The trade secret form of intellectual property is unique because its very existence requires that it have economic value. Patents and copyrights don’t need to (and often don’t) generate a dime. Trademarks must be used in commerce to exist, but they don’t have to be used in an income-producing way. But the definition of a trade secret describes it as:
information . . . that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Uniform Trade Secrets Act § 1 (emphasis added). No economic value, no trade secret.
An unpublished decision from the 6th Circuit demonstrates this principle. Summit National Inc. (SNI), the defendant in a declaratory judgment action, was the successor owner of Automated Leasing Account System (“ALAS”) software. The software had been licensed in 1983 to the predecessor of the plaintiff Daimler-Chrysler Services North America LLC (DCS), which used the software to track leasing contracts, customers and vehicles. The last installation of the ALAS software to anyone was in 1993.
DCS’s license was perpetual, for use at only one facility, and was to be used only for DCS and its wholly-owned subsidiaries. DCS breached both conditions so in May, 2002 SNI terminated the agreement and demanded that DCS cease use. DCS’s business relied heavily on the software; during the course of the litigation SNI estimated that the value to DCS of the software was $3.225 million.
DCS filed a declaratory judgment action asking for a declaration that it was not in breach of the software license. SNI counterclaimed on the breach of contract and ultimately asserted several other theories, including a misappropriation of trade secret claim.
The trial court held that the software was not a trade secret because SNI couldn’t produce a copy of the software licensed to DCS. The lower court reasoned “that a person must actually know the secret information or possess the secret device in order to have an advantage over others.”
The appeals court agreed that there was no trade secret, but on a different theory. The appeals court held that SNI hadn’t provided enough evidence that it derived any independent economic value from the secret. The fact that SNI didn’t have a copy of the software was one suggestion that there was an absence of value, but even further SNI’s president testified that by 2002 “there is no market for ALAS . . . . I wouldn’t in good conscience sell it to anybody.” So even though the worth to DCS was substantial, value to the user doesn’t prove that there is economic value to the entity claiming the trade secret, and thus SNI had no trade secret.
Daimler-Chrysler Servs. N.A., LLC v. Summit Nat’l Inc., No. 07-1357, 2008 U.S. App. LEXIS 17804 (6th Cir. Aug. 20, 2008).
© 2008 Pamela Chestek
One response to “Keeping a Trade Secret Secret May Not Be Enough”
Pamela,
Interesting blog. My name is Ken Duffy and I am a principal owner in SNI. I have been working on this case since 2001/2 up until our filing with the United States Supreme Court this past December.
To clarify a few points in your blog:
1. SNI and DCS both produced copies of the source codes / programs “under seal” with the District Court. Simply, the court literally forgot it had the codes and never performed a comparison. No jury has seen the codes either. The courts binding, yet incorrect, ruling regarding possession is inaccurate. Indeed the court itself has copies of the codes produced by SNI and DCS. DCS simply caught a lucky procedural break. And, interestingly, trade secret law does not require physical possession by the owner, only unauthorized use by someone other than the owner. Of course, SNI has copies, and produced all versions of SNI code early on in this case. “Possession” was never an issue because the codes were produced “under seal” by both parties. You may note that the 6th Circuit Court of Appeals bypassed this “possession” issue altogether, no doubt because the record clearly shows both sides produced copies of the codes/programs at issue – they are identical.
2. Our licenses contain language – as do many other standard license agreements – allowing for additional fees based on additional use after the initial installation. Indeed, DCS expanded its use to up to 1,600 unlicensed users in 9 unlicensed locations in North America to manage its multi-billion leasing operation.
3. Trade Secret and Intellectual Property law – which should control this software case – allow for the OWNER to determine use of its IP and retain unjust enrichment or savings for unlicensed use. Indeed, the well established second prong of IP/trade secret damages permits disgorgement of profits directly attributed to DCS unlicensed use of ALAS. The number you quoted is far below DCS’s profits attributable to its unlicensed use of ALAS – according to its own experts. The $3.2M figure was for a different issue.
4. DCS attempted to secretly acquire stock in SNI and thus eviscerate itself from the potential IP liability. DCS secretly offered a dormant creditor $1,000,000.00 for her shares in order to become ‘owners of ALAS’ and avoid its damages liability. SNI stopped that effort in court. SNI reacquired the outstanding stock from the shareholder. 100% of SNI stock is now privately held. DCS’s actions are a rare insight into the attempts a large multi-national, multi-billion dollar corporation will go to continue using a product vital to its leasing operations – unlicensed, with huge IP/trade secret damages at risk. If not, there is no way DCS would have authorized this secret deal.
I encourage you to continue a thorough analysis of all filed documentation on this case, including the recently filed Writ to the United States Supreme Court.
Or, feel free to contact me at kduffyjr@yahoo.com.
Sincerely,
Kenneth E. Duffy, Jr.