• Keeping a Trade Secret Secret May Not Be Enough

    by  • December 31, 2008 • trade secret

    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    An unpublished decision from the 6th Circuit demonstrates this principle.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

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