Eleventh Circuit: For Want of a Written Confidentiality Agreement, Trade Secret Claim Doomed From the Start

In Warehouse Solutions, Inc. v. Integrated Logistics, LLC et al., No. 14-14943 (11^th Circuit, May 8, 2015), the Eleventh Circuit held that the absence of a written non-disclosure agreement is relevant to assessing whether a trade secret owner took “reasonably available steps” to preserve the secrecy of an asserted trade secret, and affirmed the District Court’s holding that verbal warnings regarding confidentiality will not suffice.

The facts of the case are relatively straightforward. WSI developed a web-based software program that interfaces with UPS and FedEx tracking systems to allow companies to track packages and collect funds for late or missing packages. After seeing a WSI salesman demonstrate the program, defendant ILL began reselling the program to its own customers under a different name. WSI and ILL never executed a written agreement with regard to the resale arrangement or any other aspect of their business relationship. It was undisputed that on several occasions WSI’s founder orally told ILL that the software program was “highly confidential and proprietary” and that he instructed ILL not to share the program with anyone outside ILL, with the exception of ILL’s customers who had signed a contract “containing a confidentiality provision that expressly forbade disclosure.” After two years, ILL hired a third-party developer to write a program that was visually and functionally similar to WSI’s software, and it gave that developer a user ID and password to log into WSI’s program; once that program was written, ILL terminated its relationship with WSI.

WSI sued ILL, alleging that the software program was a trade secret that ILL had misappropriated by creating a functionally identical program. WSI argued that it took all reasonable steps to prevent disclosure of its “complicated” software program, including the use of advanced password protection and encryption, as well as end-user confidentiality provisions. ILL argued that because the software’s visible output was readily apparent to users, the “look and feel” and functionality of the program was not protectable as a trade secret, and that WSI did not take reasonable steps to maintain the program’s secrecy.

The Eleventh Circuit briefly discussed the case law distinguishing between a software program’s underlying source code (which may be a trade secret) and its visible output. The latter is much harder to protect, but courts have upheld trade secret status if the owner can show that it has taken steps to preserve the secrecy of its program’s functions, specifications and pricing. For example, restricting software use and access to licensees who are subject to written confidentiality provisions can, under the right circumstances, preserve trade secret status. The Eleventh Circuit ultimately concluded that even assuming that the functionality of WSI’s software program was not readily ascertainable by proper means, WSI’s failure to require ILL to sign a written agreement before granting ILL “high-level administrative access” to the software doomed WSI’s trade secret misappropriation claim.

It is far from certain that WSI could have prevailed on its trade secret misappropriation claims even if it had required ILL to execute a confidentiality agreement prior to granting access to the software program at issue. However, what is certain is that WSI’s failure to require ILL to execute such an agreement doomed the trade secret claims from the start. The Eleventh Circuit’s decision thus serves as an important reminder of the critical role written confidentiality provisions play in establishing that reasonable steps were taken to preserve the secrecy of alleged trade secrets.