One of the most common forms of business agreements that our clients enter into is the non-disclosure agreement (NDA). Whether to explore a potential partnership between two companies, to consider a proposed merger or acquisition, or something in between, companies of all kinds enter into NDAs permitting the limited exchange of their trade secrets and other confidential information. Many of these NDAs are negotiated on standard forms—often without lawyers—that provide little-to-no details on exactly what information will be shared that is actually "confidential," a "trade secret," or both.

Unsurprisingly, the frequency of NDAs gives rise to frequent litigation when the hoped-for partnership or transaction doesn't pan out. Oftentimes the parties will exchange information under an NDA, go their separate ways, and continue developing products that compete with one another. The receiving party might release a product that seems to look or function similarly to the disclosing party's products, prompting the discloser to accuse the recipient of engaging in trade secret misappropriation and breaching the NDA.

Under the federal Defend Trade Secrets Act and most state law, a "trade secret" includes any type of financial, business, scientific, technical, economic, or engineering information that 1) is protected by the owner through reasonable measures to keep it secret, and 2) derives economic value from not being generally known to, and not being readily ascertainable through proper means by, another person who can benefit from its use or disclosure.

Thus, in order to prove a claim for trade secret misappropriation, a plaintiff must (among other things) identify with particularity which information it claims to be a trade secret. Simply listing vague, broad, and general categories of information, without concrete specifics, is not enough to prove the claim at summary judgment or at trial.

Recently, the United States Court of Appeals for the Federal Circuit emphasized that point in a long-running battle between hair care companies Olaplex and L'Oréal. The opinion offers important guidance for anyone entangled in a trade secret dispute. Though unpublished, it reflects a trend among courts of appeals that are requiring plaintiffs to specify their trade secrets with greater particularity, as district courts have done throughout the country.

Olaplex v. L'Oréal

Olaplex styles itself as a "small California start-up" that discovered and developed "a novel, game-changing product" which protects hair during bleach treatments. In May 2015, the company shared information about its product with L'Oréal under an NDA for purposes of exploring a possible acquisition of Olaplex by L'Oréal. After those discussions ended, L'Oréal allegedly created a series of "knock-offs" that infringed Olaplex's patents and misappropriated its trade secrets—including so-called "testing and know how" and "dead ends and trials and errors" underlying its research and development process.

Olaplex filed suit in January 2017, culminating in a week-long trial in August 2019 where the jury found in its favor on trade secret misappropriation, breach of the NDA, and patent infringement. But the Federal Circuit reversed most of the verdict on appeal.

Although the court reversed the verdict for a number of reasons, most notable is its finding that Olaplex offered an "utter lack of proof that L'Oréal misappropriated anything secret" as to its alleged "testing and know how, and dead ends and trials and errors." "Indeed, Olaplex describes these groups only at the high level of generality … It never identifies with specificity any particular information about testing, know-how, dead ends, or trial-and-error processes and evidence showing that L'Oréal made use of that information, let alone evidence of why that use was improper."

The Federal Circuit explained why this was fatal to Olaplex's case. As other courts have held, a plaintiff in a trade secret action "bears the burden of defining the information for which protection is sought with sufficient definiteness to permit a court to apply the criteria for protection … and to determine the fact of an appropriation." The court cites a 2020 decision by the First Circuit, TLS Management and Marketing Services v. Rodríguez-Toledo, which rejected a trade secret claim for the same reason: the plaintiff only described its supposed trade secrets at a "high level" without specificity.

Although a plaintiff need not get into precise details in a publicly-filed complaint—after all, doing so would disclose the secret publicly—once the litigation continues and a protective order is in place, a plaintiff must set out the precise nature and bounds of the trade secret in sufficient detail to put a defendant on notice of the nature of the plaintiff's claims, and to enable the defendant and the court to determine the relevancy of any requested discovery. If necessary, courts will permit plaintiffs to specify that information under seal to avoid disclosing it in a public filing. Failure to provide "concrete identification" of a trade secret also hampers a defendant's ability to rebut the plaintiff's allegations. Nor could a court or jury fairly determine whether the information at issue is actually a trade secret, and if so, whether the defendant really misappropriated that specific piece of information.

Notably, the court applied this same "particularity requirement" to reject Olaplex's breach of NDA claim, finding that "a claim that a confidentiality agreement was breached by disclosure of a proprietary combination of data should require the same precision of proof as a comparable trade secret claim."

Guidance

Olaplex v. L'Oréal is a reminder of how to win, or defend against, a trade secret claim if you are involved in a lawsuit. But one of the best ways to avoid a lawsuit altogether is to identify trade secrets at the time they are exchanged. Remember:

• Never disclose confidential information to a third party except pursuant to an NDA or other relationship requiring the recipient to maintain secrecy.
• When you share information with an authorized recipient, put the recipient on notice as to what information constitutes your trade secrets. This ensures that the recipient knows the bounds of what it is authorized to use, and when or how to use it.
• On the flip side, if you are receiving the confidential information, request that the disclosing party identify that information with as much specificity as possible.