Reviving a significant trade secret misappropriation claim brought by a software company against a company started by its former employees, the U.S. Court of Appeals for the Fourth Circuit held that an alleged trade secret claim based on an entire software compilation must be analyzed separately from other software trade secret claims. Decision Insights, Inc. v. Sentia Group, Inc., 2009 U.S. App. LEXIS 2654 (4th Cir., Feb. 12, 2009) (Williams, J.; Wilkinson, J.; Voorhees, J).
The plaintiff, Decision Insights (DI), developed a software tool called “Dynamic Expected Utility Model,” which is used to prepare negotiating strategies. Many years later, three of the plaintiff’s employees who had developed the software left to form a new company, Sentia Group (Sentia). Sentia proceeded to develop its own software application to perform the same essential functions and analysis as DI’s software. DI filed suit against Sentia in the U.S. District Court for the Eastern District of Virginia, alleging breach of contract and misappropriation of trade secrets.
DI asserted trade secret misappropriation claims based upon its software as a total compilation, as well as 12 specific functions within the software’s code. During discovery, defendant Sentia sought sanctions against DI multiple times, alleging that DI’s discovery responses did not sufficiently identify its asserted trade secrets. In its interrogatory responses, DI identified the 12 processes alleged to be trade secrets and provided the corresponding lines of source code for each. DI also identified the entire source code of the software program, as a compilation, as a trade secret. Later DI also provided an expert report identifying and explaining each of the 12 alleged proprietary processes and explaining how its code operated as a whole. Ultimately, however, the district court determined that the plaintiff’s identification was deficient and imposed monetary sanctions of more than $13,000 against it. Sentia then moved for summary judgment, which the court granted. Concerning the trade secret claims, the court found that DI failed to meet its burden as to demonstrating the existence of a trade secret because it did not sufficiently identify its alleged trade secrets. DI appealed.
DI contended that the district court erred by finding as a matter of law that it failed to identify any trade secrets relating to its software because the court did not consider DI’s trade secret claim based on the software as a total compilation separately from its trade secret claims based upon the 12 specific functions within the code. DI also challenged the imposition of monetary sanctions. In reversing the district court, the Fourth Circuit held that DI’s alleged software compilation trade secret should be analyzed separate and apart from its other software trade-secret claims. Because the district court did not consider whether DI’s entire software might qualify for trade secret protection under the Virginia Uniform Trade Secrets Act, the Fourth Circuit remanded the trade secret misappropriation claim based upon its software compilation for independent consideration. In doing so, the Fourth Circuit indicated that DI had provided sufficient identification of its alleged compilation trade secret to Sentia by providing the source code, as well as a flow chart and expert report explaining the software program as a whole. The Fourth Circuit affirmed the district court’s grant of summary judgment on DI’s claims based upon the 12 processes, agreeing that the information DI provided for those was presented, “in such a way to prohibit meaningful analysis by [Sentia], the court, or a jury.”
Finally, the Fourth Circuit vacated the sanctions imposed against DI as inappropriate. Although the Fourth Circuit agreed that DI failed to adequately identify the 12 processes it contended were trade secrets, it also found that a genuine dispute existed concerning the method for identifying the alleged trade secrets. The court also found that DI had reasonable cause to believe its production was sufficient in light of precedent recognizing that production of source code is an acceptable method of identifying an alleged software compilation trade secret.