Companies seeking to protect their trade secrets should take note of the U.S. Court of Appeals for the Fourth Circuit’s decision to vacate a $920 million dollar jury verdict and 20-year non-compete injunction awarded to the plaintiff DuPont Company in E.I. DuPont De Nemours & Co. v. Kolon Industries, Inc.  No. 12-1260 (4th Cir. Apr. 3, 2014).  The Fourth Circuit held that the District Court for the Eastern District of Virginia, “abused its discretion and acted arbitrarily” when it excluded evidence defendant Kolon Industries sought to introduce at trial to defend against allegations that it stole the plaintiff’s trade secrets pertaining to Kevlar, a strong para-aramid fiber used, for example, in body armor and ballistics. 

The defendant asserted that one or more of 42 trade secrets at issue in the case did not meet the elements of a protectable trade secret because the alleged trade secrets involved information the plaintiff made publically available when it engaged in prior intellectual property litigation in the 1980s against a former top competitor.  Specifically, the defendant argued that the plaintiff disclosed details pertaining to Kevlar’s production process that were “strikingly similar” to numerous trade secrets at issue in this case.

The Uniform Trade Secrets Act adopted by nearly all states, including California, and applied in this case, defines a “trade secret” as information that “derives independent economic value . . .  from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Since the defendant could not be held liable for misappropriating information that is not considered a trade secret, it was material to the defense whether information the plaintiff asserted was a protectable trade secret was readily ascertainable and whether it undertook reasonable efforts to protect the information’s secrecy.

In granting the plaintiff’s pre-trial motion to exclude all evidence related to prior litigation against its former competitor, the Fourth Circuit found the district court committed prejudicial error by applying too stringent an admissibility standard.  The court held that the defendant was not required to show that a trade secret at issue was actually disclosed in previous litigation.  Instead, a “strikingly similar” standard of relevance was sufficient to allow the jury to consider whether the information retained the level of confidentiality required to be deemed a protected trade secret.  While agreeing with the district court’s finding that evidence from prior litigation may cause some jury confusion and delay, the Fourth Circuit ultimately determined these risks were far outweighed by the probative value of the evidence.

The court further noted: “[The defendant] was not required to establish, as the district court seemingly demanded, that evidence derived from [the prior litigation] amounted to an actual trade secret at issue in this case.”  Instead, to establish this evidence was relevant, the court found that the defendant simply needed to show that “one or more elements of [the plaintiff’s] misappropriation claim, e.g., the reasonableness of its efforts to maintain confidentiality, was less likely true.”   Because the defendant was deprived of this opportunity, the Fourth Circuit remanded this case for a new trial before a different judge.

This case demonstrates that standard efforts taken by a company to ensure secrecy of trade secrets – here the plaintiff took steps to protect the confidentiality of its trade secrets by requiring all employees to sign confidentiality agreements as well as pre-approving all visitors to the company’s Kevlar plant and insisting all visitors also sign confidentiality agreements -- may not be enough.  When this case is retried, the outcome will be instructive in informing companies about the extent to which confidential information disclosed in a misappropriation trial prevents the information from qualifying as confidential in the future.

This case also reminds companies and practitioners alike of the importance of obtaining a protective order when engaged in unfair competition litigation and of properly and timely designating confidential information under the protective order as well as the necessity of filing confidential exhibits under seal to protect a company’s trade secrets.