Recent SDNY Ruling Highlights Inadequacy Of Oral Instructions To Protect Trade Secrets and Importance of Pleading “Reasonable Measures” in DTSA Claims

This week, Judge Roman of the Southern District of New York granted a judgment on the pleadings dismissing a Defend Trade Secrets Act (“DTSA”) claim without leave to amend, for an alleged failure to plead “reasonable measures” to maintain the secrecy of the alleged trade secret. Altman Stage Lighting, Inc. v. Smith20-CV-2575 (NSR), 2022 WL 374590 (S.D.N.Y. Feb. 8, 2022).  The decision is a blow to trade secret owners that have only orally advised others that they consider information to be a trade secret.

In Smith, the plaintiff was a lighting manufacturer developing a “Grow Light” for the cultivation of cannabis. According to pleadings filed in the case, the former employee defendant had supervised the creation of a “Grow Light” prototype while employed by the plaintiff, which only those actively working on the project were aware of.  These project participants were allegedly told not to “discuss the project with anyone inside or outside the company.” (Id. at *5).  The plaintiff alleged that although the former employee represented that little progress had been made on the prototype, after her departure plaintiff learned that a functional prototype had not only been made but actually delivered to the defendant’s home in June 2017.  Moreover, in July, one month later—an affiliate of the former employee’s new employer, allegedly filed a patent application for an agricultural grow light very similar to the plaintiff’s “Grow Light.”

While the circumstantial evidence of alleged wrongdoing in the case appears to be strong, the plaintiff’s trade secret claim nevertheless failed because the court viewed the allegations in support of “reasonable measures” under the DTSA as deficient.  Under 18 U.S.C. § 1839(3), prototypes qualify as trade secrets only where the alleged trade secret owner “has taken reasonable measures to keep such information secret[.]”  Courts have noted a number of practices that qualify as “reasonable measures” including building security limiting physical access (see, e.g., Hagler Sys., Inc. v. Hagler Group Global, CV 120-026, 2020 WL 2042484, at *2, *11-12 (S.D. Ga. April 28, 2020)) and written confidentiality agreements and handbook policies (see, e.g., Cutera, Inc. v. Lutronic Aesthetics, Inc., 444 F.Supp.3d 1198, 1206-07 (E.D. Cal. March 13, 2020)).  In Smith, however, beyond the alleged oral instruction not to discuss the “Grow Light” with others, the pleadings did not identify any specific physical or electronic security measure, written confidentiality agreement or handbook policy.

Two takeaways from the decision for trade secret owners are first, when drafting a DTSA claim, it is important to identify and plead all examples of steps taken to protect the secrecy of a trade secret.  Second, because oral instructions are failing to qualify as “reasonable measures” under the DTSA, written agreements with anyone having access to the alleged trade secret are critical.

If you have a question about how this decision may impact your business, please contact your CSG Law attorney.