Secrecy Is a Necessary, but Not Sufficient, Condition of Alleging Information Is “Trade Secret”: a Court Rules Information Must Confer a Competitive Business Advantage to Receive Statutory Trade Secret Protection Under DTSA

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In Payward, Inc. v. Runyon, Case No. 20-cv-02130-MMC, the United States District Court for the Northern District of California granted a Rule 12(b)(6) motion, ruling that information alleged to be “secret” failed to qualify as a “trade secret” under the Defend Trade Secrets Act.  The Court applied California and federal precedent explaining trade secret information confers a competitive business advantage, and found the complaint lacked any such allegations.  The decision make sense given the particular allegations in the case.  But does a “competitive business advantage” requirement comport with a strict textualist reading of the DTSA?

The facts are unique.  Plaintiff Payward operates a global cryptocurrency exchange.  Payward alleged in its Complaint that it keeps the physical address of its office secret, in order to protect against “physical security threats.”  Payward alleged by way of example “a recent spate of kidnappings” of people who worked for cryptocurrency exchanges.  Payward alleged Defendant Runyan, a former Payward employee, disclosed Payward’s physical address in a complaint Runyan filed in state court asserting wrongful termination claims.  In federal court Payward alleged Runyan’s disclosure of Payward’s physical address constituted trade secret misappropriation under the DTSA.  Runyan moved to dismiss pursuant to Rule 12(b)(6), arguing that Payward’s physical address was not a “trade secret.”

DTSA defines “trade secret” in 18 U.S.C. § 1839(3):

the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information … whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—

    1. the owner thereof has taken reasonable measures to keep such information secret; and
    2. the information 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 (Emphasis added).

The Court appeared to assume that Payward’s physical address qualified as “business … information,” and that Payward took reasonable measures to keep its physical address secret.  The Court focused on the “independent economic value” requirement, reading that language to mean business information that confers a strategic advantage over business competitors.  The Court quoted a California appellate court case holding that “the focus of the inquiry regarding the independent economic value element is on whether the information is generally known to or readily ascertainable by business competitors or others to whom the information would have some economic value.” (Emphasis added, quoting Altavion, Inc. v. Konica Minolta Systems Labroatory, Inc., 226 Cal. App. 4th 26, 62 (2014), and noting the DTSA is “largely modeled after the Uniform Trade Secrets Act” and the definition of “trade secret” in the DTSA is “substantially identical” to the California Uniform Trade Secret Act definition, citations omitted).  The Court further observed that cases analyzing the “independent economic value” requirement “most often consider the degree to which the secret information confers a competitive advantage on its owner,” and that “independent economic value ‘has been interpreted to mean that the secrecy of the information provides a business with a substantial business advantage.’”  (Emphasis added, citations and internal marks omitted).

Against this backdrop, the Court had little trouble ruling Payward’s physical address was not a trade secret.  The Court focused on the fact that Payward did not allege “how its competitors would gain an economic advantage by learning Payward’s physical address.”  (Emphasis added).  That Payward allegedly kept its physical address secret was not enough, by itself, to meet DTSA’s statutory definition of “trade secret.”

Query, however, whether the Court’s decision comports with a strict textualist analysis.[1]  Repeating the relevant provision of the “trade secret” definition:

the information 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  (Emphasis added).

The definition does not specifically refer to a business competitor, or a competitive business advantage.  It merely refers to “another person who can obtain economic value from the disclosure … of the information.”  (Emphasis added).  The “business advantage” and “business competitor” language in the decisions quoted by the Court are logical judicial glosses applied to the statute, but judicial glosses nonetheless.

Could Payward have alleged different facts to meet the statutory definition?  Consider this law school-esque hypothetical: Payward’s Complaint alleges Runyon sold Payward’s physical address to erstwhile kidnappers.  The kidnappers actually kidnapped a Payward executive, and Payward paid a ransom in exchange for her safe return.  Wouldn’t the information have independent economic value from not being generally known, and wouldn’t the kidnappers fall within the plain language of “another person who can obtain economic value from the … use of the information?”  The “trade secret” definition in the DTSA, if read in a strict textualist manner, might lead to a surprising holding.

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[1]  In 2015 Justice Kagan famously remarked “I think we’re all textualists now.”  Harvard Law School, The Antonin Scalia Lecture Series:  A Dialog with Justice Elena Kagan on the Reading of Statutes, YouTube (Nov. 25, 2015) (https://www.youtube.com/watch?v=dpEtszFT0Tg).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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