Protorae Law
Mike Holm | LeClairRyan | UBP Team

Unfair Business Practices

This blog focuses on unfair business and trade practices such as business conspiracy, breach of fiduciary duty, misappropriation of trade secrets and other proprietary information, fraud, tortious interference with contracts and other unfair business practices that are not neatly defined. Since we are located in Tysons Corner, Virginia, many of the cases discussed will come from Virginia, Maryland and the District of Columbia courts. We hope the reader finds this blog instructive.

Wednesday, July 8, 2009

Source Code Sufficient to Prove Trade Secret

It is not uncommon for a business, whose former employee has joined or formed a competitor firm, to charge that the employee has misappropriated its trade secrets. Proving the charge is another story.

Under the Uniform Trade Secrets Act which has been adopted in Virginia, Maryland and the District of Columbia, a trade secret is defined as:
“information, including but not limited to a formula, pattern, compilation, program, device, method, technique, or process that:
1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Virginia Code § 59.1-336.

A recent decision from the Fourth Circuit Court of Appeals addressed Virginia’s trade secrets law in the context of a computer model. Decision Insights, Inc. v. Sentia Group, Inc., 2009 U.S. App. LEXIS 2654 (4th Cir. 2009). In that case, the plaintiff had developed and marketed a software program used to prepare negotiating strategies and measure risks associated with various alternatives. Three of the defendants were employees of Decision Insights (“DII”) who had worked on modifications to the software and had access to its source code. While they were still employed by DII, the employees established Sentia Group, Inc. a competitor firm. When efforts to negotiate a license of the software program from DII failed, Sentia hired the same individual who had worked with the defendants at DII to develop its own software. The result was a program that allegedly used the same methods as those used in the software owned by DII.

When DII sued, the district court granted summary judgment in favor of the defendants and dismissed the case on the basis that the plaintiff had failed to meet its burden of proof as to the existence of any trade secrets. On appeal, the Fourth Circuit took a different view and reversed (in part) the decision of the district court granting summary judgment in favor of the defendants and remanded the case for further proceedings.

In its complaint, DII claimed that its computer model, as a total compilation, was a trade secret and that within that model were 12 specific functions that individually also qualified as trade secrets. The appellate court reversed the lower court for, among other things, the failure of the district judge to consider whether the software program as a total compilation qualified as a trade secret. Id. at *19.

The court noted that the most important characteristic of a trade secret is secrecy, Id. at *17, quoting Dionne v. Southeast Foam Converting & Packaging, Inc., 397 S.E.2d 110, 113 (Va. 1990), and that it may retain that characteristic even though it is shared with others, if that disclosure is in confidence, express or implied. Id. at * 17-18, quoting Dionne, 397 S.E.2d at 113. Under long established precedent in Virginia, a “working combination” of information, all of which individually may be in the public domain, can, when combined, be protected as a trade secret. Servo Corp. of Am. v. Con. Elec. Co., 393 F.2d 551, 554 (4th Cir. 1968).

The appellate court in Decision Insights acknowledged that DII could not produce the algorithms used in the creation of the program as it was over 15 years old. Nevertheless, the court held that the source code for the software in conjunction with a flow chart and narrative explaining the software program could be an acceptable method for identifying the trade secret at issue. Id. at *21-23. On remand it directed the district judge to examine the evidence to determine whether Decision Insights adequately identified its software compilation claim such that the claim could proceed to trial. In addition the district court was directed to individually consider the independent trade secret claims separate and apart from the compilation claim. Id. at *22-23.

The take-away: For companies that had developed software programs years ago that they want to protect as trade secrets, the source code may suffice to prove trade secret status, even if the original algorithms have been destroyed. In addition, companies should not forget that the common law also protects proprietary and confidential information from disclosure by a rogue employee to a competitor in those situations where it would be difficult to prove that the information is a trade secret.


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