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Trade Secret Misappropriation Claims in Colorado

Generally speaking, trade secret misappropriation is the improper use or disclosure of information that a business has spent time and energy developing and has engaged in reasonable efforts to keep secret.

While trade secret law is primarily state law and, thus, can vary from state to state, 47 states have adopted the Uniform Trade Secrets Act, a suggested uniform framework for trade secret statutes. Accordingly, due to adoption of the act, almost all states have some consistency between their trade secret laws. However, because each state’s courts can interpret their trade secret laws differently, some amount of variation for enforcement of the act still exists between states. This article focuses on and discusses trade secret misappropriation claims in Colorado.

 

The Colorado Uniform Trade Secrets Act

Colorado has adopted and codified the Uniform Trade Secrets Act at Colorado Revised Statutes (“C.R.S.”) § 7-74-101 et seq. (the “CUTSA”).  Overall, liability under the CUTSA for misappropriation of trade secrets requires 3 elements:

(1) The existence of a trade secret;

(2) Misappropriation of that trade secret; and

(3) The use of improper means in misappropriating that trade secret.

Each of these elements will be discussed in further detail below.

First, under the CUTSA, a “trade secret” is defined as:

. . . 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.

See C.R.S. § 7-74-102. Thus, due to its broad definition, a trade secret can take many forms including formulas, plans, designs, patterns, supplier lists, customer lists, financial data, physical devices, processes, and computer software. Indeed, the trade secret definition is so broad that it includes almost anything that is created or acquired by a business that confers a competitive advantage and is kept secret by its owner. See Hertz v. Luzenac Group, 576 F.3d 1103, 1104 (10th Cir. 2009).

Importantly, a trade secret will lose its status if it is not subject to reasonable efforts to maintain its secrecy. Whether a trade secret owner engaged in reasonable efforts is determined on a case-by-case basis and depends on a cost-benefit analysis for each circumstance.

Examples of ways trade secrets can be kept secret are through the use of non-disclosure and confidentiality agreements. Indeed, use of non-disclosure and confidentiality agreements is the most common measure courts use in determining whether a plaintiff took reasonable steps to protect its trade secrets. See Jessica Brown, Trade Secrets: 10 Keys to Successful Litigation, 45 Colo.Law 35 (2016).

In general though, it is well established that if an owner discloses the trade secret to others who have no obligation to protect the trade secret’s confidentiality or if the trade secret is otherwise publicly known, any trade secret rights will be extinguished. See Hertz v. Luzenac Group, 576 F.3d 1103, 1104 (10th Cir. 2009).

Because the existence of a trade secret is a factually dependent question, Colorado courts have enumerated specific factors for determining whether a trade secret exists. Those factors are:

(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;

(3) The precautions taken by the holder of the trade secret to guard the secrecy of the information;

(4) The savings effected 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.

See Colorado Supply Co. v. Steward, 797 P.2d 1303, 1306 (Colo. App. 1990). Notably, only if a trade secret is found to exist can it be misappropriated under the CUTSA.

The second element, “misappropriation,” is defined under the CUTSA as:

(a)          Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(b)          Disclosure or use of a trade secret of another without express or implied consent by a person who:

(I)           Used improper means to acquire knowledge of the trade secret; or

(II)          At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:

(A)          Derived from or through a person who had utilized improper means to acquire it;

(B)          Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(C)          Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(III)         Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

See C.R.S. § 7-74-102(2). While the statutory definition is somewhat complex, at its simplest misappropriation of a trade secret can occur in two ways. First, a trade secret can be misappropriated directly if the person used improper means to acquire it. Second, a trade secret can also be misappropriated if a person discloses a trade secret that he knew was acquired by improper means or had reason to know had been acquired by improper means.

Accordingly, a person can be liable for trade secret misappropriation even if that person was not the one who improperly acquired it. Disclosing a trade secret that was improperly acquired by someone else can still give rise to liability under the CUTSA. However, an important component of misappropriation is that the trade secret be obtained at some point through improper means, which is in

Along these lines, the third element, “improper means,” is defined under the CUTSA as:

 . . . theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.

See C.R.S. § 7-74-102. Thus, where an individual obtains a trade secret by any of these means; theft, fraud, bribery, breaching a confidentiality agreement, etc.; the trade secret will have been obtained by improper means and misappropriation of a trade secret will likely have occurred.

Importantly, reverse engineering or independent derivation alone is not considered improper means and, thus, does not give rise to trade secret misappropriation liability. See id.

Where all elements of a trade secret misappropriation claim are met, the defendant will be liable for damages caused to the plaintiff as the result of the misappropriation.

 

Damages for Trade Secret Misappropriation Claims in Colorado

Damages for trade secret misappropriation claim depend on the nature of the trade secret as well as the type of loss that was incurred. More specifically, damages can include both the actual loss caused by the misappropriation as well as any unjust enrichment received by the misappropriating party not included in actual loss. See C.R.S. § 7-74-104.

Put in other words, a plaintiff that has established trade secrets misappropriation claim can seek both compensatory damages, which represent actual damages the owner incurred; as well as any profits the misappropriating party derived from those trade secrets. See Craig N. Johnson, Assessing Damages for Misappropriation of Trade Secrets, 27 Colo.Law 71 (1998).

For compensatory damages, specific types of losses that can be included are, among others types, costs the trade secret owner incurred for research and developing the trade secret, and lost sales or profits resulting from misappropriation of the trade secrets. See id. Similarly, while unjust enrichment damages typically include profits the defendant derived from the misappropriation, it can include any other benefit the defendant received as a result of the misappropriation as well.

Importantly, depending on the circumstances, compensatory damages may be limited to the “head start” time period; that is, the time period that the trade secret owner would have had exclusive use of the trade secrets. In such circumstances, the damages time period will only extend to the point where the trade secret became publicly known o by the amount of time it would have taken somebody to independently derive it.

Additionally, if the misappropriation is attended by circumstances of fraud, malice, or a willful and wanton disregard of the trade secret owner’s rights, the court or the jury may award additional punitive damages up to the amount of compensatory and unjust enrichment damages already awarded. See C.R.S. § 7-74-104(2).

Lastly, where a trade secret misappropriation claim is made in bad faith for the plaintiff, or where willful and malicious misappropriation exists for the defendant, the court may award reasonable attorney fees to the prevailing party. See C.R.S. § 7-74-105.

 

Statute of Limitations for Trade Secret Misappropriation Claims in Colorado

Under C.R.S. § 7-74-107, trade secret misappropriation claims “must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”

Notably, a continuing misappropriation constitutes a single claim such that a claim will begin to accrue when the misappropriation was discovered or should have been discovered, and not each time the trade secret is used. That is, the first discovered or discoverable misappropriation of the trade secret commences the running of the limitations period. See Gognat v. Ellsworth, 224 P.3d 1039 (Colo. App. 2009).

Accordingly, where a plaintiff suspects that his trade secrets have been misappropriated, he should strongly consider filing a trade secrets misappropriation action to preserve his filing date and ensure that the statute of limitations does not expire.

 

Litigating a Trade Secret Misappropriation Claim in Colorado

From a practical perspective, once a trade secret misappropriation action has been initiated the first step is to determine, secure, and collect potentially relevant electronic evidence. Once litigation is pending, or it is reasonably clear that litigation may occur, the parties have a duty to preserve any potentially relevant evidence. This is particularly important for the defendant as, if evidence is not preserved, it can result in an instruction being given to the jury that they can presume the missing evidence was unfavorable to the party that failed to preserve it. In effect, if information is not preserved, the jury is permitted to infer that the information would have proven or disproven a party’s claim depending on which party failed to preserve it. See Jessica Brown, Trade Secrets: 10 Keys to Successful Litigation, 45 Colo.Law 35 (2016).

The next step a plaintiff should take is considering whether a preliminary injunction or temporary restraining order is necessary to prevent or restrain any further use of the misappropriated trade secrets while the lawsuit is pending. While there are differences between preliminary injunctions and temporary restraining orders, the main consideration courts look at in determining whether to issue one is whether irreparable harm, injury, or loss will occur in its absence. See McData Corp. v. Brocade Commc’ns Sys., Inc., 233 F.Supp.2d 1315, 1319 (D. Colo. 2002).

Once the lawsuit has been initiated and the case is into the discovery phase, if the plaintiff seeks discovery of the defendant’s trade secrets to determine what, if anything, the defendant misappropriated, the plaintiff will first be required to identify its own trade secrets with reasonably particularity. Colorado courts have imposed this requirement to limit the amount of information the plaintiff may seek such that the plaintiff cannot go on an unfettered fishing expedition with respect to the defendant’s trade secrets. Strategically this is an important aspect of the case as defendants will want to narrow down the scope of trade secret information as much as possible while plaintiffs will likely to try to broaden it. See L-3 Commc’ns Corp. v. Jaxon Eng’g & Maint., Inc., No. 10-cv-02868-MSK-KMT (D. Colo. Oct. 12, 2011).

Additionally, throughout the course of litigation, it is important that the trade secret information be kept confidential or it will lose its trade secret status. This includes making sure any disclosed trade secret information in pleadings with the court is filed confidentiality or under seal and information disclosed to other parties is disclosed confidentially as well. Along these lines, Colorado Rule of Civil Procedure 26(c)(7) indicates that a party may move the presiding court at any time for a protective order designating that a “trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way,” thereby enabling protection of the trade secret.

Where a trade secret misappropriation claim is brought with other related claims such as civil theft, conversion, unfair competition claims, interference with contract claims, interference with prospective business relations claims, and unjust enrichment claims; Colorado law provides that some of those claims may be preempted. Specifically, Colorado courts have determined that claims dependent on the information in question qualifying as a trade secret are preempted by the CUTSA; however, claims that do not require the information qualifying as a trade secret are not preempted.

Thus, claims such as interference with prospective business relations where the defendant can have interfered with the plaintiff’s business relations independent of any trade secret existing will not be preempted while a conversion claim, which requires the existence of a trade secret as a property interest, will be preempted. Importantly, where state law claims are preempted, it is an affirmative defense and, accordingly, must be plead in the defendant’s answer. See C.R.S. § 7-74-108; Powell Products, Inc. v. Marks, 948 F.Supp. 1469 (D. Colo. 1996); Hawg Tools, LLC v. Newsco International Energy Services, Inc., 2016 COA 176M (Colo. App. 2016).

Finally, for trade secrets created during the course of employment, Colorado courts have recognized that employers are typically entitled to them. That is, trade secrets created by an employee in her scope of employment belong to the employer. See Scott System, Inc. v. Scott, 996 P.2d 775, 778 (Colo. App. 2000).

© 2017 J.D. Porter, LLC. Author: Jordan Porter. Denver, Colorado.

Disclaimer: The information on this website is intended to be general information only and not legal advice. Laws change frequently and the information on this website may not be up to date, nor is the information intended to be fully comprehensive. For legal advice specific to your case please contact J.D. Porter, LLC or another licensed attorney.