The First Circuit’s decision in TLS Mgmt. & Mktg. Servs., LLC v. Rodriguez-Toledo, 966 F.3d 46 (1st Cir. 2020) is an important reminder that trade secret owners must take great care to understand the nature of their trade secrets, how they satisfy the legal definition of trade secrets, and how they differ from other forms of intellectual property as early as possible in a case in order to create the factual record required for full enforcement and recovery.
Plaintiff TLS, a tax planning and consulting firm based in Puerto Rico, sued a former employee and subcontractor for trade secret misappropriation and breach of contract for impermissibly using its trade secrets to compete with TLS in providing services to two former TLS clients. TLS’ asserted trade secrets included (1) TLS’s Capital Preservation Reports (“CPRs”) which contained a variety of information, including public and general information such as the meaning of tax terms, concepts regarding corporate structures, case law, IRS regulations and tax statutes, state tax laws, generic taxation examples, and public trade articles, as well as individual client information and (2) its U.S. Possession Strategy (the “Possession Strategy”), which included numerous tax-savings techniques, principally the use of promissory notes and security agreements. The district court granted summary judgment for TLS on its breach of contract claim and following a bench trial ruled for TLS on its trade secret claim.
On appeal, the First Circuit noted that “[m]ost forms of intellectual property have boundaries that are defined before the commencement of litigation,” noting that patents are defined by patent claims, copyrights are defined by federal registrations, and trademarks are defined by federal registrations and the actual use of the registered mark. Id. at 51. The court made clear that trade secrets are “different” because “[t]here is no requirement of registration and . . . there is no public knowledge of the trade secret in advance of litigation. Even the defendant is not necessarily on notice of the trade secret before litigation. This raises the possibility that the trade secret owner will tailor the scope of the trade secret in litigation to conform to the litigation strategy. The present case illustrates these risks; the alleged trade secrets were not identified by TLS until the eve of trial.” Id. The court emphasized that statutory definitions of trade secrets should not be ignored until trial, pointing to the applicable definition of trade secrets under Puerto Rico’s Trade Secret Act which includes any information “(a) That has a present or a potential independent financial value or that provides a business advantage, insofar as such information is not common knowledge or readily accessible through proper means by persons who could make a monetary profit from the use or disclosure of such information, and (b) for which reasonable security measures have been taken, as circumstances dictate, to maintain its confidentiality.” Id. at 52.
The First Circuit ultimately reversed the district court’s decision, holding that TLS failed to prove that the CPRs or the Possession Strategy were trade secrets. Regarding the CPRs, the court noted that neither TLS’ attorneys nor its principal articulated what within the CPR was a trade secret; specifically, TLS “did not separate the [purported] trade secrets from the other information . . . [that was] known to the trade.” Id. at 54. Thus, “no reasonable fact finder could determine that TLS proved its claim by merely asserting that the process for compiling the CPR’s content (which generally comprised public information) qualified as a trade secret.” Id. On the Possession Strategy, the court found it consisted largely of public knowledge, and that the general concept of tax arbitrage was “hardly secret.” Id. at 55. Because the substance of the Possession Strategy was readily ascertainable from publicly known information, it was not a trade secret, even though the documents reflecting the strategy were valuable and confidential. In so doing, the First Circuit reversed the lower court which had found that the strategy was a trade secret because “it [wa]s a process and method building on the knowledge and experience of employees that [wa]s used to give TLS a business advantage.” Id.
This decision is a helpful reminder for litigants. Unlike other intellectual property, the existence of a trade secret must be proven in court. Trade secret owners should be prepared to confront and overcome defendants’ arguments and courts’ skepticism on this issue and establish a factual record that proves that the information at issue satisfies the applicable legal definition of a trade secret. Merely showing a valuable and confidential business document may not be enough, and a deficiency of proof can rear its head at any point in a case, even after a victory at trial.