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Eleventh Circuit Rules Software’s “Features and Functions” Not a Trade Secret in Absence of Written Confidentiality Agreement

Posted on: June 23rd, 2015

 

By: Michael Wolak, III

The Eleventh Circuit Court of Appeals’ recent opinion in Warehouse Solutions, Inc. v. Integrated Logistics, LLC, et al., 2015 WL 2151757 (May 8, 2015), is an important reminder that written confidentiality and non-disclosure agreements play a critical role in a party’s ability to meet its burden of establishing that its intellectual property is entitled to protection as a trade secret.  In Warehouse Solutions, Inc., the Eleventh Circuit affirmed the district court’s grant of summary judgment to Integrated Logistics, LLC (“ILL”) on Warehouse Solutions, Inc.’s (“WSI”) claim for misappropriation of trade secrets under the Georgia Trade Secrets Act, O.C.G.A. § 10-1-760, et seq., and held that the absence of a written confidentiality agreement was relevant to assessing whether WSI took “reasonably available steps” to preserve the secrecy of its software program.

WSI developed a web-based software program that interfaces with UPS and FedEx tracking systems to allow companies to track their packages.  ILL began reselling the program to its own customers under a verbal arrangement with WSI.  WSI and ILL never executed a written agreement concerning their resale arrangement or any other aspect of their business relationship.  On several occasions, WSI verbally told ILL that the software program was “highly confidential and proprietary” and instructed ILL not to share the program with anyone outside of ILL, except for ILL’s customers who had signed a contract containing a non-disclosure provision.  Without WSI’s knowledge, ILL hired a software company (Platinum) to develop its own web-based tracking system that was visually and functionally similar to WSI’s program.  ILL gave Platinum a user ID and password to log into WSI’s program.  Neither ILL nor Platinum ever had access to the WSI program’s source code.  ILL eventually terminated its business relationship with WSI and began selling the program developed by Platinum.

WSI claimed that its software program was a trade secret that ILL had misappropriated by “creating a functionally identical program.”  WSI argued that it took all reasonable means to prevent disclosure of its complicated software program, including the use of technologically advanced password protection and encryption and end-user confidentiality provisions.  ILL urged that (i) it only had access to the program’s “visible output” (e.g., the interactive screen displays), which did not constitute a trade secret because such output was readily apparent to users of the software; and (ii) WSI failed to make reasonable efforts to maintain the program’s secrecy.

The district court agreed with ILL and drew a distinction between a software program’s underlying source code, which may constitute a trade secret, and the program’s “look and feel” and “functionality.”  Unlike source code, which is written in programming language and is inaccessible to program users, “a user of [WSI’s program] can readily ascertain the appearance and functionality of the system and, thus, the visible output cannot be a trade secret.”  The district court rejected WSI’s contention that, because WSI took steps to preserve the confidentiality of its program, the “self-revealing nature” of the program’s functionality did not preclude the program’s status as a trade secret.

The Eleventh Circuit analyzed this distinction and acknowledged that a program’s visible output may still be a trade secret, “if the plaintiff can show that it worked to preserve the secrecy of its program’s functions, specifications, and pricing.”  For example, restricting access to a software program’s capabilities to licensees who are subject to confidentiality agreements can help preserve the program’s functionality as a trade secret.

The Eleventh Circuit distinguished WSI’s program, noting that dissemination of the program to users necessarily revealed the information WSI alleges to be secret – e.g., the program’s “features and functions.”  Even assuming the functionality of the program was not “readily ascertainable by proper means,” the Court of Appeals agreed with the district court that WSI’s efforts to maintain secrecy were not reasonable under the circumstances.  WSI’s failure to require ILL to sign a confidentiality agreement before granting ILL “high-level administrative access” to the program’s functionality was fatal to its claim of trade secret status.  The fact that WSI limited access to authorized users and employed encryption and password protection did not rescue its claim.  Indeed, such measures only served to restrict access to customer data – which WSI did not claim as trade secrets – rather than the functionality of the program itself.  The manner in which the program “looked and worked” was still readily apparent to authorized users with an ID and password.

The Warehouse Solutions decision underscores the importance of securing written confidentiality agreements before granting access to purported trade secrets.  While not dispositive, the absence of a written confidentiality agreement is critical to assessing whether a party took reasonably available steps to preserve the secrecy of its alleged trade secrets.  Even where the alleged trade secret information is not “readily ascertainable by proper means,” the failure to secure a written confidentiality agreement prior to dissemination can forfeit the information’s trade secret status.

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