February 28, 2018

Reference Your Trade Secret in the Terms of Use to Make it Protectable

Digital Technology & E-Commerce Blog

Trade secret protection applies of course only to confidential information. Absent certain specialized exemptions, publicizing the intricate details and applications of a trade secret extinguishes whatever “property right” once possessed by the holder. A closer question is what constitutes sufficient notice to a user of the claimed trade secret protection of certain information? The Southern District of New York recently confronted this issue. See Broker Genius Inc. v. Zalta, No. 17-cv-2099, 2017 WL 5991831 (S.D.N.Y. Dec. 4, 2017). 

In Broker Genius, the Court held that a purported holder of a trade secret cannot claim trade secret protections after failing to put a confidentiality provision in the Terms of Use of its software license. Accordingly, the Court held that the inconspicuous language of the licensor’s Terms of Use, along with its routine and frequent disclosure of the entirety of its user interface of the software that supposedly constituted a trade secret, precluded a likelihood of success on the licensor’s motion for injunctive relief for licensee’s alleged trade secret misappropriation.

Facts and Procedural History 

Plaintiff Broker Genius, Inc. (Broker Genius) the AutoPricer v.3 (AutoPricer) software, which assists in the automation of ticket pricing in secondary markets. The founder of Broker Genius claimed he intended to create software allowing brokers to build on their existing manual ticket implementation strategies. To that end, AutoPricer supposedly allowed the implementation of said strategies “within a user interface in which the user could engage with the software dynamically and have the ability to change [his or her] strategy very quickly.”

According to Broker Genius, because AutoPricer was an entirely new software, Broker Genius expended considerable time and resources to develop it, including by creating multiple versions. In the third version (at issue in this case), every user could access the complete software interface and architecture. Broker Genius then filed a patent application.

Defendant NRZ Entertainment, LLC (NRZ) is a ticket broker. In May 2015, it signed NRZ up for a 30-day trial of Broker Genius’s “full-service” subscription service. On February 3, 2016, Broker Genius and NRZ executed a one-year Service Agreement granting NRZ full use of AutoPricer (the License) which required assent to Broker Genius’s Terms of Use.  During the term of the License, Broker Genius employees conducted training sessions and explained the capabilities of AutoPricer.

NRZ concurrently began to develop its own automated pricing software named TickPricer. Although there was no evidence that NRZ accessed the source code of AutoPricer, the Court believed that it is “abundantly clear from the documentary evidence and witness testimony that defendants closely modeled TickPricer on AutoPricer v.3 and relied heavily on their own knowledge of Broker Genius’s product to build their own software.” TickPricer became operational in December 2016 and NRZ terminated the License a month early.

That same month, Broker Genius filed against NRZ: (1) a complaint alleging, among other causes of action, violations of trade secret misappropriation under New York law and the Defend Trade Secrets Act (18 U.S.C. § 1831 et seq.); and (2) a request under Fed. R. Civ. P. 65 for an ex parte temporary restraining order to, inter alia, seize any of NRZ’s property which incorporated Broker Genius’s purported trade secrets and NRZ from marketing TickPricer.

Legal Analysis and Conclusions 

To obtain a preliminary injunction, a plaintiff must show: “(1) a likelihood of success on the merits or … sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the plaintiff’s favor; (2) a likelihood of irreparable injury in the absence of an injunction; (3) that the balance of hardships tips in the plaintiff’s favor; and (4) that the public interest would not be disserved by the issuance of an injunction.” See Benihana, Inc. v. Benihana of Tokyo, LLC, 784 F.3d 887 (2d Cir. 2015). 

The Court held that Broker Genius was unlikely to prevail on its misappropriation of trade secrets claim – the sole claim on which it seeks a preliminary injunction – because the user interface of AutoPricer did not qualify as a trade secret, even though AutoPricer is undoubtedly valuable to Broker Genius and its competitors, and Broker Genius expended roughly $4 million developing it.

Courts in New York refer to the Restatement of Torts to define a trade secret. See Restatement of Torts § 757 (defining a trade secret in relevant part as “any formula … or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it”). Courts have routinely held that software user and architecture is a protectable trade secret, despite being “inherently broad concept[s].” See, e.g., Integrated Cash Mgmt. Serv., Inc. v. Dig Transactions, Inc., 920 F.2d 171 (2d Cir. 1990).

Absolute secrecy is not required for trade secret protection, but the information must be shrouded with a “substantial secrecy.” The holder forfeits trade secret protection by making certain disclosures. For example, if a person reveals a trade secret to individuals who are under no obligation to protect its confidentiality, or otherwise publicly discloses the trade secret, “his property right is extinguished.”

The Court concluded that Broker Genius failed to undertake “reasonable measures” to ensure the secrecy of the protectable elements of AutoPricer. The discreet disclosures in Broker Genius’s patent application and by its sales representatives in demonstrations, as well as its publication of screenshots of an AutoPricer predecessor software that exposed aspects of AutoPricer, did not standalone extinguish its property rights. However, “these types of disclosures – especially taken together – do strongly suggest that Broker Genius did not consider AutoPricer v.3’s software architecture or user interface to be trade secrets prior to initiating this litigation.”

More fatal to Broker Genius’s claims was the “unfettered access” it offered to all users. This is the “one disclosure that did destroy Broker Genius’s claim that [AutoPricer is] a trade secret.” Among other disclosures, Broker Genius granted each user access to the software and also sent update emails to explain the operational advantages of AutoPricer’s functionalities.  Unfortunately, the avalanche of disclosures about AutoPricer “explains why defendants were able to duplicate major portions of AutoPricer v.3’s user interface… with such speed and for relatively low cost.”

Broker Genius notified users only in the Terms of Use that AutoPricer contains trade secrets. The Court found this disclosure insufficient. To convey the confidentiality obligations associated with using AutoPricer, the Court held that “it would have been reasonable to do something more to notify users of the software’s confidentiality.” The Terms of Use were not accessible through the AutoPricer application, but instead only through its website and “simply does not contain a confidentiality provision.” Most importantly, the Terms of Use provision proscribing users from reproducing or distributing AutoPricer did not notify the user of the secrecy of the software, nor that the user was precluded from “describing to others the software’s function, structure, and appearance.”

Broker Genius’s “widespread and comprehensive disclosures extinguished the trade secret status,” of the components of AutoPricer that it claimed NRZ had misappropriated. Accordingly, the Court denied the motion for a preliminary injunction.  

On December 20, 2017, the parties agreed to a settlement wherein a permanent injunction was issued against NRZ enjoining it from distributing or selling TickPricer. NRZ paid Broker Genius a settlement payment and acknowledged that TickPricer was “improperly derived from [the] AutoPricer software in violation of our contractual obligations with Broker Genius including under Broker Genius’ Terms of Use.” The parties dismissed the case with prejudice. 

Related Insights