It should be obvious that if you want trade secret protection, you shouldn’t wave your purported trade secret around in public. Likewise, if you see someone openly disclosing your trade secret on television, you should probably do something about it.
This is the scenario that arose in a recent case between two Miami fine-dining restaurants called Mr. Chow and Phillipe. Among the 16 claims in a colorful complaint filed in the Southern District of Florida, Mr. Chow alleged that one of its former kitchen employees misappropriated several of its trade secret “signature dishes” and was using them at Phillipe. The district court dismissed the trade secret claims based on New York’s three-year statute of limitations, and earlier this month the Eleventh Circuit affirmed.
New York law, like the Uniform Trade Secrets Act (UTSA), creates a three-year statute of limitations for misappropriation. The UTSA gives trade secret owners a bit of a break by establishing a “discovery” rule under which the limitations period does not start to run until the trade secret owner discovers the misappropriation, or should have discovered it by the exercise of reasonable diligence. New York, on the other hand, favors trade secret owners by recognizing a “continuing tort” rule, whereby each successive wrongful nonpublic use of a trade secret constitutes a new tort that restarts the statute of limitations. In most other states, and under the UTSA, subsequent acts of misappropriation do not restart the clock. A lawsuit must be brought within three years after the owner discovers the first unlawful use, disclosure, or other act of misappropriation.
As we hinted above, the most brazen act of trade secret usage that should have tipped off Mr. Chow was Philippe’s preparation of the signature dishes on television. In fact, a recipe from that show is available online — Green Prawns with Chinese Noodles. But the court found that the defendant had also publicly disclosed the trade secrets by openly serving the dishes to the public in the Phillipe restaurants and by giving a restaurant tour and a menu to a Mr. Chow employee before the first restaurant even opened. All of these acts took place more than three years before the lawsuit was filed. During that time, Mr. Chow never sent a cease-and-desist letter or voiced an objection as the Phillipe business grew and opened a new location. The result is that Mr. Chow’s secret recipes are no longer so secret, though the restaurant owner was able to secure a million-dollar jury verdict for false advertising and unfair competition. Phillipe has since gone out of business in South Beach.
Mr. Chow isn’t the only one who got burned by leaving his pan unattended on the fire. In Portman v. New Line Cinema, the plaintiff claimed trade secret protection in a motion picture comedy idea that he said was reflected in the movie Wedding Crashers. But like the owner of Mr. Chow, he sat on his rights for too long. With the movie’s release on July 15, 2005, the purported trade secrets were disclosed to the public, but the plaintiff did not file suit until July 2009. By that time, the trade secret claim was barred by the statute of limitations.
Even if delay in filing suit does not bar a claim under the statute of limitations, such delay can create problems in other ways. For example, in Cypress Semiconductor Corp. v. Superior Court, the California Court of Appeal held that a third party’s inadvertent use of a trade secret did not constitute misappropriation and would not trigger the statute of limitations. But the court observed that the law still provides incentives for action by the trade secret owner. Standing idle in the face of such inadvertent use could amount to a failure to exercise reasonable efforts to maintain secrecy, thereby depriving the information of trade secret status. Failure to act could also defeat any future claim against the inadvertent user, since the UTSA protects parties who acquire trade secrets in good faith and materially change their position before receiving notice that they are using the secrets.
These cases highlight the perils of inaction in the face of trade secret theft. If you want to have your cake and eat it too, it’s best to act quickly to protect your trade secrets.