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Common Trade Secret Defenses

By Eric Misterovich

When a plaintiff brings a trade secret cause of action, he or she must prove three elements:

  1. Subject matter: The existence of a trade secret
  • The trade secret holder must prove that the alleged secret was the type of information trade secret was intended to protect, that it is not generally known, and that it is something that creates a commercial advantage
  1. Fencing: Maintenance of the trade secret through reasonable secrecy measures
  • The trade secret holder must establish that reasonable precautions were taken to prevent disclosure of the secret information
  1. Misappropriation: Infringement by breach of confidence or improper means
  • The trade secret holder must prove that another (usually a competitor) wrongfully acquired the information

A company subject to a trade secret suit can destroy the plaintiff’s claim by asserting a myriad of trade secret defenses aimed at one or more of the three elements listed above. Here is a list of the most common defenses at the exact element each is aimed at (some may overlap):

Subject Matter Defenses

  1. Information becomes sufficiently well known
  • This defense requires a showing that the alleged secret was already available in the public domain. The defendant should point to books, articles, or other documents that reveal the secret has already been disclosed or that it was readily ascertainable.
  1. The existence of a patent
  • If the trade secret has been patented then it is accepted as public knowledge and no claim can be brought forth. This is because one of the requirements of patent protection is that it must be published. However, this will not necessarily prevent as patent suit since patent law supersedes trade secret law.

Fencing Defenses

  1. Failure to take reasonable secrecy measures
  • This defense requires a defendant to show evidence that the holder did not take sufficient measures to protect the secret. Such deficiencies in protection could range from a failure to require an employee to sign an express non-disclosure agreement to not properly securing access to a manufacturing plant. Needless to say, it is a highly fact intensive inquiry and the court will weigh the holder’s secrecy measures against the nature of the industry or business at hand.
  1. Voluntary, non-confidential disclosure and innocent use
  • This defense is similar to the abovementioned one, except that it requires the presence of a third party. If the company disclosed its secret to a third party without an adequate non-disclosure agreement in place, and then a competitor innocently learns of the secret, then the action could be dismissed. However, if the court does decide a trade secret was in place then the defendant will need to cease use upon learning of its existence.

Misappropriation Defenses

  1. Reverse engineering
  • This is the most common trade secret defense. It occurs when someone takes a competitors product and breaks it down in a backwards fashion in order to determine how it works or what it is made of. A competing company is legally allowed to reverse engineer any form of a trade secret and then use it in its own operations in whatever form. However, this defense is usually limited to products or other items that are available to the public at large. It most likely will not be effective if the reverse engineering involved a manufacturing process or something else that is managed internally by the company holding the secret.
  1. Independent discovery
  • This occurs when a company simply discovers a competitor’s trade secret as a result of its own efforts. This is an even more wholesome defense than reverse engineering because it does not imply that the defendant company was in possession of the information, process, product, etc. that was subject to trade secret protection. If a defendant is able to assert this defense properly than it does not even matter that a trade secret exists, as it is legal to discover the secret using only one’s own labor.

Standard Defenses

  1. Statute of limitations
  • As in many state-based tort and contract cases, the statute of limitations will only allow a holder to assert a misappropriation action in a certain time period. It is wise to check relevant state law in order to determine if the statute of limitations has already expired. This should be the first action taken by a defendant because an expiration of the relevant time period will defeat a claim without any need for further litigation regarding the secret.
  1. Laches
  • This is a defense akin to the statute of limitations, but instead of a straight temporal restriction it instead involves prejudicial delay. For example, if the defending company had used the secret for a certain amount of time with the reasonable belief that the holder would not sue, then the court may find unfairness on the part of the plaintiff regarding any subsequent litigation.

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