The article below is the second in a series regarding "What You Need to Know About U.S. Law." Attorneys from a variety of practice groups at Pierce Atwood will author similar articles in the coming months to educate our overseas colleagues on U.S. law. Please feel free to contact the authors directly if you wish to comment on this article or suggest topics for future installments in this series.
Trade secrets are a well-established if often poorly understood concept. Massachusetts and New York further complicate the analysis as neither has adopted the Uniform Trade Secret Act which has been adopted in 47 other states. New York trade secret law is a pastiche of judicial decisions delineating a common law body of governing jurisprudence. Massachusetts has adopted its own unique set of laws that has been explained and expanded upon by judicial decisions.
A General Discussion of Trade Secrets
In the information/technology economy, the data, strategies, expertise, customer information, and business opportunities harvested from the resources sowed in research and development, marketing, and employee training are the key assets a business must protect to ensure its success today and in the future. Very often, these intangible assets will be protected as trade secrets.
Unlike trademarks, copyrights, and patents, there are no filings or disclosures to be made with a government office and no certificate defining the metes and bounds of an enterprise’s trade secrets. In addition, unlike trademarks, copyrights and patents, which are delineated and governed in whole or in part by federal law, trade secret protection is governed by state law. A trade secret is the most ethereal of the four types of intellectual property. A trade secret, unlike a patent, trademark, or copyright, can be irrevocably lost simply by failing to maintain its secrecy. Trade secret protection is also shallow in that a party can seek redress, in most cases, only for either the improper acquisition or an unlawful use or disclosure of the trade secret. Indeed, a party acquiring a trade secret without an unlawful act by a third party and without a contractual prohibition on disclosure or use of the trade secret can make unfettered use or disclosure of that trade secret. In addition, a third party may later independently develop or discover the trade secret and an earlier party possessing that trade secret will have no legal redress against that third party.
The Massachusetts Trade Secret Protection Act prohibits the unlawful misappropriation of another party’s trade secrets:
“whoever embezzles, steals or unlawfully takes, carries away, conceals or copies or by fraud or by deception obtains, from any person or corporation, with intent to convert to his own use, any trade secret… shall be liable in tort to such person or corporation for all damages arising therefrom.”
Mass Gen. Laws ch. 93 §42. A trade secret includes “anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences, or records a secret scientific, technical, merchandising production or management information, design process, procedure, formula invention or improvement.” Mass Gen. Laws ch. 266, §30.
In Massachusetts, the individual who misappropriated a third-party’s trade secrets on behalf of or for the benefit of their business or employer can be held personally liable for their unlawful acts. In addition, a competing business can be held liable for the receipt of a competitor’s trade secrets if the party disclosing the trade secrets had a duty or obligation not to disclose the trade secrets and the recipient (i) knew or even just had reason to know that the materials were the competitor’s trade secrets and (ii) knew or had reason to know that the disclosing party was under a legal obligation not to disclose the trade secrets.
New York courts have adopted the Restatement of Torts’ definition of “trade secrets” as “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” To state a claim for misappropriation of trade secrets under New York law, the plaintiff must allege: “(1) that it possessed a trade secret, and (2) that the defendants used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means.”
Under either Massachusetts or New York law, the key factual issues are that the information must actually be a secret, the measures taken by the business to guard the secrecy of the information, and the ease or difficulty with which the information could be independently acquired or duplicated by third parties.
The Inevitable Disclosure Doctrine
The inevitable disclosure doctrine arises when an employee not subject to a non-compete agreement leaves his former employer for a competitor. The former employer argues that the employee will inevitably disclose the former employer’s trade secrets or confidential information in the course of working for the competitor and, therefore, should be enjoined from working for the competitor.
Massachusetts has not adopted the inevitable disclosure doctrine. Absent an enforceable non-compete agreement, courts in Massachusetts have repeatedly denied requests for an injunction to prevent a former employee from taking a job with a competitor based only on the alleged inevitable disclosure of trade secrets.
Under very limited circumstances, New York has applied the inevitable disclosure doctrine.
The Risk of Litigating Trade Secret Misappropriation
Both Massachusetts and New York require the plaintiff bringing a trade secret misappropriation action to disclose the allegedly misappropriated trade secrets with specificity. In that, generally, to disclose a trade secret is to extinguish its protection as a trade secret and, therefore, this requirement could render litigation brought to protect a trade secret pyrrhic at best. However, steps can be taken to avoid this threat to trade secret protection.
Unlike patents, trademarks, and copyrights, there is no absolute right (i.e. Federal Subject Matter Jurisdiction) to bring a claim for trade secret misappropriation in federal court. Instead, absent diversity jurisdiction, a trade secret misappropriation action must be brought in state court. In both state and federal courts, the rules governing discovery and procedure provide for some additional protections to prevent the disclosure to third parties of the trade secrets at issue in the litigation. These protections include sealing the parties’ court filings or portions of the filings from public disclosure and delineating a process limiting the distribution of testimony or documents, even from parties to the litigation in certain instances. However, anytime you disclose information in what is presumed to be a public forum, such as court proceedings, there is a risk of that information leaking to the public. Moreover, although one party may seek to prevent or limit the disclosure of the trade secrets at issue, the other party may oppose those efforts for its own strategic purposes all of which places the trade secrets at risk depending on the court’s eventual rulings.
Damages and Injunctive Relief
Under both New York and Massachusetts law, the plaintiff in a trade secret action can seek both preliminary and permanent injunctive relief. The injunctive relief can take the form of an order prohibiting the defendant from taking, receiving, using, assigning, or otherwise transferring the trade secret. In addition, a plaintiff can be awarded its lost profits or the profits of the defendant that were unjustly gained by the unlawful use of the misappropriated trade secret.
In Massachusetts, under Mass. Gen. Laws. ch. 93A, the court also has the discretion to double the damages award to the plaintiff and, in some circumstances, triple the damages award. Under the same statute, the court may also award the plaintiff its attorneys’ fees in the action. New York does not have a similar statute.