Think You're Missing a Trade Secret? Don't Delay Taking Action

January 1, 2009

By: John M. Tanner

A recent holding by the Colorado Supreme Court underscores the importance of protecting your trade secrets, and taking action if you believe they have (or even part of one has) been misappropriated.

Background on Trade Secrets:  Colorado has adopted the Uniform Trade Secret Act, which defines the kind of information that can constitute a trade secret.  C.R.S. §§ 7- 74-101 et seq. The type of information that can be a trade secret includes “the whole or any portion or phase of any scientific or technical information . . . or other information relating to any business or profession which is secret and of value.  To be a ‘trade secret’ the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.”  C.R.S. § 7-74-102.

Colorado courts have identified six factors that are useful in determining if something fits within the statutory definition.  Porter Industries, Inc. v. Higgins, 680 P.2d 1339 (Colo. App. 1984).  While no single factor is determinative, the very first one is “the extent to which the information is known outside the company.”  Thus misappropriation of a trade secret, without the holder taking immediate action, can cause significant damage to any claim regarding it, as it could cause a court to determine that the information is no longer a trade secret at all.

Background of Gognat:  Gognat v. Ellsworth, 259 P.3d 497 (Colo. 2011), involved a trade secret process for exploiting underground mineral deposits.  In 1997, the inventor shared the process with some joint venturors. They used the process to exploit some mineral rights in 2001, agreeing to provide him some payment based on the profitability of the project.  He thought he was under-compensated, but took no further action because he relied on promises of the venturors that the matter would be worked out.

In 2004 some of those same venturors used the process again in a different geographic area, and this time the inventor brought suit for, among other things, misappropriation of trade secrets.  The defendants moved for summary judgment on the grounds that the suit was barred by the Statute of Limitations.  The inventor argued that the use by the defendants in 2004 was different than the prior use, and thus a new claim arose.  The defendants prevailed, and this was recently affirmed by the Colorado Supreme Court.

Legal Significance of Gognat:  Essentially, the Supreme Court held that the Uniform Trade Secrets Act treats the misappropriation of any part of a trade secret as a misappropriation of the entire trade secret and the misappropriation of all related trade secrets.  Thus the use of the trade secret without adequate compensation (and therefore consent) in 2001 triggered accrual of the claim for relief, thus the suit in 2005 was time- barred.

Significantly, Gognat addressed the argument that the trade secret exploited in the second venture was applied differently than it had been in the first venture (and thus a new claim arose). The Court, reading very precisely the words of the statute, determined that it did not matter:

Because the term “trade secret” is defined, in pertinent part, to include the whole, as well as any portion or phase, of any valuable and secret scientific or technical information, the words of the statute themselves mandate that any particular part of such information be considered a trade secret, but they do not permit different portions or phases of one trade secret to be classified as different trade secrets. . . . In the absence of any contention that . . . different parts of the secret information or process were discovered or developed at distinctly different times, for distinctly different purposes, and using distinctly different experiments or analyses, the fact that a body of secret information was disclosed to the same individual, at the same time, normally provides a powerful reason for treating it as a single trade secret. (Emphasis in original.)

In some ways, this is not a surprise.  While most causes of action do not accrue until both the fact of the wrong and the knowledge of damage are (or should be) known, a cause of action for misappropriation of a trade secret accrues when “the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” C.R.S. § 7-74-107. Thus the statute presumes the misappropriation is itself damage. This makes perfect sense:  some of the value of a trade secret is in the fact that it is secret (another factor identified in Porter Industries).  Thus the cause of action may accrue once someone without permission becomes aware of a trade secret, even if there is no immediate commercial exploitation of the information.

Take Away Lessons:

1.  Trade Secrets should be protected.  The most important aspects of protecting a trade secret are:  (a) keeping it secret from those outside a company; and (b) keeping it on a “need to know” basis even within a company.  The factors in Porter Industries should

be reviewed regularly regarding all of a company’s sensitive information.

2.  Trade Secret cases should be filed promptly.  The Uniform Trade Secrets Act provides that claims for theft of trade secrets must be brought within three years.  C.R.S.

§ 7-74-107.  Equitable doctrines might bar claims even sooner than that. In the

meantime, if the information is known to others than those needed to exploit it, it may cease being a trade secret altogether.

3.  Owners of Trade Secrets should properly document use of their inventions. The result in Gognat could have been avoided if the inventor had properly documented his relationship with his business partners.  A properly-drafted license could have

established time limits and compensation for the inventor.  It could have also established minimum payments to compensate the inventor regarding the use of his trade secrets—a common practice in intellectual property licensing.

Owners of inventions have alternatives to licenses.  For example, they can contribute trade secrets to a company in exchange for an ownership interest. The key is to not let a trade secret be known to others absent proper documentation regarding whatever the business deal is.

