Standing to Sue: Possession vs. Ownership of Trade Secrets
Trade secrets encompass a unique area of intellectual property law that where protection is granted without any formal filings. Unlike patents, trademarks, and copyrights, which generally require filing an application with a government office, trade secrets are protected via—you guessed it—secrecy.
Once you have a protectable trade secret, you will generally have recourse to sue for misappropriation. However, the courts have given standing to sue for this cause of action not just to the originator of the trade secret, but also to those who are in possession of the trade secret and have an obligation to protect the confidentiality of the information.
This blog will explore the topic of a third party’s right to bring a cause of action for misappropriation even though the third party is not the owner of the trade secret.
Trade Secret Protections, Generally
Trade secrets are defined under 18 U.S.C. § 1839[1] and Cal Civ Code § 3426.1[2]. Boiled down, three things must be true for the information you seek to protect:
- Derives independent economic value;
- Not generally known to the public;
- Reasonable measures were taken to keep the information secret.
A good way to understand whether the information you want to protect as a trade secret derives independent economic value is to ask whether competitors would be able to gain immediate economic benefits if they got their hands this information. If so, your information likely derives independent economic value.
As to the second point, it is important to understand that the law only requires the information be not generally known to the public; it does not have to be a secret from everyone.
Finally, your efforts to protect the information have to reasonable under the circumstances. This does not mean or require that “confidential information be kept completely clandestine or mandate the use of nondisclosure agreements in all instances.” BladeRoom Grp. Ltd. v. Facebook, Inc., 219 F. Supp. 3d 984, 992 (N.D.Cal. 2017). However, if you disclose your information to those who have no obligation to protect that information, you will have extinguished your rights to protection. In re Providian Credit Card Cases, 96 Cal.App.4th 292, 304 (2002).
Non-originator’s Standing
It is widely understood that owners of intellectual property will be able to seek damages for infringement or misappropriation. This is true for patents, trademarks, copyrights, and trade secrets. However, within the realm of trade secrets, courts have ruled that rather than ownership, rightful possession of the protected information can be enough to give a party standing to sue.
Let’s say a ABC Company (“ABC”) has developed a novel, efficient method of producing a widget using proprietary software and machine sequences. Rather than disclosing this information to the public by attempting to secure a patent, ABC decides to go down the trade secret route and keep this information confidential. ABC then discloses this information to you, and you are able to incorporate this secret method and incorporate it into your own business practices. The disclosure is protected by non-disclosure agreements wherein you can use but not disclose the trade secret, and now you have a duty to maintain the secret. A few years down the line, you discover that despite reasonable efforts, one of your vendors hacked into your servers and pulled information—specifically, ABC’s trade secret—and began using it for economic gain.
The Plaintiff in BladeRoom faced a similar situation. In BladeRoom, the Plaintiff, as a licensee of another’s trade secret, filed a complaint alleging misappropriation against Facebook. 219 F. Supp. 3d at 989. Facebook argued, citing Nextdoor.com, Inc.v. Abhyanker, No. C-12-5667 EMC, 2013 U.S. Dist. LEXIS 101440, at *27, (N.D. Cal. July 19, 2013), that in order for plaintiff to bring a viable claim for misappropriation, the plaintiff must own the trade secret. Id. at 990. However, the court in BladeRoom stated that the citation denotes recognition of the “first element of a prima facie misappropriation claim” and that the term ownership is over-simplified in the cited text. Id.
Surprisingly, the court in BladeRoom placed great emphasis on possession rather than ownership of a trade secret. In following the rulings of courts in other jurisdictions, the court in BladeRoom stated that a party “has standing to bring a trade secrets claim if it has possession of the trade secret.” Id. “Those courts reason that ‘fee simple ownership’ as an element of a trade secret misappropriation claim ‘may not be particularly relevant’” because the confidential and proprietary aspect of a trade secret “flows, not from the knowledge itself, but from its secrecy.” Id. (quoting DTM Research, L.L.C. v. AT&T Corp., 245 F.3d 327, 332 (4th Cir. 2001)). Rather than ownership, “it is the secret aspect of the knowledge that provides value to the person having the knowledge.” Id. Further, although the confidential or proprietary secret information can be transferred, as with personal property, the continued secrecy within the transfer provides value, and any general, unprotected disclosure will destroy value. Id. Because trade secrets derive independent economic value from being not generally known to the public, “the better focus for determining whether a party can assert a misappropriation claim is on that party’s possession of secret knowledge, rather than on the party’s status as a true ‘owner.’” Id.
This emphasis was echoed more recently by the 3rd Circuit in Advanced Fluid Sys. v. Huber, 958 F.3d 168, 177 (3d Cir. 2020). In Huber, the Respondent obtained a license to use another company’s trade secrets. 958 F.3d at 178. Appellant Kevin Huber (“Huber”), while employed by Respondent, had access to the licensed trade secret information. Id. at 175. After Huber resigned, he continued to use the information he obtained during his employment, and Respondent filed a claim for misappropriation. Id. Appellants argued that because Respondent did not actually own the trade secret, Respondent lacked standing. Id. at 177. However, the court in Huber stated that while ownership is generally sufficient to bring a claim for trade secret misappropriation, ownership is not a necessary condition. Id. “A per se ownership requirement for misappropriation claims is flawed since it takes account neither of the substantial interest that lawful possessors of the secrets have in the value of that secrecy, nor of the statutory language that creates the protection for trade secrets while saying nothing of ownership as an element of a claim for misappropriation.” Id. Moreover, Respondent, as a licensee, had standing to sue because it was given possessory interest by the owner of the trade secret, even though full ownership interest was not transferred. Id. at 179.
Although both cases involve licensees, there is no distinction made by the courts in either BladeRoom or Huber between a licensee and a possessor of trade secret information. Rather, it appears that anyone who has been granted a possessory interest in a trade secret—and thereby an interest in keeping the information a secret—has standing to sue for misappropriation. The key takeaway here is that in light of these rulings (and referring back to the hypothetical above), the fact that you possess this information while not owning the trade secret may allow you to sue for misappropriation, as ownership may not be a strict requirement. It will be interesting to see if these rulings will be further adopted by other courts moving forward.
[1] (3) the term “trade secret” means 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—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) 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.
[2] (d) “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
