If Trade Secrets Misappropriation Claims Can Be Brought by Non-Owners, What Should Companies Do To Manage Risk?

2 minute read | May.20.2020

Last week, we examined the recent Third Circuit decision in Advanced Fluid Systems, which held that a trade secrets plaintiff did not need to be an owner or a licensee of the alleged trade secrets to bring a state law misappropriation claim under Pennsylvania’s UTSA—all that was required was that the plaintiff had “lawful possession” of the trade secrets. In so holding, the Third Circuit added to the weight of the Fourth Circuit’s similar analysis of Maryland’s UTSA in DTM Research, L.L.C. v. AT&T Corp., 245 F.3d 327 (4th Cir. 2001).

But this “lawful possession” standard may not withstand challenge under all circumstances. The language of the federal DTSA, for example, provides that only a trade secret “owner,” which includes licensees, may bring a misappropriation claim. And, under the Louisiana UTSA, only a trade secret owner may bring a misappropriation claim. See Gabriel Int’l, Inc. v. M&D Indus. of Louisiana, Inc., 719 F. Supp. 522 (W.D. La. 1989).

Given this landscape, how should a company properly assess and manage its risks?

  1. If you are a trade secret owner, remember that your licensees AND those you authorize to legally possess your trade secrets may be entitled to bring a misappropriation claim against downstream wrongdoers. Think through those risks and adjust your contracts accordingly. For example, you may want to require that your licensees consult or coordinate with you if they intend to bring suit against a third party where your IP is at issue.

  2. If you are a trade secrets owner, you may wish to include the following provisions in your licenses and JV documents:

    1. The right to review or audit your licensees’ trade secret policies and programs; and

    2. The requirement that your licensees notify you of departures of any employee(s) who had access to your IP. Upon learning of such departures, you may wish to monitor the situation to see if the individual(s) move to one of your competitors or form their own company in the same space.

  3. For both trade secret owners and their joint venturers: include in your agreements express assignment or license provisions to prevent a challenge to whether the joint venturer’s possession of the trade secrets is lawful.

  4. For companies on-boarding new employees or involved in JVs—particularly JVs that are winding down or where negotiations seem to be going nowhere: properly assess your risk of a misappropriation suit by considering those who can allege they are licensees or lawful possessors of trade secrets—not just owners—under the prevailing law in applicable jurisdictions.