Divine Providence For Trade Secret Thieves?

On May 2, 2024, the U.S. District Court for the Eastern District of Texas issued a noteworthy trade secret opinion in Providence Title Co. v. Truly Title, Inc., Civil Action No. 4:21-CV-147-SDJ.  Providence requires a trade secret owner to take a wait-and-see approach if unauthorized acquisition or disclosure of its trade secret occurs.  Under Providence, a trade secret owner does not have a viable trade secret misappropriation claim unless unauthorized use -- indeed, successful, unauthorized use -- of its trade secret occurs.  The Defend Trade Secrets Act (DTSA) says otherwise.

Providence Is Not True To The DTSA

The Supreme Court requires application of fundamental principles where a statute, such as the DTSA, is at issue.  Three such principles are pertinent here.

First, a court “must enforce plain and unambiguous statutory language according to its terms.”  Hardt v. Reliance Standard Life Ins. Co., 130 S. Ct. 2149, 2156 (2010) (cleaned up).  In other words, where “the plain language of [the statute] is unambiguous, [the] inquiry begins with the statutory text, and ends there as well.”  Nat’l Ass’n of Mfrs. v. Dep’t of Def., 138 S. Ct. 617, 631 (2018) (cleaned up). 

Second, a court “is obliged to give effect, if possible, to every word Congress used.”  Nat’l Ass’n of Mfrs. v. Dep’t of Def., 138 S. Ct. 617, 632 (2018) (cleaned up).  Providence acknowledges that “courts are dutybound to give meaning to each word in a statute when possible.”  Providence, p. 10 (cleaned up).

Third, the United States’ “constitutional structure does not permit [a court] to rewrite the statute that Congress has enacted.”  Puerto Rico v. Franklin Cal. Tax–Free Trust, 136 S. Ct. 1938, 1949 (2016). 

Providence strays from those principles.  Rather than apply the plain and unambiguous language of the DTSA, Providence rewrites the DTSA in four ways, which are discussed below.  Providence also selectively relies on portions of Fifth Circuit precedent.  That reliance conflicts with the plain and unambiguous language of the DTSA and those principles.     

Issue no. 1: Providence concludes that unauthorized acquisition of a trade secret cannot be an act of misappropriation.

Providence holds that “a plaintiff must show that a defendant actually used its trade secrets to succeed on a misappropriation claim.”  Providence, p. 16.  See also id. at 14 and id. at 2.

In reaching that holding, Providence disregards the significance of unauthorized acquisition of a trade secret.  See Providence, p. 22 (“In sum, [Plaintiff] has shown acquisition-perhaps even improper acquisition-but not use.”).  Thus, Providence concludes that unauthorized acquisition of a trade secret cannot be an act of misappropriation. 

Providence’s rationale for its holding and conclusion is that the DTSA merely “suggests that either acquisition of a trade secret . . . by improper means or disclosure or use of a trade secret constitutes misappropriation.”  Providence, p. 16, n.4 (cleaned up). 

Providence is mistaken.  The DTSA does not suggest what misappropriation is.  The DTSA defines the term “misappropriation” to include unauthorized (1) acquisition, (2) disclosure or (3) use.  18 U.S.C. § 1839(5)(A), (B).  The term “or” plainly and unambiguously accounts for three alternative acts, each of which can be an act of misappropriation.  Id.  

Providence notes that “the parties do not dispute that use is a requirement” to prove trade secret misappropriation.  Providence, p. 16 n.4.  Despite that circumstance, the court was aware of the plain and unambiguous language of the DTSA and Fifth Circuit precedent, namely, CAE Integrated, LLC v. Moov Techs., 44 F.4th 257, 263 n.19 (5th Cir. 2022).  Providence, p. 14, p. 16 n.4.  Indeed, Providence acknowledges CAE as explaining that “the plaintiff need not show actual use of trade secrets, but only that the defendant is in a position to use trade secrets.”  Providence, p. 14 (cleaned up).  But Providence then apparently fails to appreciate that a person’s unauthorized acquisition of a trade secret puts the person in a position to use the trade secret.  Likewise, a person’s unauthorized disclosure of a trade secret puts a recipient in a position to use the trade secret.

Issue no. 2: Providence concludes that unauthorized disclosure of a trade secret cannot be an act of misappropriation.

Providence explains that Defendant Truly obtained one of Plaintiff’s alleged trade secrets -- employee compensation information -- through communications with two other Defendants.  Providence, pp. 1-3, 21.  Providence then concludes that related deposition testimony “merely identifies what [a Defendant] sent to Truly-it does not show that she or Truly or any other Defendant actually used the information to prepare offers or to otherwise poach [Plaintiff’s] employees.”  Id. at 22. 

Providence further explains that a Defendant shared another of Plaintiff’s alleged trade secrets -- branch-specific financial information -- with Defendant Truly.  Providence, pp. 22-23.  See also id. at 4.  Providence then concludes that the “evidence does not show that any Defendant actually used the branch-specific” financial information.  Id. at 24.

As explained above, the DTSA defines the term “misappropriation” to include unauthorized (1) acquisition, (2) disclosure or (3) use.  18 U.S.C. § 1839(5)(A), (B).   As such, communicating, sending and sharing, i.e., disclosing, can be acts of misappropriation.  Providence is mistaken when it concludes that unauthorized disclosure of a trade secret cannot be an act of misappropriation.

Issue no. 3: Providence does not assess independent economic value of information from the perspective of the information owner.

The DTSA defines a “trade secret” as information that, among other things, “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”  18 U.S.C. § 1839(3). 

Relatedly, the Supreme Court has explained that “[w]ith respect to a trade secret, the right to exclude others is central to the very definition of the property interest.  Once the data that constitute a trade secret are disclosed to others, or others are allowed to use those data, the holder of the trade secret has lost his property interest in the data. […] The economic value of that property right lies in the competitive advantage over others that [the trade secret holder] enjoys by virtue of its exclusive access to the data, and disclosure or use by others of the data would destroy that competitive edge.”  Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1011-12, 104 S. Ct. 2862 (1984). 

Likewise, the Third Circuit has explained that when “someone steals a trade secret and discloses it to a competitor he effectively assumes for himself an unrestricted license in the trade secret.  And that bears its cost.  After all, what value does a trade secret hold when it’s no longer a secret from the trade?  The trade secret’s economic value depreciates or is eliminated altogether upon its loss of secrecy when a competitor obtains and uses that information without the owner’s consent.  Oakwood Labs. LLC v. Thanoo, 999 F.3d 892, 913 (3rd Cir. 2021) (cleaned up).  Further, “even if it is true that [a defendant has] not yet launched a competing product, that does not mean that [a plaintiff] is uninjured.  It has lost the exclusive use of trade secret information, which is a real and redressable harm.”  Id. at 914.

In sum, the “independent economic value, actual or potential,” is value the information derives from its secrecy and value to the information owner.  18 U.S.C. § 1839(3); Ruckelshaus, 467 U.S. at 1012; and Oakwood, 999 F.3d at 913.  The independent economic value lies in the competitive advantage that the owner enjoys over others who cannot access the information.  Id.  Thus, if an information owner loses control over its information because, for example, an unauthorized person can or does access, acquire, disclose or use the information, the independent economic value derived from secrecy, i.e., the information’s value to the owner, is compromised because the secrecy is compromised.  Id. 

Mindful of the DTSA, Providence acknowledges that it “must carefully consider whether the materials at issue derive any independent economic value from their secrecy.  18 U.S.C. § 1839(3).”  Providence, p. 10.  But Providence does not do that. 

More specifically, Providence acknowledges, but does not carefully consider, Plaintiff’s contention “that the information has independent economic value because it gave Defendant Truly a ‘roadmap’ to ‘poach entire offices, which Truly knew to be profitable,’ replicating ‘overnight[] what had taken [Plaintiff] decades to develop.’”  Providence, p. 12.  That lack of consideration is especially notable given Providence’s reliance on Reingold v. Swiftships, Inc., 126 F.3d 645 (5th Cir. 1997).  Providence, pp. 10-14.  That is, Providence does not carefully consider Plaintiff’s contention regarding development time, despite Reingold explaining that development time for an alleged trade secret -- i.e., a ship mold in that case -- is relevant in assessing independent economic value:

"[T]he ship mold derive[d] independent economic value . . . 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[.]  Originally, it had cost $1 million and had taken nine months to construct the 90 foot ship mold.  Consequently, it would have been extremely expensive and time consuming for anyone to duplicate the mold through independent designing, planning, and construction or by reverse engineering.  [The defendant’s] agreement to pay $195,000 per vessel for using the mold in building two initial vessels, and $20,000 for its use in building each subsequent vessel, cogently indicates that the mold derived independent economic value from not being generally known to and not being readily ascertainable by proper means by other persons."

Reingold, 126 F.3d at 650 (cleaned up).  The relative impact of the agreement in Reingold does not diminish the relevance of or justify Providence’s failure to carefully consider Plaintiff’s contention regarding development time.  Indeed, Reingold describing the agreement as “cogently indicat[ing] that the mold derived independent economic value from” its secrecy is appropriate because the agreement evidences the defendant’s acknowledgement of that value.  Id.   

Issue no. 4: Providence concludes that a person who can obtain economic value from disclosure or use of information means (a) a person whose success is guaranteed by the information or (b) a person who achieves success solely because of the information.

Under the DTSA, information qualifies as a trade secret where, among other things, it is not “generally known to, and not [] readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”  18 U.S.C. § 1839(3).  So, the standard is whether the person “can” -- i.e., is able to -- obtain economic value from the disclosure or use of the information.  There is no requirement that the person actually disclose or use the information.  If the person, i.e., a defendant, actually discloses or uses the information and obtains economic value, then those circumstances can be readily accounted for in any remedy, such as damages and injunctive relief.  

Despite the plain and unambiguous language of the DTSA, Providence concludes that Defendant “did not-and could not-reap an economic benefit by merely obtaining and possessing [Plaintiff’s] alleged trade secrets-something else was necessary.  Information does not have independent economic value if its value depends upon an additional factor.”  Providence, p. 13 (cleaned up).   

Providence continues:

"[Defendant’s] success alone does not demonstrate that the information was independently valuable; at most, it indicates that the factors-the business information plus something else (e.g., successful solicitation of [Plaintiff’s] employees, hiring [Plaintiff’s] employees worth their salary, increase in market share by converting [Plaintiff’s] clients)-have panned out for [Defendant].  This success was not guaranteed, and it cannot be credited to the business information alone.  Had [Defendant] merely possessed the alleged trade secrets or had it failed in soliciting [Plaintiff’s] employees and customers, the business information would have been worthless.  In sum, unlike the ship mold in Reingold which equipped its possessor with the innate capability to make one-of-a-kind ships, the economic value of the compensation and branch-specific financial information here is contingent on additional factors.  Thus, they do not derive independent economic value from their secrecy, and, therefore, are not trade secrets."

Providence, pp. 13-14 (emphases in original).  See also id. at 12.

An unauthorized person who obtains and possesses, i.e., acquires, another’s information, especially a competitor’s information, does not “merely” obtain and possess the information.  Compare 18 U.S.C. § 1839(5) with Providence, p. 13.  Upon such acquisition, the person can obtain, i.e., reap, economic value, i.e., benefit, from disclosure or use of the information.  Compare 18 U.S.C. § 1839(3) with Providence, p. 13.  

Providence rewrites the DTSA by concluding that a “person who can obtain economic value from the disclosure or use of the information” means (a) a person whose success is guaranteed by the information or (b) a person who achieves success solely because of the information.  Compare 18 U.S.C. § 1839(3)(B) with Providence, pp. 13-14.  The DTSA does not contain any such definition.  18 U.S.C. § 1839(3)(B).   

Providence further rewrites the DTSA with a “something else” or “additional factor” standard, or a not anything else or no “additional factor” standard, such that a person cannot “obtain economic value from the disclosure or use of the information” if the information is connected or related to another factor or a broader operation, process, plan or strategy.  Providence, pp. 13-14.  The DTSA does not contain any such standard.  18 U.S.C. § 1839(3)(B). 

To illustrate the existence and effect of a “person who can obtain economic value from the disclosure or use of the information,” suppose the same general scenario in Providence.  Providence, pp. 2-4.  In other words, suppose negotiations between Company A and Company B do not result in Company B acquiring Company A and then Company B, without authority, acquires information about Company A.  Further suppose Company C then expresses interest in acquiring Company A or entering a license with Company A, where licensed information would be or include the information Company B acquired.  Company B’s unauthorized acquisition of the information and its ability to -- i.e., it “can” -- obtain economic value from the disclosure or use of the information would reduce, if not eliminate, the independent economic value of the information.  18 U.S.C. § 1839(3).  Indeed, Company C may be and is likely to be less interested, or perhaps will be uninterested, in further pursuing or closing a deal with Company A if it learns of Company B’s unauthorized acquisition of the information.  Company C may demand and receive from Company A some type of concession, such as a lower purchase price or lower royalty, or simply walk away from the potential deal because Company B “can obtain economic value from the disclosure or use of the information.”  If the deal closes and then Company C learns of Company B’s unauthorized acquisition of the information, Company C may attempt to revoke, terminate or modify the deal through, for example, a termination provision or a breach of representation or warranty claim.  Consider again the same general scenario described above.  But instead of Company C’s involvement, Company A applies for a loan and the collateral it presents is or includes the information Company B acquired.  The resulting dynamic, including the lender’s thinking and response, will likely be similar to the above-described dynamic involving Company C and its thinking and response. 

Conclusion

Under the DTSA, unauthorized acquisition, disclosure or use of a trade secret can be an act of misappropriation.  Further, independent economic value of secret information lies in the competitive advantage that the information owner enjoys over others who cannot access the information.  With that, if Providence remains as written, i.e., is not reconsidered and corrected or reversed on appeal, and is subsequently followed in another case in any forum, then trade secret rights may be improperly deprived or diminished.  So, for now and at the very least, Providence should motivate a trade secret owner to consider bringing a trade secret claim in a forum other than the Eastern District of Texas.