Keeping Your Secrets: The Burdens of Proof in Trade Secrets Litigation

Recently, Barnes & Thornburg LLP assisted a client in obtaining summary judgment in a case in which the client was accused of violating Illinois’ version of the Uniform Trade Secrets Act (UTSA). That case, Loparex, LLC v. MPI Release Technologies, LLC, 2011 WL 1135906 (S.D. Ind.), underscores the importance of taking action before litigation to ensure that trade secrets will continue to be protected by both the courts and others.

The Facts

Plaintiff Loparex, LLC and Defendant MPI Release Technologies, LLC are competitors in the release liner industry. Products produced in this industry include, for instance, nametags with peel-off backings. Beginning in 2006, Loparex hired Stephan Odders to manage a sales team that targeted specific states. After Loparex terminated his employment, and after the term of his noncompetition agreement expired, Mr. Odders began employment with MPI. Loparex was concerned that Mr. Odders’ would disclose potentially secret information to MPI.

Gerald Kerber began working for Loparex as an engineering manager in the summer of 2006. As part of his job, Mr. Kerber had access to formulas Loparex considered confidential. He also, learned about the production processes at Loparex and how to operate and maintain Loparex’s curing machinery. Mr. Kerber resigned his job at Loparex on September 18, 2009, leaving to manage one of MPI’s facilities. Within a week of his resignation, because he believed he no longer needed them, Mr. Kerber destroyed the notebooks that he kept during his employment at Loparex.

Loparex sued MPI in the Southern District of Indiana, asserting claims for damages under the Uniform Trade Secrets Act and Indiana’s Crime Victims Act as well as several tort theories.

To prove that MPI had misappropriated trade secrets, Loparex submitted into evidence twenty pages of formulas and machine operating settings. Loparex submitted a second exhibit that consisted of supplier quotations and related correspondence. Finally, Loparex submitted an affidavit as a third source of trade secret designations.

A Heavy Burden: the Court’s Decision in Loparex

Illinois law applied to the case and Illinois has passed the Uniform Trade Secrets Act. This Uniform Act is the law in 46 of the 50 states. To prevail on a trade secrets claim under the Act, a plaintiff must prove that: (1) it has information qualifying as a trade secret; (2) at least one of its trade secrets has been misappropriated; and (3) the defendant used that trade secret in their business activity or inevitably will. The court ultimately concluded that Loparex failed to prove any of these requirements.

To qualify as a trade secret under the USTA, information must: (1) be “sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (2) [be] the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.” Id. at *5 (quoting 765 Ill. Comp. Stat. 1065/2(d)). The court noted that plaintiffs are often “reluctant to disclose exactly which information” meets this statutory definition because “the more precise the claim, the more a party does to tip off a business rival to where the real secrets lie and where the rival’s own development efforts should be focused.” Id. (quoting IDX Sys. Corp. v. Epic Sys. Corp., 285 F.3d 581, 583 (7th Cir.2002)).

Plaintiffs seeking to survive a motion for summary judgment, however reluctant they might be, are required to show that concrete secrets have been appropriated. Id. According to the court, it is “not enough to point to broad areas of technology and assert that something there must have been secret.”Id. (quoting Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir.1992)).

Applying the above standard to the evidence submitted by Loparex, the court determined that Loparex had failed to meet its burden to sufficiently describe its trade secrets. Id. Nothing in Exhibit L, which consisted of twenty pages of formulas and machine operating instructions, “explain[ed] why the formulas and settings represent[ed] economic value for Loparex, or how Loparex keeps them confidential.” Id. Further, Loparex did not submit any evidence which would attest “to the economic value that the specific information contained in [Exhibit M] represents to Loparex.” Id. at 6. This information, which consisted of pricing data, did not satisfy the requirements of the USTA, especially in light of Illinois case law holding that pricing information cannot satisfy the confidentiality requirements for a trade secret. Id.

Finally, the affidavit submitted by Loparex also insufficiently described any actionable trade secrets. Id. The court found this affidavit to be “impermissibly conclusory” and noted that such affidavits “never suffice to defeat summary judgment.” Id. This fact is especially true in the context of trade secrets, where courts must “separate information that meets the statutory criteria for protection from information that does not, specificity about the scope of the trade-secret claim is essential.” Id. Simply designating information as “proprietary,” “formula,” or “secret” does not meet the statutory requirement. Id. These descriptions do not distinguish “those portions of the formula and production process that are “readily observable,” from those that aren't; only the later are protected.” Id. at *7.

After concluding that Loparex had failed to properly designate any information qualifying as a trade secret, the court also concluded that Loparex failed to meet its burden of demonstrating that at least one of its trade secrets has been misappropriated. Id. The misappropriation element requires a plaintiff to show that its trade secret was stolen rather then being either stolen or acquired from a third source. Id. The court noted that Loparex offered “absolutely no evidence” that Mr. Odders had misappropriated any trade secrets, and the evidence it offered that MPI and Mr. Kerber misappropriated trade secrets was unconvincing. Id.

Finally, the court held that Loparex had failed to establish the third element of a trade secret claim: that the defendant made use of the plaintiff’s trade secret. Id. Loparex argued that MPI was able to “jumpstart” its production with the help of misappropriated trade secrets, but this allegation was not supported by any evidence. Id. The court found it particularly significant that Loparex was not able to point to “any new product that MPI [had] developed that resemble[d] any Loparex product.” Id.

Because Loparex was not able to meet its burden of proving that MPI had violated the Illinois USTA, the court granted summary judgment for the defendants.

The Grass is not Greener: Trade Secret Burdens of Proof in Other Jurisdictions

The high standard articulated by the Loparex court requiring businesses to produce actual evidence of concrete secrets is not uncommon. Numerous courts in the Seventh Circuit have reached the same conclusion. See Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir. 1992) (“It is not enough to point to broad areas of technology and assert that something there must have been secret and misappropriated. The plaintiff must show concrete secrets.”); Carpenter v. Aspen Search Advisors, LLC, 2011 WL 1297733 at *3 (N.D. Ill) (dismissing plaintiff’s trade secrets claim for failing to provide specifics about the nature of the confidential data for which it claimed trade secret protection); UTStarcom, Inc. v. Starenet Networks, Corp., 675 F. Supp. 2d 854, 875 (N.D. Ill. 2009) (“[D]etermination of trade secrets requires a document-bydocument analysis that takes into consideration the content of the materials in question, how they were treated or protected, whether they are valuable, how much effort went into their creation, and more.”).

Because most states base their trade secret laws on the USTA, it is not surprising that the standards upon which to evaluate a plaintiff’s claims are similar across jurisdictions. Plaintiffs in many jurisdictions are required to produce specific evidence of trade secrets to succeed in litigation. In the Eighth Circuit, for example, courts have held that information must be delineated with some particularity to establish that it constitutes a trade secret. SL Montevideo Technology, Inc. v. Eaton

Aerospace, LLC, 491 F.3d 350, 354 (8th Cir. 2007); see also Strategic Directions Group, Inc. v. Bristol-Myers Squibb Co., 293 F.3d 1062, 1065 (8th Cir. 2002) (the assertion that a trade secret resides in some combination of otherwise unknown data is not sufficient to prove the existence of a trade secret). The Sixth Circuit also adheres to a similar test. See, e.g., Polar Molecular Corp. v. Amway Corp., 2008 WL 907472 at *3 (W.D. Mich.) (holding that merely designating information as proprietary is not sufficient to make that information a trade secret).

Carry that Weight: What Loparex Means to Companies Seeking to Protect Trade Secrets

For many companies, protecting their trade secrets is a crucial aspect of their business model. With every employee that retires, accepts a position with another company, or is terminated comes the possibility that trade secrets could be shared with a competitor. Entities seeking to protect their trade secrets are justifiably concerned that, if too much information is disclosed during the litigation process, trade secrets may be lost. If litigation is pursued as a means to protect trade secrets, businesses need to be prepared to disclose sufficient information to support their claims and work with counsel to obtain appropriate protective orders.