Property, intangible

a blog about ownership of intellectual property rights and its licensing

Only Owners (Or Licensees) Can Bring a Claim Under the Federal Trade Secrets Act

In 2016 the United States enacted trade secret law at the federal level. Before that, trade secret law was available only at the state level, meaning a patchwork of different standards and no federal jurisdiction for claims. The Defend Trade Secrets Act (“DTSA”), changed that.

Like trademark law, the federal trade secret law does not preempt state law but coexists with it. And like trademark law, sometimes one can state a claim under one scheme but not the other. That may be the case with trade secret law when it comes to ownership. The DTSA plainly requires ownership of the trade secret as an element of the claim:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

18 U.S.C. § 1836(b)(1).

Plaintiff Focused Impressions (FII) was schooled on that in Focused Impressions, Inc. v. The Sourcing Group. Third Party Defendant Lynn Smith was first employed as Chief Operating Officer by FII and then Smith became an independent contractor for FII. FII’s business was largely focused on managing relationships between paper and envelope suppliers and non-party Liberty Mutual Insurance. Defendant The Sourcing Group (TSG) was one of those suppliers and a client of FII. (As an aside, who would have thought that the procurement of paper and envelopes would be such a complicated undertaking, but I guess insurance companies go through a lot of envelopes and paper.) After Smith was no longer directly employed by FII but only a contractor, Smith also started working directly for TSG as the Chief Marketing Officer in addition to her work for FII on TSG’s behalf.

The relationship between FII and TSG deterioriated, resulting in this lawsuit. FII sued TSG and TSG counterclaimed FII, alleging a breach of FII’s agreement to provide relationship management between TSG and Liberty Mutual. FII then sued Smith as a third party defendant, claiming that if there was a breach it was Smith’s fault.

As part of her FII duties, Smith was privy to information about other suppliers’ relationships with Liberty Mutual, specifically the prices The Regal Press, Inc. and Wright Business Graphics, LLC, charged Liberty Mutual. The FII complaint alleged that Smith used confidential information about Regal’s and Wright’s pricing to try to persuade Liberty Mutual (unsuccessfully) to buy products from TSG that were cheaper than the competitors’ products.

LII alleged violation of the DTSA against Smith. In the third party complaint, FII alleged that (bold in original):

• “FI created and maintained trade secret information within the meaning of the Defend Trade Secrets Act; specifically, the prices at which Regal and Wright sold their products to Liberty Mutual (the “Trade Secret Information”). This pricing information was negotiated and set by and between either Wright or Regal, FI, and Liberty Mutual.” [Compl. ¶ 105 (emphasis added)]
• “The secrecy of this information gives Regal and Wright, and by association FI, an economic advantage over their competitors ….” [Id. ¶ 106 (emphasis added)]
• “The contractual agreement between Wright and Liberty Mutual and between Regal and Liberty Mutual specifies the purchase price for each of the products those companies sell to Liberty Mutual. Pursuant to the terms of those contracts, the purchase price shall be maintained strictly confidential, meaning the information is not generally available to the public. FI became privy to Wright’s and Regal’s pricing information as part of the relationship management services it provides to those companies pursuant to contractual arrangements with them.” [Id. ¶ 109 (emphasis added)]

• “The requirement in the Smith Agreement to maintain the confidentiality of FI’s suppliers etc. was intended to protect the financial interests of companies for which FI performed services, as well as FI’s own financial interests ….” [Id. ¶ 112 (emphasis added)]
• “Smith misappropriated FI’s, Wright’s, and Regal’s Trade Secret Information when she used her knowledge of that Information to offer prices for TSG products, a competitor of both Wright and Regal, at an amount that she knew would undercut the prices that those companies charged to Liberty Mutual.” [Id. ¶ 113]
• “Smith’s misappropriation of the Wright’s Trade Secret Information, by using that information to undercut Wright’s prices and business, caused actual economic harm to FI ….” [Id. ¶ 117 (emphasis added)]

The court explained that FII had not alleged ownership of trade secrets:

Although FII initially makes the conclusory allegation that it “created” Regal and Wright’s pricing information, subsequent allegations make clear that even FII believes that the information belongs to Regal and Wright. See [Compl. ¶¶ 105–06, 109, 111–13, 117]. For example, FII “became privy to Wright’s and Regal’s pricing information,” Smith needed to “maintain the confidentiality of FI’s suppliers,” and Smith misappropriated “Wright’s Trade Secret Information.” [Id. ¶¶ 109, 112, 117 (emphasis added) ]. Furthermore, the pricing information was memorialized in “contractual agreement[s] between Wright and Liberty Mutual and between Regal and Liberty Mutual,” to which FII was not a party. [Id. ¶ 109]. If this pricing information belonged to anyone, it was Regal, Wright, and possibly LMI. But, as alleged, this pricing information did not belong to FII.

FII fails to allege that it had “rightful legal or equitable title to, or license in” the pricing information it alleges was a trade secret. See 18 U.S.C. § 1839(4). Having failed to plead an essential element of its DTSA claim, the claim is dismissed.

(Emphasis in original.)

The court also therefore dismissed the supplemental state law claims. Never fear, though, one of them was a breach of contract against Smith for the misuse of the confidential information – while FII didn’t have a DTSA claim against Smith, they presumably still have a cognizable claim for the breach of a confidentiality agreement that obliged Smith to not misuse their clients’ confidential information.

The defintion of “owner” in the DTSA includes “licensee,” so I am left wondering why FII didn’t allege it was a licensee of the pricing information. Should we be amending our confidentiality agreements so that there is a “license” to the trade secrets one has access to, not just a duty to maintain their confidentiality?

The DTSA is worded differently from the Uniform Trade Secrets Act. In the Uniform Trade Secrets Act “misappropriation” is defined as: “(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means ….” Some states have construed this language as not requiring ownership of the trade secret in order to state a claim. There are decisions interpreting at least Maryland, Wisconsin and Pennsylvania law that ownership of the trade secret is not a requirement for a claim of misappropriation.

The DTSA leveraged the Economic Espionage Act of 1996, which already relied on the concept that a trade secret has an “owner.” But it could turn out to be a big difference between the federal and state law regimes.

Focused Impressions, Inc. v The Sourcing Group, No. 19-cv-11307-ADB (D. Mass. Apr. 16, 2020).

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