Mass Law Blog

Governo Law: Mass SJC Clarifies Chapter 93A in Cases of Employee Misappropriation

Governo Law: Mass SJC Clarifies Chapter 93A in Cases of Employee Misappropriation

Every Massachusetts lawyer that drafts a civil complaint wonders – or should wonder – “can I allege 93A in this case?”

This law, M.G.L. c. 93A, is the Massachusetts unfair competition statute. It makes illegal “unfair and deceptive” acts and practices in the consumer and business contexts. The law is attractive to plaintiffs because it is one of the few state laws that provides the prospect of double or treble damages, as well as attorney’s fees. 

What is “unfair and deceptive”? There are many cases where the courts attempt to parse out what conduct falls under 93A. It’s complicated, and there is a substantial body of 93A jurisprudence. The legal standards are beyond the scope of this post, but to get a sense for how the Massachusetts Supreme Judicial Court (SJC) approaches this take a look at the SJC decisions in Morrison v. Toys “R” Us, Inc. and Aspinall v. Philip Morris Cos.

Because the law is largely judge-created, unless they follow c. 93A law closely most lawyers aren’t fully up to speed on the nuances of 93A and recent developments. And if you don’t assert 93A in your complaint, you might be deemed to have waived it if you try to add it later. What if the law changes between the date you file and the date you are challenged on it? You may be out of luck.

Given these factors many lawyers will include a 93A count almost reflexively, thinking that they’ll worry about the viability of the claim later, if and when the defendant challenges it. You’ll often see a 93A count in even the most routine cases, where it is eventually dropped or dismissed before trial. 

There are a number of limitations on 93A, and one important limitation is that the illegal conduct must take place “in the conduct of any trade or commerce.” Based on this language the courts have held 93A to be inapplicable in the employment relationship. An employer-employee dispute is considered an “internal” business dispute outside “trade or commerce.” As a result of a series of decisions applying this doctrine, it is near-black letter law that 93A cannot be claimed by an employer against an employee, whether the employee’s violation occurs during or after the employment relationship. One well-known example of this is in the area of noncompete law – even though an employee’s breach of a noncompete may take place after employment ends, it is still considered an employer-employee dispute arising out of the employment relationship, and 93A does not apply. 

Traditionally, under Massachusetts law, the act of misappropriating a trade secret by an employee falls under this restriction if the misappropriation occurs during the employment relationship. However, the courts have struggled with this doctrine, attempting to distinguish intra-employment conduct (which is exempt) from post-employment conduct (which may not be exempt).

The most recent decision in the line of employee misappropriation-93A cases is Governo Law Firm LLC v. Bergeron (2021). In this case six attorney-employees of the Governo law firm secretly downloaded proprietary information belonging to the firm and used that information when starting a new firm. 

You’d think lawyers would know better.

At trial the jury returned a verdict for $900,000 in favor of Governo Law on the claims of  conversion, breach of the duty of loyalty, and conspiracy.   

However, Governo Law was unhappy with several aspects of the trial, one of which was that the judge instructed the jury that Chapter 93A did not apply to anything the defendants did while still employed by Governo, and the jury ruled against Governo on its 93A claim. This cost Governo Law the potential for double or treble damages and attorneys fees. 

Governo Law appealed, and it won on this issue  – the SJC reversed and sent the case back for a new trial on the 93A claim. The court fudged the distinction between the attorneys’ conduct during employment and afterwards. The heart of its holding is as follows:

[T]he  93A, claim required the jury to consider that the defendants stole the plaintiff’s materials in order to determine whether the subsequent use of these materials was unfair or deceptive.  . . . where an employee misappropriates his or her employer’s proprietary materials during the course of employment and then uses the purloined materials in the marketplace, that conduct is not purely an internal matter; rather, it comprises a marketplace transaction that may give rise to a claim under 93A . . . . That the individuals were employees at the time of the misappropriation does not shield them from liability under 93A, where they subsequently used the ill-gotten materials to compete with their now-former employer.

This holding is not entirely new law – the state appeals court reached similar decisions in 2011 and 1984. (Specialized Tech. Resources, Inc. v. JPS Elastomerics Corp. (2011); Peggy Lawton Kitchens, Inc. v. Hogan (1984)). The Superior Court has also issued decisions on this issue. However, this is the first time the issue has reached the state supreme court, and it’s an important new landmark in Massachusetts 93A law. Whether it will lead to further erosion of employee 93A immunity in other contexts where the defendant’s conduct straddles the line between employee and non-employee remains to be seen. It may be that any illegal conduct during employment that will shed light on a former-employee’s post-employment conduct may now be admissible under the rationale used by the SJC in this case.

Governo Law is now entitled to a new trial, and this time the jury will be free to consider the six attorneys’ conduct while still employed by Governo Law in considering whether their subsequent use of the converted materials was an unfair or deceptive act. Exactly how the judge will instruct the jury on 93A remains to be seen – the SJC did not provide directions on this issue. However, the SJC opinion makes clear that the jury will be able to consider the fact that the attorneys stole Governo Law’s proprietary information, and regardless of whatever precautions the judge may take in the jury instructions, it’s hard to believe that jurors will not conflate employment conduct (stealing proprietary information) with post-employment conduct (using that information). 

Governo Law goes into its 93A retrial (assuming no settlement) with a strong upper hand. 

Governo Law Firm LLC v. Bergeron, 487 Mass. 188 (2021).

Reminder from SDNY – Trade Secrets Need To Be Kept Secret

Reminder from SDNY – Trade Secrets Need To Be Kept Secret

A recent opinion from an SDNY federal district court reminded me of a client I represented many years ago. The company insisted that the core functionalities and user interface of its software program were trade secrets. A competitor had copied these, and the client asked my firm to commence a lawsuit for misappropriation of trade secrets.

An investigation showed that the client’s software was disclosed to prospective clients in one-on-one meetings and at trade shows without any requirement that a confidentiality or nondisclosure agreement be signed. Once a customer licensed the software an NDA was part of the sale, but before then it was not.

A secondary concern was that the software was used by hundreds of employees (via a site license), but these employees were not told that the software contained trade secrets – only the manager that signed the license agreement agreed to this. Was this sufficient to protect the trade secrets in the software? I was concerned it was not.

I advised the client that we could not bring suit against the client’s competitor. The client was not pleased with this advise, but so it goes.

The court’s opinion in Broker Genius, Inc. v. Zalta reminded me of this engagement. In this case Broker was seeking a preliminary injunction against a competitor based on similar facts. Source code was not at issue – Broker claimed trade secret misappropriation only of the user interface and functionalities that would be viewed by end users of the software.

The court found that Broker did protect the confidentiality of its software before it entered into a license by limiting what prospects could see – in that respect it did a better job than my client.

However, Broker’s primary tool for protecting its trade secrets was the Terms of Use implemented via a clickwrap license. But, there were problems with this license. First, as was the case with my client:

Broker Genius licensed its software to its customers on a per company basis. Because these customers include companies with as many as 120 employees … only the person who initially sets up the corporate account on behalf of her organization is required to assent to the Terms of Use  … other employees who may be more involved in everyday use of the software would not have the opportunity to individually assent and would not know what the Terms of Use were …

Second, the Terms of Use paralleled the Copyright Act, but didn’t contain a confidentiality provision. Broker’s Terms of Use stated that users of Broker’s software may not “[r]eproduce, modify, display, publicly perform, distribute or create derivative works of the Site or Apps or the Content.” This language tracks the exclusive rights language of Section 106 of the Copyright Act, but does not, as the court stated, “amount to a confidentiality or non-disclosure clause that notifies users of the secrecy of any aspect of [Broker’s software] or preclude [licensees] from describing to others the software’s functions, structure, and appearance.”

Third, the court questioned whether a clickwrap license was sufficient to protect trade secrets, although it did not base its decision on this fact.

Based on factors one and two above, the court denied Broker’s motion for a preliminary injunction.

Here are my takeaways from this case –

  • Don’t disclose your trade secrets to prospective customers. Either limit what they can see, or require an NDA. (Broker actually passed this test).
  • Don’t use a clickwrap agreement to impose a confidentiality requirement. Although the court did not base its decision on the fact that Broker had done this, clickwraps are suspect in the eyes of many judges, and I would not advise a client to base such an important contractual provision on a clickwrap.
  • If your software is going be used by many employees under a site license, the employees need to be reminded that the software is confidential every time they access the program, or at the very least periodically. You can’t assume an employee agrees to confidentiality based on a manager’s signature on a contract.
  • Make sure your contract, regardless of form (paper or clickwrap), contains an appropriate confidentiality/trade secret provision. Merely echoing the Copyright Act won’t accomplish this.

Broker Genius, Inc. v. Zalta (S.D.N.Y, December 4, 2017).

Lightlab Wins Trade Secret Case, Recovers No Damages

This case, decided by the Massachusetts Supreme Judicial Court on July 28, 2014, shows how difficult it can be to recover damages in a trade secret case. The facts (boiled down) are straightforward. Lightlab manufactures optical coherence tomography systems (OCT). Lightlab had a joint development/non-disclosure agreement with Axsun. Axsun disclosed Lightlab secrets to Volcano, a competitor to Lightlab and would-be acquiror of Axsun. Lightlab obtained a preliminary injunction enjoining the use of its trade secrets by Axsun and Volcano, and also enjoining Volcano’s acquisition of Axsun until after the Lightlab/Axsun agreement expired in 2014, more than five years later.

At trial Lightlab was able to obtain a verdict for trade secret misappropriation (and related claims) from a Massachusetts Superior Court jury.

However, the trial was bifurcated, and before presenting its damages case to the jury Lightlab first needed to run the gauntlet of expert disqualification thrown down by the defendants (Axsun and Volcano). It failed to do this – outside the presence of the jury the trial judge questioned Lightlab’s damages expert for three days, following which she disqualified the expert, leaving Lightlab with no damages case to present.*

*In business and intellectual property cases damages are almost always established through the testimony of a damages expert.

Lightlab had some unfavorable facts to overcome in order to prove damages. The trial judge held Lightlab’s damages experts’ proposed testimony to be speculative (and therefore inadmissible) based on her findings that Lightlab –

  • had no profitable sales of its OCT device since it began sales in 1999
  • was unable to prove it had lost any sales as a result of the infringement

In addition to these key facts, Lightlab –

  • had no guaranteed funding from its parent company to develop the new version of its product that was the basis for the expert’s damages theory
  • had not (as of the time of trial in 2010) obtained FDA (or non-U.S.) regulatory clearance for its newest product
  • had not yet invented the new generation of its product that was the basis for the expert’s anticipated damages testimony

The trial court judge also found that the expert had performed no market study to support certain assumptions he made concerning Lightlab’s market share through 2038, the 28 year period for which the expert claimed to have calculated damages.

The trial judge closed out the case with no trade secret damages awarded to Lightlab. Lightlab appealed, and the Massachusetts Supreme Judicial Court (SJC) affirmed the trial judge’s decision

It is notoriously difficult for a start-up company such as Lightlab, which had no history of profitability, to recover trade secret damages based on “future” lost profits. In an important sense Lightlab was a victim of its own success – it obtained a preliminary injunction against the use of its trade secrets before the defendants could utilize them, so the defendants never profited directly from the misappropriation.

Given the early preliminary injunction and the factors listed above Lightlab was faced with a seemingly near-insurmountable challenge to recover damages. To overcome this obstacle Lightlab advanced some cutting-edge arguments, the most interesting of which was that as a result of the misappropriation Lightlab had lost the “first mover advantage.” The “first mover advantage” theory is not described in any detail by the SJC in the Lightlab decision, but it is described by Pearson Education as follows (link):

The basis of first-mover advantage is [that] by being the first to enter a new market, the business gains an advantage over its actual and potential rivals. . . . If the business is first into a market, so the thinking goes, it can establish what the military thinkers would call ‘defensible ground’. First, it can capture market share much more easily without having to worry about rivals trying to capture the same customers. Second, when the rivals do come along – as they inevitably will – the first-mover and its management team will have advantages in the ensuing competition, such as familiar products, brand loyalty, the best retail outlets, up-and-running distribution systems, and so on. By beating rivals into the market, the first-mover can consolidate its position and compete more effectively, not only defending its previously acquired share but even continuing to expand.

However, the SJC found that Lightlab was able to cite almost no judicial authority in support of this damages theory: “Significantly, [Lightlab’s expert] acknowledged that nothing in the economic literature supports quantifying lost profits based on first mover advantage. … [The trial judge’s] conclusion that [the expert’s] use of first mover advantage in his methodology rendered that methodology incapable of being validated and tested was well within her discretion.”

Before closing out its opinion the SJC expressed its “concern” that traditional lost profits analysis may not be an adequate model for analyzing harm caused by misappropriation of trade secrets of a “start-up” business. “This fact,” the court stated, “should not render them ‘damage proof.'” The court stated that “other theories of damages may lend themselves to misappropriation of trade secret cases and that such theories may be ripe for testing in our courts.” However, the court did little to indicate what these “other theories” might be and, for Lightlab, this was too little too late.*

*The court’s only citation in connection with this comment was to a 2002 ABA publication, “Enforcement of Trade Secret Rights and Noncompetition Agreements”, pp. 23-32 (link)

There are other important issues addressed in this opinion, not touched on here, relating to damages, the judge’s role in excluding expert witnesses and the scope of injunctive relief in trade secret litigation. Trade secret decisions from the Supreme Judicial Court are few and far between, so Lightlab will be closely studied in trade secret litigation in Massachusetts for many years to come.

Lightlab Imaging, Inc. v. Axsun Technologies, Inc. (SJC, July 28, 2014)

Massachusetts Court Finds There Was No Trade Secret. Should Defendants be Awarded Attorney’s Fees?

We’ve been telling clients for decades that if you think you have trade secrets or confidential information, you need to protect them. Far and away the best way to ensure you’ve done that is to require anyone who receives access to the information to sign a non-disclosure agreement, an “NDA.”

In a Massachusetts state case reported on the front page of this week’s Massachusetts Lawyer Weekly, the plaintiff didn’t do that. In fact, it appears that the plaintiff, CRTR, Inc., did next to nothing to protect its allegedly confidential information from an independent contractor to whom it provided access, and then later sued for trade secret misappropriation.

To quote from the court decision:

[The first CRTR employee] states that she knew the customer lists were confidential, though no one had ever told her so, and [a second CRTR employee] states that on one occasion, she was told not to bring work out of the office. This is not adequate evidence that CRTR took any meansures to protect its purported trade secrets. There is no evidence of a policy regarding confidential information. …  It is undisputed that CRTR never required any of the defendants to sign a confidentiality agreement. …

On this basis, the court granted the defendants summary judgment.

It is often said that in America, you can sue anyone for anything. This is true, as far as it goes, but under Massachusetts state law a frivolous litigant risks paying the prevailing party’s attorney’s fees under M.G.L. c 231, Section 6F. This statute sets a difficult standard – the prevailing party  must establish that the claims for which it seeks counsel fees were “wholly insubstantial, frivolous and not advanced in good faith.”

The prevailing defendants in this case just might have a shot at that.

CRTR, Inc. v. Lao (Plymouth Sup. Ct. Dec. 30, 2013)

Inevitable Disclosure Doctrine Fails Again (This Time In New York)

I’ve written about the “inevitable disclosure doctrine” many times over the years, most recently in a blog post focusing on Massachusetts case law.  This line of cases arises when an employee does not have a noncompete agreement, but does have a non-disclosure/trade secret agreements.  The employer then argues, based on the NDA/trade secret agreement, that the employee will  ”inevitably” disclose the former employer’s trade secrets or confidential information in the course of working for a competitor, and therefore should be enjoined from working for the competitor. Disclosure of the employer’s trade secrets is, the employer argues, “inevitable” without an injunction.

Lawyers have been bringing cases under this theory for years, with lottery-like success. As I stated in a July 2012 post, “cases where the courts have accepted this theory without evidence of actual misappropriation are almost as rare as hens teeth.” Nevertheless, lawyers are a persistent bunch, and they Just. Keep. Trying.

In September a New York federal court, applying New York law, proved the near-futility of this legal  theory once again. In Janus et Cie v. Andrew Kahnke (S.D.N.Y. Aug. 29, 2013), the district court judge dismissed an employer’s complaint against a former employee, where the case was based entirely on the alleged inevitable disclosure of trade secrets.

As is typical in these cases, the former employee had not signed a non-compete agreement with Janus (the former employer), but had signed a non-disclosure agreement that prohibited him from sharing Janus’s “confidential information.”  Janus’ suit sought a permanent injunction against the employee working for a Janus competitor (a classic case of overreaching that likely disposed the court against Janus from the outset).

Dismissing the case, the court stated that Janus had made “the extraordinary request that the Court be the first to recognize the inevitable disclosure of trade secrets as a stand-alone claim in a complaint bereft of any allegations that [the employee] misappropriated trade secrets or breached a non-compete agreement.”  The court stated that the inevitable disclosure doctrine should be applied “only in the rarest of cases,” and not where (as in this case) the employer is unable to show that the former employee misappropriated its trade secrets. The court stressed that the doctrine was “fraught with hazard” and that the facts alleged had failed to persuade the court that Janus had successfully “threaded the ‘exceedingly narrow path through judicially disfavored territory.”

In other words, as I stated in the post linked above, in the absence of a valid non-compete agreement, to have a chance of succeeding under “inevitable disclosure,” a plaintiff must have proof that trade secrets have been  disclosed, not that they might be disclosed in the future. As the law goes in Massachusetts, so it goes in New York and most other states.

Oh, Did I Forget to Tell You That Was Confidential? Better Overkill Than Underkill

Oh, Did I Forget to Tell You That Was Confidential? Better Overkill Than Underkill

A lot of non-disclosure agreements (NDAs) provide that if one party gives the other a document and expects it to be treated as confidential, the document must be marked “confidential.”  Or, if the confidential information is communicated orally, the party that wants to protect it must notify the receiving party in writing within a specified number of days. (“Hey, the stuff we told at our meeting on Monday relating to our fantastic new product idea? That’s all confidential under our NDA”).

This was the situation in Convolve, Inc. v. Compaq Computer, decided by the Court of Appeals for the Federal Circuit on July 1, 2013.  The NDA at issue in that case provided that to trigger either party’s confidentiality obligations “the disclosed information must be: (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated confidential in a written memorandum summarizing and identifying the confidential information.”

Big mistake. People sign agreements like this and a year later they have completely forgotten that they need to follow them. Or, employees come and go, the NDA is buried away someplace, and new employees are blithely unaware that they need to follow the terms of the NDA.

That’s what happened to Convolve. It had trade secrets relating to hard disk drive technology. It disclosed the secrets at a meeting, but it failed to follow-up and designate it confidential under the NDA. Its argument that the parties knew the information was confidential (even though it wasn’t designated), went nowhere with the CAFC:

Convolve contends the district court erred when it found that Compaq failed to protect the confidentiality of certain information because it failed to designate it as such pursuant to its obligations under the NDAs. Convolve asserts that the parties understood that all of their mutual disclosures were confidential, notwithstanding the marking requirements in the NDAs. … Convolve … contends that the parties’ course of conduct did not require a follow-up letter. … The plain language of the NDA unambiguously requires that, for any oral or visual disclosures, Convolve was required to confirm in writing … that the information was confidential. … The intent of the parties, based on this language, is clear: for an oral or visual disclosure of information to be protected under the NDA, the disclosing party must provide a follow-up memorandum. … Convolve argues that, regardless of whether the confidentiality of the trade secrets was confirmed in writing, … the parties understood their mutual disclosures were confidential, notwithstanding the NDA strictures.  … [However], the NDAs do not appear reasonably susceptible to the interpretation Convolve urges.

Don’t put provisions like this in your NDAs if you want to protect your trade secrets or confidential information. Include a provision that everything you give to your business partner is confidential, and keep your options open. If something isn’t confidential, no harm done. If you think it is and the recipient disagrees, let the recipient prove it in court, should that become necessary. Better overkill than underkill.

Massachusetts Quick Links – October 2012

Oriental Financial Group, Inc. v.  Cooperativa De Ahorro y Crédito Oriental (1st Cir. October 18, 2012) — In this case the First Circuit adopts the trademark law “progressive encroachment doctrine,” joining the 6th, 7th, 8th, 9th and 11th circuits. The progressive encroachment doctrine may be used as an offensive countermeasure to the affirmative defense of laches (delay in brining suit) where the trademark owner can show that “(1) during the period of the delay the plaintiff could reasonably conclude that it should not bring suit to challenge the allegedly infringing activity; (2) the defendant materially altered its infringing activities; and (3) suit was not unreasonably delayed after the alteration in infringing activity” (quoting Oriental Financial).

Harlan Laboratories, Inc. v. Gerald Campbell (D. Mass. October 25, 2012) — Applying Indiana law, Judge Patti Saris issues a preliminary injunction enforcing a one year non-compete agreement. However, the opinion makes liberal use of Massachusetts and First Circuit precedents.

Blake v. Professional Coin Grading Service (D. Mass. October 6, 2012) — In this case, which involves alleged trade secrets associated with a method to grade the “eye appeal” of coins, Judge William Young concluded that the “method” was not subject to trade secret protection due to the fact it had been publicly disseminated before being disclosed to the defendants. However, Judge Young ruled that the case could proceed based on the alleged misappropriation of a proposed marketing plan.  In addition to his analysis of trade secret law, the case contains an extensive discussion of Lanham Act issues including “reverse confusion” (which is always confusing) as well as the application of Massachusetts law to the intellectual property issues raised in the case (conversion, breach of contract, the covenant of good faith and fair dealing, unjust enrichment and civil conspiracy).

In DeJesus v. Bertsch, Inc. (D. Mass. Oct. 16, 2012) Judge Young conducts a detailed analysis of corporate successor tort liability under the Massachusetts “de facto merger” and “mere continuation” exceptions. In this case he concludes that the defendant corporation is not subject to successor liability.


Hair Color Formulas and Salon Client Contact Info Not a Trade Secret, Says Superior Court Judge

Hair Color Formulas and Salon Client Contact Info Not a Trade Secret, Says Superior Court Judge

When I think of trade secret cases I tend to think of “high end” stuff: secret manufacturing processes, software algorithms, chemical or biological secrets, maybe even the formulas for Coca Cola or Kentucky Fried Chicken.  The truth, however, is more mundane, as shown by a case decided by Judge Nicholson in Barnstable County. In this case, which was dismissed in favor of the defendant hair stylist on summary judgment, the court held that a hair salon’s hair color formulas and customer contact information were not trade secrets.   This was an easy case, since the stylist knew many of her clients socially outside the salon and there was no employment or secrecy agreement other than an employee handbook, which is a weak basis on which to make a trade secret claim. After all, how many employees read handbooks? The judge also ruled that the hair color formulas belonged to the stylist who had developed them for the salon’s clients, not the salon, since there was no agreement to assign the formulas to the salon.  I find this latter rationale suspect, since “inventions” created within scope of employment and while on the job typically belong to the employer.  However, I question whether the color formulas qualify as trade secrets in the first place.  Case closed.

Esalon, Inc. v. Isolde Hoffman



Not Every Great Idea Is a Trade Secret

Not Every Great Idea Is a Trade Secret

You have a brainstorm: there is a market for dumpster rentals, and what better place to make the rentals than The Home Depot? You go to Home Depot and have it sign a non-disclosure agreement before you disclose this idea to it. You disclose the dumpster idea to Home Depot executives, but after much discussion and a great deal of back and forth over several years with many Home Depot employees, Home Depot turns you down. The next thing you know, Home Depot is renting dumpsters, using a business model not too different from the one you proposed.

You cry foul. You sue Home Depot in Massachusetts state court for misappropriation of trade secrets. Home Depot removes the case to Massachusetts federal district court where it grinds through a couple of years of discovery. During that process you claim that the damages you’ve suffered are between $19 and $60 million.

Home Depot files a motion for summary judgment. U.S. District Court Judge Douglas Woodlock grants summary judgment. Judge Woodlock observes that the idea of renting dumpsters through Home Depot is not a trade secret.

(1) the idea of Home Depot renting and (2) the idea of renting dumpsters [was not a trade secret] . . . anyone even vaguely familiar with the home improvement industry could have put these two concepts together easily based upon information in the public domain.

Essentially, the court relied on the hoary Massachusetts trade secret doctrine which state that a confidentiality agreement cannot make secret that which is not secret. Case dismissed.

Here is a link to the decision.

By the way, most large companies will not sign an NDA in advance of receiving business ideas for this very reason – if they reject the idea and adopt it later, they are vulnerable to suit. They then have to show that either the idea is not a “secret” (as Home Depot did here) or that it was already under consideration somewhere within their company prior to disclosure. Most companies conclude that rather than take that risk, it’s better to just refuse to sign NDAs. Without the NDA, this case would never have been filed or, it would have been dismissed much earlier. Home Depot learned that lesson the hard way.

How To Protect a Trade Secret (or, calling Ocean's Eleven)

Clients often ask what measures they need to take to protect their trade secrets, should it be necessary to enforce them in court and prove that they were treated as secrets.

Here’s how Kentucky Fried Chicken does it, according to an AP story published today:

The recipe lays out a mix of 11 herbs and spices that coat the chain’s Original Recipe chicken, including exact amounts for each ingredient. It is written in pencil and signed by Harland Sanders.

The iconic recipe is now protected by an array of high-tech security gadgets, including motion detectors and cameras that allow guards to monitor the vault around the clock.

Thick concrete blocks encapsulate the vault, situated near office cubicles, that is connected to a backup generator to keep the security system operating in times of power outages.

The recipe is such a tightly held secret that not even Eaton knows its full contents. Only two company executives at any time have access to the recipe. KFC won’t release their names or titles, and it uses multiple suppliers who produce and blend the ingredients but know only a part of the entire contents.

“We’ve very comfortable with the security,” [KFC President Roger Eaton ]said. “I don’t think anyone can break into it.”

Hmmmm …. perhaps a real-life George Clooney will be interested. Of course, we don’t really know what’s in that vault, do we?

Uniform Trade Secret Act Legislation – In Massachusetts, the Sixth Time May Be a Charm

Steve Chow at Burns & Levinson has sent me the legislation attached below, which the Massachusetts Uniform Law Commission, of which he is a member, filed with the Massachusetts House of Representatives on November 5, 2008.

This is the sixth attempt since 1995 to get the 1985 Uniform Trade Secret Act (UTSA) enacted in Massachusetts; although there was no opposition, the furthest that a prior attempt progressed was to third reading in the House. The uniform act has been adopted by 45 states and the District of Columbia. Apart from Massachusetts, the only other states that have not adopted the act are New York, New Jersey, Texas and Wyoming.

Steve Chow advises me that, because of some interest from the Joint Committee on Economic Development and Emerging Technologies and the Associated Industries of Massachusetts, there is a better than even chance that the legislation will be adopted in Massachusetts before the end of this legislative session, which ends in July 2010.

Here is a link to the proposed legislation

Update: As of April 2013, Massachusetts still has not adopted the UTSA.

Zotero Lawsuit Illustrates Conflict Between Open Source and Contractual IP Rights

The following is background that may be necessary for some readers to understand the issues raised in the Thompson v. Zotero lawsuit, discussed below.

The Mozilla Firefox web browser (the second-most popular web browser, after Microsoft Internet Explorer) allows anyone with the talent and interest to develop “add-ons”. An add-on is a computer functionality that is added to and integrated with the Firefox browser. The Firefox user downloads the add-on from the web, and the add-on is automatically “installed” by Firefox. The add-on can be used, disabled or deleted, at the user’s choice. What makes this possible is that Firefox is an open source web browser, allowing developers to fully integrate their software with the browser. Developers can register their add-ons with the Firefox web repository, where over 6,000 add-ons are available. The add-ons are rated and critiqued by users, creating a reliable marketplace based on reputation.

Microsoft’s Internet Explorer has add-onsin name, but it is a much more restricted, less open and less integrated technology, and therefore is far less robust than the Firefox add-ons. For this reason, the Firefox add-ons are growing at an exponential rate, and their availability is contributing to the growing popularity of Firefox.

Some of the add-on technologies are so robust that they are taking market share from conventional, for-profit companies. This seems to be the case with the Zotero add-on, which may be taking market share from the Thompson Reuters product, EndNote Software. Both products help academics and researchers create academic bibliographies and manage citations. However, EndNote’s traditional, packaged software costs almost $300, whereas Zotero’s add-on is free and can be downloaded in seconds. It appears that some potential purchasers of Endnote are opting for the lesser functionality of Zotero given the better price and convenience.

With that as background, the lawsuit.

Zotero was created by employees of George Mason University, which is owned by the Commonwealth of Virginia. George Mason is a licensee of EndNote, and the license prohibits reverse-engineering. Thompson alleges that the George Mason developers reverse engineered EndNote in order to allow Zotero to convert proprietary EndNote files into open source Zotero files.

Now, a word about the law. It is clear that a software program may be reverse engineered (decompiled or disassembled, for example) as part of the process of developing a compatible product. This so-called “intermediate copying” was held to be copyright fair use in the Sega v. Accolade case in 1992 and was reaffirmed by no less a legal luminary than Judge Richard Posner in Assessment Technologies v. WIREdata decided in 2003.

However, it is also true (as the Assessment Technologies case points out) that this right of fair use may be restricted by a contract. (See Bowers v. Baystate Technologies (2003), to the same effect). A contract or license may prohibit reverse engineering or the creation of intermediate copies.

If George Mason’s contract with Thompson contained a “no reverse engineering” provision as Thompson asserts in its lawsuit, and George Mason did in fact reverse engineer EndNote to achieve compatibility, George Mason/Virginia may be liable for breach of contract. In fact, EndNote may have blocked the legal ability of any legal licensee of EndNote to reverse engineer EndNote for this purpose, since presumably not only George Mason but every proper licensee would be similarly restricted.

Whether this turns out to be the case – whether George Mason did reverse engineer EndNote to achieve compatibility, and whether EndNote has built a legal “Maginot Line” with no breaks or faults, across which no competitive developer can cross, remains to be seen as the facts of the case develop. It may be the case that the EndNote software did not require reverse engineering in order for Zotero to access its formats. It may also be the case that Zotera (or others in the marketplace, even nonlicensees) can technically and legally sidestep any contractual restrictions, and still provide conversion to EndNote file formats.

Whichever way this case goes, this dispute is interesting because it represents the clash of the old and the new: old, in the sense that savvy IP lawyers have been advising their clients for years to use contracts, in addition to copyright, to protect their software, and it appears that EndNote has tried to do this. New, in the sense that open source, when combined with new web technologies, may present a competitive and technical challenge to products like EndNote that good lawyering may be able to delay, but may prove unable to stop.

The complaint in this case can be accessed here.