Defending Against Trade Secret Misappropriation Lawsuits

Both of these strategies need to be fully considered in appropriate trade-secret misappropriation cases, to which e-commerce counsel are no strangers.

Trade Secret Per Se Doctrine

In Secure Services Technology, Inc. v. Time and Space Processing, Inc., 722 F. Supp. 1354 (E.D. Va. 1989), the plaintiff, Secure Services Technology Inc. (“SST”), sued the defendant, Time and Space Processing Inc. (“TSP”), for misappropriating SST's proprietary handshake protocol for its secure facsimile machines.

The U.S. District Court determined that SST's trade-secret claim was defective because even if SST's handshake-protocol signal qualified as a trade secret, SST had failed to use reasonable precautions to protect the trade secret. The court noted, for instance, that SST failed to claim any protection for proprietary information in its sales to the government. SST, it turns out, had sold to the government all right, title and interest in its secure facsimile machines, reserving no rights for the company. No notice was given, as required by the Federal Acquisition Regulations, that the secure facsimile machines contained proprietary information. No markings were placed on the machine or in the related instructional material to indicate the presence of proprietary materials, either.

(Editor's note: The Federal Acquisition Regulations, referred to collectively in the singular, Federal Acquisition Regulation, and in the plural as the Federal Acquisition Regulations System, are available online at www.acquisition.gov/far. The 2005 reissued regulations are available in two volumes in .PDF format, spanning about 2,000 pages. The Web site also allows access to various databases, such as an archive, and various display formats.)

Under these circumstances, the court concluded that SST had waived its right to trade-secret protection in its implementation of the standard T.30 facsimile protocol by failing to comply in any way with the government regulations pertaining to retaining a proprietary interest in information contained in the facsimile machines it sold to the government. SST, then, forfeited any trade-secret rights it might have had in its proprietary handshake protocol by failing to comply with the marking requirements under the Federal Acquisition Regulations.

This court ruling is the basis for the Trade Secret Per Se Doctrine. I use per se to describe the doctrine because the government regulations require companies to comply with specific marking and other requirements to reserve rights in products and information delivered to the government under government contracts.

These specific requirements constitute what “reasonable precautions” a trade-secret owner must comply with to protect trade secrets under the applicable circumstances. If the products and information are not delivered with restricted rights, then it is very likely the government will have “unlimited rights” in the deliverables. The government regulations specify what requirements with which companies doing business with the government must comply to preserve trade-secret rights in the deliverables.

These requirements are very important to government personnel, because they are subject, among other legal requirements, to the Trade Secrets Act, 18 U.S.C. '1905. These employees may be criminally liable for wrongfully disclosing trade secrets. As such, government personnel must be on notice if any deliverables they are handling include vendor trade secrets. Also, these requirements represent the minimum “reasonable efforts” the trade-secret owner must meet or exceed in doing business with the government to protect trade secrets. Failure to meet these procurement requirements constitutes “per se” unreasonable efforts to protect trade secrets, and is likely to result in the trade secrets being lost as the result of the Trade Secret Per Se Doctrine.

In trade-secret litigation, government procurement should be one of the areas for discovery. If the trade-secret owner delivered products or services to the federal government, and those products or services embodied the alleged trade secrets, then discovery should seek to determine whether the trade-secret owner complied with the marking and other requirements to reserve trade-secret rights in the products and services delivered to the government. If the trade-secret owner failed to meet these regulatory-mandated reasonable efforts, then the defendant may be entitled to summary judgment as a consequence of the Trade Secret Per Se Doctrine.

Open-Source Software

Open-source software is being widely used. The use of open-source software may result in the forfeiture of trade secrets in connection with the distribution of open-source software implementations. Open source, it should be noted ' per se ' is not treated as confidential information.

Open-source software is software for which the source code is freely and publicly available. Source-code availability is a major requirement in open-source licensing. The open-source license must include a distribution of “unobfuscated” source code, or a well publicized means of obtaining the source code for no more than reasonable reproduction costs. Software distributed under an open-source license is distributed under a copyright license without trade-secret protection. The inclusion of even a small amount of open source code may require that the entire software product be distributed as open-source software under an open-source license.

Computer Associates Int'l Inc. v. Quest Software, Inc., 2004 U.S. Dist. LEXIS 11832 (N.D. Ill. June 28, 2004), raises the importance of open-source software in the context of claims of trade-secret misappropriation. The case raises the specter of the importance of General Public License (“GPL”) open-source software to defendants in trade-secret misappropriation litigation.

During discovery related to computer software alleged to embody trade secrets, the defendants will want to ascertain whether open source code is included in the software that was allegedly infringed, because inclusion of the open-source software could result in a forfeiture of trade-secret rights. By many accounts, open-source software has been broadly incorporated in many software products without the knowledge of company management, so discovery should include consideration of whether open source code has been included in the software that is alleged to embody or represent protectable trade secrets.

In conducting this discovery for open source code, defendants' counsel may want to use scanning technology to review the code for the software in question. For example, Black Duck Software's “protextIP/development” purportedly automatically recognizes when one of the thousands of open-source programs ' even small blocks of open source code ' have been inserted into source code. These scanning technologies can provide defendants with visibility into source-code composition, source-code origin and licensing obligations, and may prove to be helpful in preparing an open-source defense to trade-secret claims.

Conclusion

The Trade Secret Per Se Doctrine and the forfeiture of trade secrets that may result from including open source code in software need to be fully considered. They both may constitute very significant legal defenses to trade-secret misappropriation claims in appropriate circumstances. Full consideration can bring success defending against cases that could make or break a firm, e-commerce or other kind.

There are several often-overlooked strategies for defending against trade-misappropriation claims.

The first relates to government procurement. I call this strategy the Trade Secret Per Se Doctrine.

The second strategy pertains to open-source software.

Both of these strategies need to be fully considered in appropriate trade-secret misappropriation cases, to which e-commerce counsel are no strangers.

Trade Secret Per Se Doctrine

In Secure Services Technology, Inc. v. Time and Space Processing, Inc., 722 F. Supp. 1354 (E.D. Va. 1989), the plaintiff, Secure Services Technology Inc. (“SST”), sued the defendant, Time and Space Processing Inc. (“TSP”), for misappropriating SST's proprietary handshake protocol for its secure facsimile machines.

The U.S. District Court determined that SST's trade-secret claim was defective because even if SST's handshake-protocol signal qualified as a trade secret, SST had failed to use reasonable precautions to protect the trade secret. The court noted, for instance, that SST failed to claim any protection for proprietary information in its sales to the government. SST, it turns out, had sold to the government all right, title and interest in its secure facsimile machines, reserving no rights for the company. No notice was given, as required by the Federal Acquisition Regulations, that the secure facsimile machines contained proprietary information. No markings were placed on the machine or in the related instructional material to indicate the presence of proprietary materials, either.

(Editor's note: The Federal Acquisition Regulations, referred to collectively in the singular, Federal Acquisition Regulation, and in the plural as the Federal Acquisition Regulations System, are available online at www.acquisition.gov/far. The 2005 reissued regulations are available in two volumes in .PDF format, spanning about 2,000 pages. The Web site also allows access to various databases, such as an archive, and various display formats.)

Under these circumstances, the court concluded that SST had waived its right to trade-secret protection in its implementation of the standard T.30 facsimile protocol by failing to comply in any way with the government regulations pertaining to retaining a proprietary interest in information contained in the facsimile machines it sold to the government. SST, then, forfeited any trade-secret rights it might have had in its proprietary handshake protocol by failing to comply with the marking requirements under the Federal Acquisition Regulations.

This court ruling is the basis for the Trade Secret Per Se Doctrine. I use per se to describe the doctrine because the government regulations require companies to comply with specific marking and other requirements to reserve rights in products and information delivered to the government under government contracts.

These specific requirements constitute what “reasonable precautions” a trade-secret owner must comply with to protect trade secrets under the applicable circumstances. If the products and information are not delivered with restricted rights, then it is very likely the government will have “unlimited rights” in the deliverables. The government regulations specify what requirements with which companies doing business with the government must comply to preserve trade-secret rights in the deliverables.

These requirements are very important to government personnel, because they are subject, among other legal requirements, to the Trade Secrets Act, 18 U.S.C. '1905. These employees may be criminally liable for wrongfully disclosing trade secrets. As such, government personnel must be on notice if any deliverables they are handling include vendor trade secrets. Also, these requirements represent the minimum “reasonable efforts” the trade-secret owner must meet or exceed in doing business with the government to protect trade secrets. Failure to meet these procurement requirements constitutes “per se” unreasonable efforts to protect trade secrets, and is likely to result in the trade secrets being lost as the result of the Trade Secret Per Se Doctrine.

In trade-secret litigation, government procurement should be one of the areas for discovery. If the trade-secret owner delivered products or services to the federal government, and those products or services embodied the alleged trade secrets, then discovery should seek to determine whether the trade-secret owner complied with the marking and other requirements to reserve trade-secret rights in the products and services delivered to the government. If the trade-secret owner failed to meet these regulatory-mandated reasonable efforts, then the defendant may be entitled to summary judgment as a consequence of the Trade Secret Per Se Doctrine.

Open-Source Software

Open-source software is being widely used. The use of open-source software may result in the forfeiture of trade secrets in connection with the distribution of open-source software implementations. Open source, it should be noted ' per se ' is not treated as confidential information.

Open-source software is software for which the source code is freely and publicly available. Source-code availability is a major requirement in open-source licensing. The open-source license must include a distribution of “unobfuscated” source code, or a well publicized means of obtaining the source code for no more than reasonable reproduction costs. Software distributed under an open-source license is distributed under a copyright license without trade-secret protection. The inclusion of even a small amount of open source code may require that the entire software product be distributed as open-source software under an open-source license.

Computer Associates Int'l Inc. v. Quest Software, Inc., 2004 U.S. Dist. LEXIS 11832 (N.D. Ill. June 28, 2004), raises the importance of open-source software in the context of claims of trade-secret misappropriation. The case raises the specter of the importance of General Public License (“GPL”) open-source software to defendants in trade-secret misappropriation litigation.

During discovery related to computer software alleged to embody trade secrets, the defendants will want to ascertain whether open source code is included in the software that was allegedly infringed, because inclusion of the open-source software could result in a forfeiture of trade-secret rights. By many accounts, open-source software has been broadly incorporated in many software products without the knowledge of company management, so discovery should include consideration of whether open source code has been included in the software that is alleged to embody or represent protectable trade secrets.

In conducting this discovery for open source code, defendants' counsel may want to use scanning technology to review the code for the software in question. For example, Black Duck Software's “protextIP/development” purportedly automatically recognizes when one of the thousands of open-source programs ' even small blocks of open source code ' have been inserted into source code. These scanning technologies can provide defendants with visibility into source-code composition, source-code origin and licensing obligations, and may prove to be helpful in preparing an open-source defense to trade-secret claims.

Conclusion

The Trade Secret Per Se Doctrine and the forfeiture of trade secrets that may result from including open source code in software need to be fully considered. They both may constitute very significant legal defenses to trade-secret misappropriation claims in appropriate circumstances. Full consideration can bring success defending against cases that could make or break a firm, e-commerce or other kind.