Second Circuit Decision Proposes Lessons for Trade Secret Licenses

Second Circuit Decision Proposes Lessons for Trade Secret Licenses

A recent decision by the Second Circuit Court of Appeals highlights the importance of carefully drafting trade secret licenses. As the plaintiff discovered, if you fail to properly restrict further disclosure of your trade secret to third parties, it could lose its protection altogether.

Allegations of Trade Secret Misappropriation

The case, Turret Labs USA Inc. v. CargoSprint LLC, involved a software program known as Dock EnRoll. Turret Labs USA Inc. (“Turret Labs”) alleged that CargoSprint, LLC (“CargoSprint”) and its chief executive officer, Joshua Wolf, improperly gained access to Turret Labs’ software, Dock EnRoll, and reverse-engineered it to create their own competing program.

As detailed in the Second Circuit’s decision, Dock EnRoll is an “air cargo ground handling control application that allows for payment of fees and scheduling of shipments based on synchronized real-time United States Customs release notifications, [and] was the first software of its kind at the time. The software was exclusively licensed to Lufthansa Cargo Americas (Lufthansa) for use by “freight forwarders” who coordinated shipping and storage of cargo delivered by Lufthansa. The exclusive licensing agreement with Lufthansa authorized it to manage Dock EnRoll and grant access to other users.

According to Turret Labs’ second amended complaint, CargoSprint was “given unfettered access to all corners of the Dock EnRoll platform that, based on Lufthansa’s protocols, no freight forwarder or other user would have been granted access to, and it was only due to Defendants’ wrongful actions that they were able to obtain such greater access to the platform.” Moreover, such “expansive unauthorized access to [Dock EnRoll] and confidential information contained therein allowed [Defendants-Appellees] to reverse engineer the software,” and create a program that is “identical to Dock EnRoll, particularly the scheduling system.” 

Turret Labs’ lawsuit alleged claims of misappropriation of a trade secret under the Defend Trade Secrets Act (DTSA) and common-law misappropriation of a trade secret. Under the DTSA, the owner of a “trade secret that is misappropriated may bring a civil action . . . if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” For “financial, business, scientific, technical, economic, or engineering information” to constitute a “trade secret,” two factors must be satisfied: (A) the owner must have “taken reasonable measures to keep such information secret”; and (B) 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 . . . .” 

The district court dismissed the trade secret claims under the DTSA and common law, concluding that Turret Labs failed as a matter of law to plead that Dock EnRoll was a “trade secret” under the DTSA and common law because the Turret Labs did not adequately allege that it took reasonable measures to keep its information secret from third parties. In support, it cited that neither Lufthansa nor its third-party freight forwarders were under any specific contractual obligation to Turret Labs to maintain the confidentiality of the software program.

Second Circuit Dismisses Lawsuit

The Second Circuit affirmed the dismissal, concluding that Turret had not adequately alleged that it took reasonable measures to keep its information secret from third parties. “In the absence of nonconclusory allegations that it took reasonable measures to keep its information secret, Turret Labs has not plausibly alleged that defendants-appellees misappropriated a ‘trade secret,'” the Second Circuit wrote.

In reaching its decision, the Second Circuit agreed with the district court that “where an alleged trade secret consists ‘primarily, if not entirely,’ of a computer software’s functionality — ‘functionality that is made apparent to all users of the program’ — the reasonableness analysis will often focus on who is given access, and on the importance of confidentiality and nondisclosure agreements to maintaining secrecy,” the panel said. In Turret Labs’ case, the Second Circuit further agreed that the company’s failure to take further steps to safeguard the confidentiality of its software program was fatal to its trade secret misappropriation claims, writing:

Notably absent from Turret Labs’ [second amended complaint] is any specific allegation that Lufthansa or any other user of Dock EnRoll was required to keep Turret Labs’ information confidential. Turret Labs does not plead that it had confidentiality or nondisclosure agreements in place with Lufthansa or other users of Dock EnRoll. Nor does it allege that Lufthansa was obligated to limit access to the software to freight forwarders that were themselves bound to respect the secrecy of Turret Labs’ information. Although the [second amended complaint] alleges generally that Lufthansa’s internal guidelines dictated the terms of use, there is no allegation that these guidelines contractually obligated users to keep the software, its client-facing functionality, or its internal mechanics confidential. And without confidentiality or nondisclosure agreements in this context, it is not apparent from the SAC that any user could not simply replicate the software after using it. 

Key Takeaway

As the court’s decision in Turret demonstrates, where trade secret information is “made apparent to all users” of a product, a standard licensing agreement may be insufficient to adequately protect the trade secret. Accordingly, trade secret owners should consider additional measures, such as restricting third-party access and including a provision in the licensing agreement that requires that any third parties who the licensee permits to use the software be subject to a nondisclosure agreement (or, including confidentiality/nondisclosure language in the licensing agreement itself).

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, we encourage you to contact Jill Michael, Libby Varghese, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.