tedamley

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Trade Secrets “reasonable measures” for Safeguarding:  Second Circuit Weighs In

July 25, 2022

In Turret Labs USA, Inc. v. CargoSprint, LLC (“Turret”), the Second Circuit highlighted the importance of trade secret holders taking specific steps under the Defend Trade Secrets Act, 18 U.S.C § 1836(b) (the “DTSA”) for information with potential value to be legally protected.

According to the Court,

"the DTSA gives scant guidance on what constitutes “reasonable measures” to keep information secret. But given that trade secrets may appear in a wide variety of “forms and types,” § 1839(3), “[w]hat measures are `reasonable’ must depend in significant part on the nature of the trade secret at issue,” see Exec. Trim Constr., Inc. v. Gross, 525 F. Supp. 3d 357, 380 (N.D.N.Y. 2021). We agree 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. Turret Labs, 2021 WL 535217, at *4; see also Mason v. Amtrust Fin. Servs., Inc., 848 F. App’x 447, 450 (2d Cir. 2021) (holding that plaintiff’s failure to “execut[e] a nondisclosure or licensing agreement or . . . stipulate[e] in his employment contract that the [software] was his proprietary information” evidenced that he “had not taken reasonable measures to protect his information”); Inv. Sci., LLC v. Oath Holdings Inc., №20 Civ. 8159, 2021 WL 3541152, at *3 (S.D.N.Y. Aug. 11, 2021) (concluding that the plaintiff did not employ reasonable measures to protect its claimed trade secrets because, among other reasons, the plaintiff “concede[d] that it did not require [the defendant] to sign a confidentiality agreement before sharing the contents of the [product]”); Exec. Trim, 525 F. Supp. 3d at 380; Charles Ramsey Co., Inc. v. Fabtech-NY LLC, №1:18-CV-0546, 2020 WL 352614, at *15 (N.D.N.Y. Jan. 21, 2020) (collecting cases); Mintz v. Mktg. Cohorts, LLC, №18-CV-4159, 2019 WL 3337896, at *6 (E.D.N.Y. July 25, 2019) (dismissing a DTSA claim because plaintiff “did not require defendants to sign a non-disclosure agreement nor any sort of covenant to protect the passwords”)."

Turret, thus, points to the advisability of licensors and other owners of trade secret information, in an effort to take DTSA-related “reasonable measures”, putting into place robust written nondisclosure instruments to be executed by permitted users thereof.

Do you possess valuable trade secrets that you hope to commercialize or monetize? If so, please reach out to me to schedule an introductory consultation.

[tedamley]

Loans as Securities?  Second Circuit Set to Decide. 

November 10, 2022

In Kirschner v. JPM, briefs are being submitted in an appellate action which seeks to reverse a 2020 Federal District Court determination that a term loan issued in connection with a credit facility was appropriately characterized as a loan, as opposed to a security. 

In its decision, the District Court granted a motion of the financial institutions involved in the case to dismiss the securities law claims at issue because the loan involved in the case was not a security.

A finding that the loans were securities would have had an enormous potential regulatory impact on the loan market in general. When extending credit to borrowers, lenders are not required to conduct their loan activities in compliance with federal and state securities laws. If they were, the expense and risks associated with this line of business would increase exponentially.

With the case now before the Second Circuit, parties not directly involved in the case have the opportunity to submit “amicus” (or friend of the court) briefs to assist the panel of judges in understanding the likely implications of its ruling as to the matters before it.

At the end of May 2022, the Loan Syndications and Trading Association (“LSTA”), an organization that represents the loan community, submitted such a brief (hyperlink) in the Kirschner appellate case.

In a newsletter communication announcing the submission, the LSTA issued the following statement about the amicus brief:

The LSTA filed the amicus brief because (i) we agree with the SDNY that Term Loan Bs [the loan tranche at issue in the case] are not securities and (ii) treating them as such would have profoundly negative implications for borrowers, lenders and the syndicated loan market and would materially disrupt the formation of capital by US companies.

For a specific financial product, do you have questions about whether it is or is not a security? If so, please reach out to me to schedule an introductory consultation.