TRADE SECRET PROTECTION IN THE ANIMAL HEALTH 
AND ANIMAL SCIENCE SECTOR

By: Sanjay K. Murthy, Shareholder, Rocco Screnci, Associate, and Maya Chawla, Summer Associate, all of McAndrews, Held & Malloy, Ltd.

INTRODUCTION

Trade secrets law in the United States is (or should be) top of mind for all businesses these days. As the past year reminds us, trade secret protection and enforcement are complex and legally nuanced areas, and each requires much more than a light-touch legal assessment.  This article explores some of these key developments in trade secret protection and enforcement in the animal health and animal science sector.  Specifically, in the past year a number of animal health companies have been involved in trade secret disputes touching on the following areas: former employees taking source code, former employees taking customer lists, and former employees taking confidential documents.  To address these types of issues, we have provided some guidance to help your company protect valuable trade secrets and avoid these types of problems. 

SECURING TRADE SECRET PROTECTION

Trade secrets are protected in the United States by federal legislation—the Defend Trade Secrets Act—and on a state-by-state basis. Fortunately, however, there are few differences between federal- and state-level trade secret protections because the federal trade secret legislation was modeled after the Uniform Trade Secrets Act, which almost all 50 states have enacted in some form.^[1] For the sake of brevity, this section focuses on federal trade secret law but identifies important differences with state law.

The United States affords broad trade secret protection to commercially sensitive information. A “trade secret” can include “all forms and types of financial, business, scientific, technical, economic, or engineering information.”[2] In effect, that definition can extend to virtually any commercially valuable information. Some courts have extended trade secret protection to the genetic information of agriculture or livestock.[3] Other common examples of information that usually qualify as trade secrets include secret recipes or formulas, internal pricing information, and source code. But not all commercially valuable information qualifies as a trade secret. To qualify as a trade secret, the information must meet two other requirements.

The first requirement is that the information must “derive[] 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.”[4] In other words, the information itself is not inherently valuable; the value of a trade secret comes from its secrecy—“from not being generally known”—and difficulty to be learned through “proper means.” This of course means that well-known public information cannot qualify for trade secret protection. But “information ascertainable through proper means” encompasses information that is indirectly revealed, such as by public disclosure of a related product or service. For example, while a device’s blueprint might not be public knowledge, the device’s design will not qualify as a trade secret if it can be reverse engineered and reproduced.[5]

At the same time, however, not all information that is technically available to the public is barred from qualifying as a trade secret. A classic example is a compilation of information—like a customer list—that includes public information (addresses, phone numbers, and the like). Because the hallmarks of a trade secret are that it is not readily ascertainable and provides a competitive advantage through its secrecy, courts examine how a compilation containing public information functions within a business and whether it could be easily recreated. With a customer list, for example, courts ask whether the customers on the list are readily ascertainable as prospective customers of the business’s goods or services, or whether the compilation was uniquely generated from years of marketing and advertising efforts.[6] Evidence of the latter indicates that the list could not be easily reproduced through proper means and thus is more likely to receive trade secret protection.[7]

The second requirement for trade secret status is that the owner of the commercially valuable information “has taken reasonable measures” to ensure it remains secret.[8] But for measures to be “reasonable,” they need not be perfect. The “reasonableness” of any particular measures varies depending on the nature of the information and the industry.[9] But some common best practices have emerged:

• Affixing stamps or labels to denote that a document is “Confidential”
• Restricting access to documents either physically (e.g., lock and key) or digitally (e.g., password requirements)
• Imposing confidentiality policies and/or requiring nondisclosure agreements before allowing access to commercially sensitive information.[10]

Even so, there is no one-size-fits-all solution to ensuring adequate security. At bottom, courts evaluate “reasonableness” on a case-by-case basis and typically leave the ultimate determination for the factfinder—often a lay jury—to decide based on the costs and benefits of the particular security measure(s).

Another key consideration in deciding whether confidentiality measures are adequately “reasonable” also hinges on the relationship between the parties. For instance, in cases where the parties have little to no preexisting relationship or are engaged in an arm’s-length transaction, binding nondisclosure agreements with all the relevant parties are typically required. As an example, a recent case addressing this issue involved a business pitch for a financial-services product to a third-party insurance company. Even though the owner of the alleged trade secrets had entered into nondisclosure agreements with other third parties who set up the pitch meeting, it had not entered into a nondisclosure agreement with the insurance company to whom the pitch was directed.[11] As a result, the information was not kept adequately confidential to form the basis of a trade secret claim.[12]

By contrast, the employer-employee relationship already imposes implicit duties on employees to act in their employer’s interests, so courts often award trade secret protection to information disclosed to employees absent a binding nondisclosure agreement.[13] But as a recent case highlights, employers still must take some affirmative measure to keep the information safe from disclosure: In In re Island Industries, Inc., the court of appeals affirmed the dismissal of a trade secret claim because the employer exclusively relied on the common law fiduciary duty of confidentiality.[14] Put differently, because the owner of the alleged trade secret must impose “reasonable measures” to preserve confidentiality, it could not rely solely on a duty imposed by common law. And yet, if the employer had imposed minimal affirmative measures—like company policy requiring confidentiality and/or limiting access to the information—the case likely would have been decided differently.[15]

In sum, the evaluation of “reasonable measures” varies depending on the totality of the circumstances in each case. At a minimum, “reasonable measures” require a sufficiently confidential relationship (whether by explicit agreement or implied at law) and some affirmative steps, such as a written policy or clear access restrictions, to preserve secrecy of the commercially sensitive information.

But while “reasonable measures” are a legal requirement for trade secret protection in the United States, businesses may want to consider implementing extraordinary measures to preserve their trade secrets. After all, trade secrets are a valuable tool in a business’s intellectual property arsenal. Unlike patents and copyrights, trade secrets have no predetermined lifespan, meaning that they can last in perpetuity as long as they remain secret and commercially valuable. Nor are there transactional costs associated with registering trade secrets with an administrative agency since trade secrets are not registered with or examined by the government. And a well-guarded trade secret can often provide even stronger protection than patents (which can often be easily designed around), copyrights (which are often subject to online piracy), and trademarks (which must be vigorously enforced and are often copied by knock-off products).

With that in mind, trade secret owners may want to consider where their security measures are most vulnerable and how to strengthen those measures. One common scenario is when an employee with access to sensitive information leaves to work for a competitor. While requiring all employees to sign noncompete and nondisclosure agreements can help deter potential trade secret theft and strengthen any resulting legal claims if such theft occurs, they still leave businesses susceptible to departing employees who either did not read or do not care to honor their agreements. For these reasons, employers should consider implementing additional cybersecurity measures and offboarding policies when employees leave a company. These policies could include requiring prompt return of any company property, restricting access to sensitive documents immediately upon learning of an impending departure and monitoring the departing employee’s access to sensitive information.

Another nascent issue is the proliferation of generative AI. For example, use of generative AI has become prevalent for mundane tasks like writing emails. This can be dangerous because some generative AI trains by using the inputs provided by a given user. As a result, someone who uses generative AI must be careful to ensure that no commercially sensitive information is used to prompt the AI output. To prevent inadvertent disclosure of trade secrets when using generative AI, a good place to start is to ensure that employees understand and are adequately trained on a company’s confidentiality policies. It is also important to update these policies and training to confront new technologies, such as identifying which programs are appropriate and for what uses.

But even all those steps may not be enough to stop trade secret theft, as a crafty employee (or competitor) may begin funneling sensitive information out of the company (or to a competitor) before announcing his or her departure for a rival company. When that happens, a business’s task transforms from preventing theft to mitigating its consequences. The best way to do this is to have proof of what was stolen. Gathering evidence may include keeping track of what the employee accessed in the weeks (or even months) before joining a competitor.

Another way to help prove what the employee stole is by leaving “fingerprints” in particularly sensitive algorithms, formulas, recipes, and the like. These “fingerprints” can be anything that will help uniquely tie the trade secret information to its source and thus prevent any assertion that the information was generated independently through proper means. A common fingerprinting technique for software involves introducing innocuous errors (like typos) into the source code. These errors should not affect how the code ultimately works and should ideally be hard to detect upon careful inspection, but their presence is compelling evidence that the information was stolen given that it is unlikely that both the trade secret owner and the alleged copier made the same mistake.[16]

In implementing an effective intellectual property strategy, businesses should also be aware of the downsides to relying on trade secrets. For one, because trade secrecy is like Pandora’s box—once information becomes public knowledge, trade secret protection is gone—businesses should leverage other forms of intellectual property when appropriate. Patents, for example, are better suited to protect inventions that are easily reverse engineered or sufficiently mimicked by competitors. Copyrights can also prove particularly valuable for protecting software or creative materials, such as marketing plans.

Another downside to relying on trade secrets is that they can be harder to enforce because the United States prioritizes public access to legal proceedings, lay juries, and robust discovery procedures, all of which can lead to potential disclosure of trade secrets. For similar reasons, the lack of formal registration for, and consequences of, public disclosure of trade secrets also makes buying, selling, and licensing trade secrets harder than other forms of intellectual property.[17] For instance, simply pitching a product or service can lead to disclosure—and therefore destruction of trade secret protection—of the very information trying to be sold.[18] In these situations, it is crucial that the trade secret owner ensures that all present have signed a valid nondisclosure agreement before sharing any sensitive information.

OUTLOOK AND CONCLUSIONS

As discussed, trade secret law in the United States is dynamic and often complicated. The ever-changing and legally nuanced area of trade secrets over the last year is a reminder that all businesses should take a fresh look at what trade secrets they have and how they will protect them.  It is critical for companies in the animal health and animal science sector to put in place appropriate safeguards to ensure the protection of valuable trade secrets.  Moreover, recent cases illustrate that trade secret enforcement is growing as more employees leave their companies to work for potential competitors.