How Ticket Software Lost Trade Secret Protection

According to Broker Genius, because such software did not previously exist in the marketplace, Broker Genius expended considerable time and resources on developing AutoPricer, including honing the user interface through trial and error and customer feedback. As such, Broker Genius created multiple versions of AutoPricer. The third version, released in 2015, gave access to the complete software interface and architecture to every user. Broker Genius filed a patent application in which it described the functionality of AutoPricer identically to its description in the case.

Defendant NRZ Entertainment is involved in the ticket broker business. In May 2015, one of its owners signed NRZ up for a 30-day trial of Broker Genius's “full-service” subscription service. On Feb. 3, 2016, Broker Genius and NRZ executed a one-year service agreement granting NRZ full use of the Broker Genius software and requiring NRZ to agree to Broker Genius's terms of use. Throughout the course of the license, Broker Genius employees conducted training sessions and explained to NRZ the capabilities of AutoPricer.

NRZ concurrently began to develop its own automatic ticket pricing software, named TickPricer. Although there was no evidence that NRZ accessed the source code of AutoPricer, the Southern District of New York noted it was “abundantly clear from the documentary evidence and witness testimony that defendants closely modeled TickPricer on AutoPricer v.3 and relied heavily on their own knowledge of Broker Genius's product to build their own software.”

TickPricer became operational in December 2016 and NRZ terminated its license with Broker Genius a month early. That same month, Broker Genius filed against defendants: a complaint alleging, among other causes of action, violations of trade secret misappropriation under New York law and the federal Defend Trade Secrets Act, 18 U.S.C. §1831 et seq.; and a request under Rule 65 of the Federal Rules of Civil Procedure Federal for an ex parte temporary restraining order to, inter alia, seize any of the defendants' property containing Broker Genius's trade secrets and to restrain NRZ from marketing TickPricer.

However, the district court held that Broker Genius was not likely to prevail on its misappropriation of trade secrets claim — the sole claim on which it sought a preliminary injunction — because the user interface of AutoPricer did not qualify as a trade secret, even though AutoPricer is undoubtedly valuable to Broker Genius and its competitors, and Broker Genius expended roughly $4 million developing the software.

Courts in New York refer to the Restatement of Torts to formulate a definition of trade secret. See, Restatement of Torts §757 (defining a trade secret in relevant part as “any formula … 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”). Courts have routinely held that software user and architecture is a protectable trade secret, despite being “inherently broad concept[s].” See, e.g., Integrated Cash Mgmt. Serv. v. Dig Transactions, 920 F.2d 171 (2d Cir. 1990) (also holding that a trade secret can exist in a combination of constituent elements, irrespective of whether each element by itself is deemed in the public domain).

Absolute secrecy is not required, but the information claimed to be a trade secret must be shrouded with a “substantial secrecy.” “Reasonable measures” is the lodestar for a trade secret being sufficiently guarded. Of course, the holder can forfeit trade secret protection by making certain disclosures. If a person reveals a trade secret to individuals who are under no obligation to protect its confidentiality, or otherwise publicly discloses the trade secret, the right is extinguished.

The Broker Genius court concluded the plaintiff failed to undertake “reasonable measures” to ensure the secrecy of the protectable elements of AutoPricer. The discreet disclosures in Broker Genius's patent application and by its sales representatives in demonstrations, as well as its publication of screenshots of an AutoPricer predecessor software that exposed aspects of AutoPricer, evaluated individually did not extinguish its property rights in AutoPricer. However, the court stated that “these types of disclosures — especially taken together — do strongly suggest that Broker Genius did not consider AutoPricer v.3's software architecture or user interface to be trade secrets prior to initiating this litigation.”

More fatal to Broker Genius's claims was th e “unfettered access” it offered to all users. This is the “one disclosure that did destroy Broker Genius's claim that [AutoPricer is] a trade secret,” the court wrote. Broker Genius granted each user access to the software itself as well as technical manuals, and sent update emails to explain the operational advantages of AutoPricer's functionalities. Its customer service staff provided answers to user questions centered on elements of AutoPricer that Broker Genius elsewhere claimed were trade secrets. Unfortunately, the avalanche of disclosures about AutoPricer “explains why defendants were able to duplicate major portions of AutoPricer v.3's user interface … with such speed and for relatively low cost,” the court observed.

Broker Genius notified users only in the terms of use that AutoPricer contains trade secrets. The Southern District of New York found this insufficient. To convey the confidentiality obligations associated with using AutoPricer, the court held that “it would have been reasonable to do something more to notify users of the software's confidentiality.” Broker Genius failed to do so. The terms of use were not accessible through the AutoPricer application, but instead only through its website. The terms of use also “simply does not contain a confidentiality provision.” Most important, the terms of use provision proscribing users from reproducing or distributing AutoPricer did not notify the user of the secrecy of the software, nor that the user was precluded from “describing to others the software's function, structure, and appearance.”

Broker Genius's “widespread and comprehensive disclosures extinguished the trade secret status” of the components of AutoPricer that it claimed NRZ had misappropriated. Accordingly, the district court denied Broker Genius's motion for a preliminary injunction.

However, the parties agreed to a settlement through which the permanent injunction was issued enjoining NRZ from distributing or selling the TickPricer product. NRZ paid Broker Genius a settlement payment and acknowledged that TickPricer was “improperly derived from [the] AutoPricer software in violation of our contractual obligations with Broker Genius including under Broker Genius' Terms of Use.”

The parties dismissed the case with prejudice.

*****
Richard Raysman is a New York-based partner at Holland & Knight and Peter Brown is the principal at Peter Brown & Associates in New York City. They are co-authors of Computer Law: Drafting and Negotiating Forms and Agreements (Law Journal Press).