Court Demands an Almost Impossible Level of Diligence to Protect Trade Secrets

The Perils of Believing People Are Generally Honest

This is the sort of case that keeps lawyers up at night and, if taken seriously, increases litigation and litigation-avoidance costs. It’s the sort of case that makes lawyers ask, “Is this just a bizarre outlier, or must I start advising my clients to it?” And, if you spend any time around lawyers, you know that legal advice is subject to a ratchet effect. You really do tend to advice your clients to the worst cases, because if it happened once, who is to say it won’t happen again, just because what the court did was crazy?
The case I’m talking about is Alta Devices v. LG Electronics. At this stage in the proceedings, we only have Alta Devices’ complaints as a source of facts, so everything I say about the case is really just Alta Devices’ allegations about what happened. Anyway, here is Alta Devices’ story:
Once upon a time, a really big foreign company, LG Electronics, said that it wanted to work with Alta Devices. At the time Alta Devices was the only company that made a certain technology, and the technology could be used in LG Electronics’ products. Why don’t we work together, suggested LG Electronics, and maybe your technology could be used to make our products better? LG Electronics had previously expressed interest in the field of Alta Devices’ technology. Alta Devices saw how this plan could be mutually beneficial and agreed. But this was all a ruse. LG Electronics  had no intention of working with Alta Devices. It just wanted to get access to the technology so it could steal it and use it in its products without having to pay for it.
As is usual for this sort of arrangement, Alta Devices and LG Electronics executed a non-disclosure agreement. The NDA did all the normal things NDAs do: it defined Alta Devices’ technology and required LG Electronics to keep it confidential, or else. It also required LG Electronics to “return”¹Why do NDAs and similar documents still use the term “return,” when it’s physically impossible to “return” most information these days? Unless the information was limited to certain pieces of media (like certain DVDs or hard drives), the best you can do is ask the receiving party to return any physical media (including copies the receiving party made) and securely delete any confidential information that was copied onto the receiving party’s more general storage. any of Alta Devices’ confidential information at the end of the NDA’s one-year “disclosure period,” or if Alta Devices asked it to.²The NDA also limited LG Electronics’ obligation to maintain confidentiality of Alta Devices’ information for only three years after the termination of the NDA. Normally, NDAs keep this obligation indefinite because trade secrets can last indefinitely. Presumably, this limitation was something LG Electronics insisted on and reflects an imbalance in bargaining power.
When things didn’t work out between Alta Devices and LG Electronics—part of LG Electronics’ nefarious scheme!—LG Electronics was supposed to return Alta Devices’ confidential information, but didn’t. Perhaps it just forgot. There’s so much for a big company like LG Electronics to keep track of; how could it remember something like returning stuff to a little company? Or maybe “forgetting” was part of the nefarious plan. Later, after a second set of interaction between the two companies (but not otherwise relevant to the dispute), Alta Devices asked for its stuff back, and LG Electronics just kind of blew them off. Alta Devices is just a little start up and LG Electronics is one of the biggest consumer products companies in the world. Do you think LG Electronics feels obligated to do as demanded by some teensy little company, even if there’s an enforceable contract saying that it must? What, exactly, is the point of being a really big company if you can’t ignore little companies when they’re no longer useful to you? Or, again, maybe this was part of the nefarious plan.
Several years later—and by “several years later,” I mean “more than three years after the date according to the NDA that LG Electronics was supposed to send Alta Devices’ confidential stuff back”—LG Electronics started selling technology very similar to Alta Devices’ technology, and for a lot less than Alta Devices charges. Alta Devices concludes the reason LG Electronics was able to develop its technology so cheaply was that it was stolen—from Alta Devices. Alta Devices sues for (among other things) misappropriation of trade secrets.

I Think Everything Is a Trap. That’s Why I’m Still Alive.

LG Electronics attacked the claim on grounds that Alta Devices waited too long to bring it. Claims for misappropriation of trade secrets typically have a three-year statute of limitations, and the three-year “clock” starts when you discover or “should have discovered with reasonable diligence” that the defendant had misappropriated your trade secrets. The test for when you “should have known” is something called “inquiry notice”: the moment you knew enough that any reasonable person would have looked into it. This inquiry notice test is meant to help the owner of the trade secrets because without it, a bad actor could secretly misappropriate your trade secrets and go public only three years after it stole the trade secrets from you.
LG Electronics’ argument went like this. When it failed to return Alta Devices’ confidential information on the date required by the NDA, Alta Devices should have been suspicious that something was going on and looked into it, at least when Alta Devices also knew that LG Electronics was also interested in the field of the technology. Since Alta Devices didn’t sue until more than three years had passed from that date, Alta Devices’ trade secret claims were time barred.
The court was persuaded and dismissed Alta Devices claims for misappropriation of trade secrets. And this is where lawyers might freak out a little. It is not at all unusual for parties to an NDA to fail to return confidential information.³We don’t need to worry about a situation where the bad actor only pretends to return the confidential information be secretly keeps a copy of it. That would constitute “deceptive concealment,” which automatically “tolls” the statute of limitations. And it’s not at all unusual for the parties to an NDA to be interested in the same fields of technology. After all, that’s one common reason to form NDAs in the first place: to share technology in the same field.
Does this decision mean that, every time one party to an NDA fails to return confidential information when it’s supposed to, the disclosing party must consider suing the receiving party for misappropriation of trade secrets, even if there is no reason to believe (yet) that the receiving party is doing anything with the information. For all the disclosing party knows, the information is safely tucked away, forgotten, in a filing cabinet⁴How quaint! in a dusty storeroom. Surely not! The point of statutes of limitations is rid the legal system of stale lawsuits, i.e., reduce the burden on the courts. But a rule that requires parties to at least consider suing under this fairly common situation would only encourage lawsuits that might not otherwise need to be filed.
At this point, you might legitimately wonder how there even was a claim for misappropriation of trade secrets back when the NDA was in effect. At that point, after all, LG Electronics hadn’t done anything with the trade secrets, and it would be years until it would. The answer lies in the protean meaning of “misappropriation” in trade secrets law. “Misappropriation” means, as you would expect, using the trade secret or disclosing it someone else. But it also means acquiring trade secrets wrongfully. And the nefarious scheme that Alta Devices described certainly qualifies: LG Electronics entered the NDA in order to steal trade secrets.
But wait, that’s only what Alta Devices alleged. What if the truth is different?⁵Imagine if the court denied LG Electronics’ motion and LG Electronics’ designated witness was asked in deposition: Did you enter into the NDA with the purpose of stealing technology? What do you think the LG Electronics witness would testify? Sure! We totally set out to defraud those suckers! What if LG Electronics entered the NDA with good motives, i.e., it genuinely wanted to work with Alta Devices, but things didn’t work out, and it genuinely forgot to return the confidential information. It was only later that LG Electronics, frustrated with Alta Devices, chose to use the trade secrets to develop its own competing product? In other words, if LG Electronics’ behavior had been less bad, it wouldn’t have gotten this claim dismissed. That’s a strange, perverse result.
The only legal authority the court relies on for this rule (i.e., failure to return confidential information pursuant to an NDA + general knowledge that the receiving party is interested in the relevant field of technology) is an unreported trial court decision, Wang v. Palo Alto Networks. Now, trial-level decisions do not need to be followed, even if they’re from the same U.S. judicial district. Two trial judges are allowed to disagree about how to treat the same set of operative facts. It’s not until the court of appeals (or above) rules on an issue that it becomes binding (and even then only on those courts under its purview). The reasoning in Wang on this point is quite—a short paragraph only—yet the court here follows it more or less blindly: Judge Alsup said so, so it must be so.

The Incremental Costs of Bad Law

It’s an odd result that, if you obtain trade secrets under false pretenses but are fairly circumspect about it, you can probably avoid a claim for misappropriation by entering into an NDA (fraudulently) that includes a requirement that you return the information by a certain date, accidentally forget to return the information, work secretly on the technology using the trade secrets for three years, then introduce the product. Yet, one who didn’t employ fraud to get the secrets but uses them later can’t as easily escape liability. It’s also perverse that parties to NDAs must be ready to sue for trade secret misappropriation every time a party forgets to return information.
This latter problem can probably be resolved by making a few changes to your form NDA. Instead of requiring the return of information, give the receiving party the choice of “returning” the information (with a certificate of destruction) or keeping the information in strict confidence forever (defining “forever” as meaning until it becomes public knowledge through no fault of the receiving party’s). Or include a tolling provision that kicks in if the receiving party uses the trade secrets in a competing product.
The former problem can be avoided if we look at different types of misappropriation as different claims. Acquiring information is a very different beast from using it to make a competing product. Acquisition of a trade secret can be harmless, if it just sits in a dusty file cabinet somewhere, and the trade secret owner should have the option of waiting to see if anything comes of the acquisition, i.e., it gets used in a way that causes competitive harm. This avoids unnecessary lawsuits.
Another way to look at it is to focus on the wrongful nature of the acquisition. While disclosing a trade secret to someone who doesn’t need to know it will deprive the trade secret of its secrecy, and thus cause it to cease being a trade secret at all, this isn’t the case when that someone else is under an obligation to maintain the confidentiality of the trade secret—such as, though, say, I don’t know, an NDA. In fact, this is completely normal and usual. Thus, even if LG Electronics had some nefarious purpose when it entered the NDA, Alta Devices had no reason to suspect that. Even after LG Electronics failed to return the information, Alta Devices still had no reason to suspect anything. Maybe LG Electronics just forgot. Anyway, under the NDA, LG Electronics still had an obligation to maintain the confidentiality of the information for another three years, and Alta Devices was entitled to rely on that.
In the meantime, unless and until an appellate court contradicts this holding, or there’s a clear trend of courts rejecting this holding, we lawyers will have to wonder how to protect our clients from this unfair result. Revising NDAs is a good start. So is calendaring deadlines for returning information, and being really, annoyingly insistent about getting information “returned.” Maybe thinking twice about agreeing to work with potential competitors. These are incremental costs, but costs nonetheless.
Thanks for reading!

Rick Sanders

Rick is currently General Counsel for Software Freedom Conservancy. Previously, he has been practicing law as an intellectual-property litigator since 2000.