July 6, 2023

Court Evaluates Evidence of a Trade Secret's Independent Economic Value

Holland & Knight Trade Secrets Blog
Christian B. Hecht | Thomas W. Brooke | John P. Moran
Trade Secrets Blog

Information must be "secret" or not generally known to have value as a trade secret, and value cannot be based upon general company revenue or sales price alone. As a result, owners of trade secrets must take reasonable efforts to maintain secrecy.

These concepts are apparent in Synopsys, Inc. v. Risk Based Sec., Inc., where the U.S. Court of Appeals for the Fourth Circuit ruled that an asserted trade secret must have independent economic value because of its secrecy and that a general showing of a company's acquisition price and revenue, without a nexus to the asserted trade secret, was not evidence of the asserted trade secrets' independent economic value. No. 22-1812, 2023 WL 4009505 (4th Cir. June 15, 2023).

Risk Based Security Inc. (RBS) sued Synopsys Inc. (Synopsys) alleging misappropriation of trade secrets in a database RBS compiled and licensed to other companies. Both RBS and Synopsys identify vulnerabilities in open-source software. RBS developed a database of vulnerabilities called VulnDB. RBS licensed the database to a subsidiary of Synopsys. RBS alleged that Synopsys used the licensed database to develop its own database, violating the license agreement and misappropriating 75 RBS trade secrets.

The court noted that both Virginia and federal law require a trade secret have: 1) "independent economic value," meaning that the secret must "[d]erive[] 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." Id. at *6; and 2) must be subject to "reasonable secrecy," meaning that it is "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Id.

RBS sought to establish independent economic value of the asserted trade secrets using the company's recent acquisition price and its licensing revenue The court rejected this general evidence because it was not specifically tied to any of the asserted trade secrets. The court therefore found that RBS failed to show that any value independently derived from the asserted trade secrets' secrecy because such general evidence "cannot substitute for evidence about the seventy-five alleged trade secrets' value." Id. at *8. RBS' evidence of valuation "was not particularized to its … alleged trade secrets whether they are viewed individually, in smaller groupings, or as a whole." Id. at *9. Both Virginia and federal law require "a specific connection between value and secrecy," emphasizing that the statutory definition refers to value "from not being generally known … and not being readily ascertainable" Id. Consequently, RBS failed to satisfy the statutory definition of a trade secret.

A key takeaway from the Fourth Circuit's decision is that proof of a trade secret requires specific economic evidence tied to the asserted trade secret's value that arises from it being a protected secret. As a result, general evidence of the company's value or even its licensing revenue without a nexus to the asserted trade secret may not be sufficient to support the existence of a trade secret.

In addition to showing such independent value, owners of data, information, processes and even customer lists need to take reasonable efforts to maintain the secrecy of this information in order to constitute a trade secret and maintain trade secret protection. Simply calling a concept or innovation a trade secret, without such efforts, will not suffice. Steps, including agreements with vendors, clients and employees, must be taken to protect these ideas.

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