing company and aided them in creating a competing product. Not so familiar. 

Most people have more ethics than this. The company was naturally peeved. A massive lawsuit ensued. Nobody won but the lawyers (so, there is always a silver lining, LOL). The point here is that the company was virtually compelled to take the action. When they found out about the misappropriation, if they had stood idly by, they would not have taken reasonable efforts to protect the trade secret and a court would have likely not allowed them to try to protect it against any subsequent infringers. Another part of the trade secret dance.

These lawsuits are usually very complex, expensive and divert a lot of management resources. They then require experts (e.g. attorneys, engineers, chemists, physicists, etc.) to develop the case, often with the help of private investigators and computer forensic experts.

In the case alluded to above, certain private investigators were engaged and these investigators were talented enough to be able to seat one of their operatives (a stunning, former Mossad operative with a “photographic” memory) on a transoceanic flight in the seat next to one of the malfeasors – a self-professed lady’s man (although married). Over the course of the event, which started in the preflight lounge, the defendant was proud enough of his endeavors in the matter, to divulge a lot of information regarding exactly how he heisted the goods right out from under the noses of our client. At a minimum, this should make you want to be quiet on flights—you never really know who is sitting next to you.

If you have to resort to the courts to protect your trade secrets, all of the elements described above will be scrutinized and examined under the microscope and harsh light of 20/20 hindsight. Therefore, the creation of a program and its routine and rigorous enforcement is essential because every element of your program will be attacked as a defense to enforcement.  If you fail to show that you have trade secrets or that you have not adequately protected them, even if the defendant wrongly accessed them, you will likely lose your case. Not only will you be unable to enforce it against the present defendant, it is likely that you will be unable to enforce them against any subsequent violator.

“Learn how to dance!” -Gene Kelly to Debby Reynolds (so, Fred Astaire taught her), Singing in the Rain.