Recent Second Circuit Decision Reinforces Need to Take Reasonable Measures to Protect Trade Secrets

March 30, 2022

The COVID-19 pandemic has ushered in a wave of changes to the workplace, including the growing number of employees working on a hybrid schedule or remotely. These changes present new challenges for employers, including the further dispersion of their confidential and trade secret materials onto mobile electronic devices and the increased potential for misappropriation if the employee leaves and joins a new employer. A recent decision from the Second Circuit, Turret Labs USA, Inc. v. CargoSprint LLC et al., No. 21-925 (2d Cir. Mar. 9, 2022), reinforces well-established law, and serves as an important reminder, that employers should take reasonable steps to protect the confidentiality of their trade secret information. If not, courts may decline to enforce the employer’s rights to such information in the event of misappropriation. Also, with the influx of workers using personal devices or storing documentation in remote or home office locations, employers should pay extra attention to their policies on electronic and physical security measures around the information to best ensure it remains confidential.

In the Turret Labs case, Turret, an aviation software company, alleged that CargoSprint and its CEO improperly gained access to Turret Labs’ software and reverse-engineered it to create their own competing program. Turret sued under the federal Defend Trade Secrets Act and for common law misappropriation of trade secrets. The district court dismissed the trade secret claims, ruling that Turret failed as a matter of law to show that its software—known as “Dock EnRoll”—was a trade secret because it did not adequately allege that it took reasonable measures to keep its information secret from third parties. The Second Circuit affirmed this dismissal.

As the Court held, “what measures are reasonable must depend in significant part on the nature of the trade secret at issue.” In that case, the alleged trade secret consisted primarily of the computer software’s functionality. Although Turret alleged that it took internal measures to protect its software, including housing it on servers kept in “monitored cages,” Turret did not plead that it required third parties who were given access to the software to enter into confidentiality and nondisclosure agreements. As a result, the Court explained that the internal measures Turret took to protect its software were “largely irrelevant” where users of the software could simply “view and replicate [the software’s] functionality.” Turret lacked a reasonable expectation that any “user of [the software] was required to keep Turret Labs’ information confidential.”

Turret Labs USA, Inc. v. CargoSprint serves as a valuable reminder that courts will not accept at face value an employer’s claim that its information is a “trade secret.” Such claims will be scrutinized and the analysis will focus in part on the measures the employer takes to protect the information, including as to third parties who are given access to the information. Courts will consider whether third parties who are given access to such trade secrets are bound to a duty of confidentiality, including through non-disclosure agreements. Depending on the nature and value of the information, courts may also review the extent to which the employer undertook other measures to protect the information, including, but not limited to, (a) marking the information or document as “confidential” or “trade secret,” (b) limiting access to such information within the company to those with a need to know; (c) requiring those who receive copies of the information to return it and (d) imposing other electronic and physical security measures around the information to protect its confidentiality. This ruling has no bearing on the application of confidentiality covenants in contract or claims arising in tort and for injunctive relief stemming for wrongful removal of company property.

Please contact a member of Herrick’s Employment Group with any questions.

John H. Chun at +1 212 592 1546 or [email protected]

© 2022 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.