Chapter 19 - § 19.3 • TRADE SECRET PROTECTION

• Jurisdiction: Colorado

§ 19.3 • TRADE SECRET PROTECTION

Trade secrets are critically important to many employers, and have been the subject of increasing numbers of disputes and reported cases in recent years. Since the 1980s, the legal framework for Colorado trade secret cases has been Colorado's version of the Uniform Trade Secrets Act, the Colorado Uniform Trade Secrets Act, C.R.S. §§ 7-74-101, et seq. (CUTSA). However, as of May 11, 2016, there is a parallel federal statute available to aggrieved plaintiffs, the Defend Trade Secrets Act of 2016, codified at 18 U.S.C. §§ 1832, et seq. (DTSA). The DTSA creates a federal cause of action for misappropriation of trade secrets, and its existence will create new procedural and substantive options for plaintiffs to consider in formulating their claims.

A detailed analysis of the DTSA is beyond the scope of this chapter, which focuses on Colorado law. Suffice to say that the DTSA is similar to CUTSA in many respects, but a substantial departure in others. The DTSA definition of "trade secret" is similar to CUTSA's, although slightly broader. Compare C.R.S. § 7-74-102(4) and 18 U.S.C. § 1839(3). The DTSA definition of "misappropriation" is virtually identical to that of CUTSA. Compare C.R.S. § 7-74-102(2) and 18 U.S.C. § 1839(5).

The most significant new feature of the DTSA is its creation of a mechanism for seizure of the misappropriated trade secret on an ex parte and emergency basis. See 18 U.S.C. § 1836(b)(2). A plaintiff must make a very particular showing to invoke this remedy, which is in many ways similar to an emergency replevin proceeding under C.R.C.P. 104. This option, in addition to the possibility of enhanced damages and some procedural benefits of being in federal court generally, make a federal court proceeding under the DTSA a valuable option for plaintiffs to consider. The DTSA expressly does not preempt state law remedies such as claims under CUTSA, see 18 U.S.C. § 1838, so the federal and state statutory claims may be pursued in tandem. The discussion below focuses on CUTSA and Colorado common law, with cross references to the DTSA for comparison purposes.

§ 19.3.1—Definition Of "Trade Secret"

Confidential information acquired during the course of employment may be protected from disclosure as a trade secret, but general knowledge of a business operation may not. Mulei v. Jet Courier Serv., Inc., 739 P.2d 889, 892 (Colo. App. 1987), rev'd on other grounds, 771 P.2d 486 (Colo. 1989). The general ability and knowledge an employee brings into employment, and the skill and experience acquired during it, are not the employer's property. Id. What constitutes confidential information is a question for the trier of fact. Porter Indus., 680 P.2d at 1341.

It has been said that an exact definition of "trade secret" may not be possible, but it is helpful to consider the following factors:

1) The extent to which the information is known outside the business;
2) The extent to which it is known to those inside the business, i.e., by the employees;
3) The precautions taken by the holder of the trade secret to guard the secrecy of the information;
4) The savings affected and the value to the holder in having the information as against competitors;
5) The amount of effort or money expended in obtaining and developing the information; and
6) The amount of time and expense it would take for others to acquire and duplicate the information.

Id. (quotations omitted). A court need not provide a thorough discussion of each of these factors in determining whether particular information constitutes a trade secret. See Innovatier, Inc. v. CardXX, Inc., 2012 U.S. Dist. LEXIS 17227, at *6-7 (D. Colo. Feb. 13, 2012). However, courts frequently quote and apply these factors in evaluating the existence of trade secrets under Colorado law. See, e.g., Port-a-Pour, Inc. v. Peak Innovations, Inc., 49 F. Supp. 3d 841 (D. Colo. 2014) (concluding that plaintiff's drawings and specifications constituted trade secrets after an analysis of the six factors).

In 1986, the Colorado legislature enacted its own version of the "Uniform Trade Secrets Act," C.R.S. §§ 7-74-101, et seq., which defines the term by stating as follows:

"Trade secret" means the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a "trade secret" the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.

C.R.S. § 7-74-102(4).

Although the type of information that may be protected as a trade secret is broad, the information must be "secret" and of "value." Information is not secret if it can be obtained easily from other sources. Colorado Supply Co. v. Stewart, 797 P.2d 1303, 1306-07 (Colo. App. 1990). The filing of a patent terminates trade secret protection for matters described therein. Injection Research Specialists, Inc. v. Polaris Indus., L.P., 168 F.3d 1320 (Fed. Cir. Aug. 13, 1998) (unpublished opinion). However, material in a patent application remains secret until it is published by the U.S. Patent and Trademark Office and may constitute a trade secret until the application becomes public. See Innovatier, Inc. v. CardXX, Inc., 2011 U.S. Dist. LEXIS 83835, at *10 (D. Colo. Aug. 1, 2011). A patented product cannot constitute a trade secret, but confidential information concerning methods for selling and distributing the product can. Energex Enter., Inc. v. Anthony Doors, Inc., 250 F. Supp. 2d 1278, 1284 (D. Colo. 2003). For two recent cases in which the plaintiffs' allegations that certain information was trade secret were sufficient to survive a motion to dismiss, see Zimmer Spine, Inc. v. EBI, LLC, 2011 U.S. Dist. LEXIS 103629, at *25-26 (D. Colo. Sept. 14, 2011) and L-3 Commc'ns Corp. v. Jaxon Eng'g & Maint., Inc., 863 F. Supp. 2d 1066, 1080-81 (D. Colo. 2012). The similar definition under the DTSA appears at 18 U.S.C. § 1839(3).

To obtain trade secret protection, the owner must take reasonable measures to maintain secrecy. Network Telecommunications, Inc. v. Boor-Crepeau, 790 P.2d 901, 902 (Colo. App. 1990). A court may require a trade secret owner to prove that the steps taken to protect the trade secret were more than normal business precautions, Colorado Supply Co., 797 P.2d at 1306, but extreme and unduly expensive procedures are not required. Network Telecommunications, 790 P.2d at 902.⁴ See § 19.2.4 for a discussion of two cases, Harvey Barnett, Inc. v. Shidler, 338 F.3d 1125 (10th Cir. 2003), and DoubleClick, Inc. v. Paikin, 402 F. Supp. 2d 1251 (D. Colo. 2005), which address the effect of public disclosure of some components of an alleged trade secret.

One court has observed that the reported decisions do not explain how to distinguish between "normal business precautions" (deemed inadequate to create trade secrets) and "reasonable efforts to protect secrecy" (which can create trade secrets). See L-3 Commc'ns Corp. v. Jaxon Eng'g & Maint., Inc., 2013 U.S. Dist. LEXIS 139219, at *14 (D. Colo. Sept. 27, 2013). In L-3, the defendant moved for summary judgment on the plaintiff's trade secrets claim on grounds that the plaintiff had not taken adequate internal measures to safeguard secrecy and had also insufficiently restricted its customers from using the information in question. The court denied the motion, concluding that the internal efforts were sufficient, and the plaintiff's customers were under at least an "implicit obligation" to maintain the information's confidentiality. Id. at *19. By contrast, the court in Shell v. Swallow, 2016 WL 183631 (D. Colo. Jan. 15, 2016), found no such obligation where customers were given copies of the alleged trade secrets as handouts at seminars attended by hundreds of people annually.

One frequently litigated category of trade secrets is customer lists and related customer information. Customer lists that are readily obtainable from other sources are not trade secrets,⁵ but other customer lists may be. For example, a customer list was found to be a trade secret where the employer created the list over several years through substantial expense and effort, considered the list to be a significant business advantage, limited access to the list, and notified the employees who had access to the list that it was confidential. Network Telecommunications, 790 P.2d at 902.⁶ Further, each week the distributed lists were collected, accounted for, and shredded. The court pointed out that the Colorado Uniform Trade Secrets Act defined "trade secrets" to include a listing of names, addresses, or telephone numbers. Id. at 901.

Two cases from the U.S. District of Colorado confirm that "[d]etailed customer information is a trade secret." Xantrex Technology, Inc. v. Advanced Energy Industries, Inc., 2008 U.S. Dist. LEXIS 41206, *46 (D. Colo. May 23, 2008). In Xantrex, the defendant had prior access to customer lists as well as exposure to customer concerns and issues. Similarly, in...