trade secrets

Delaware Decision Highlights Dilemma for Startups to Protect Their Trade Secrets When They Seek Investment Financing

Counsel advising businesses must often deal with conflicting goals; that is especially true for startups.  Such business want to protect their intellectual property (including trade secrets) but still be able to disclose enough to attract investment capital. A recent Delaware decision highlights the tension in these goals.

 All businesses want to protect their intellectual property, including their trade secrets and other confidential information.  On the other hand, since intellectual property is often a startup’s chief asset, startups need to share their information with investors to convince them of the value of what they have developed.  The standard response is to use a non-disclosure agreement.  But those have their limits – investors often insist on flexibility to invest in other companies, including competitors.

 A recent Delaware Chancery case, Alarm.com Holding, Inc. v. ABS Capital Partners Inc. (2018), highlights this tension.  The court dismissed a trade secret complaint by a technology company against an investment company because the only basis for the claim of misappropriation of trade secrets was the move to the competing firm – which had been expressly agreed was allowed.

 

Counsel advising startups and drafting NDA’s need to be aware of this tension. Startups often lack the negotiation leverage to require more stringent terms in their NDA.  But at minimum they need to be aware of what non-disclosure agreements permit and whether they can tolerate the risk that such would create for their trade secrets. 

 

Decision Shows What Can Go Wrong in Trying to Protect a Trade Secret

Trade secrets are a fickle form of intellectual property.  They can be invaluable in protecting a company’s assets, and potentially can last forever.  Coca-Cola famously has maintained its formula as a trade secret for well over a century.  On the other hand, trade secret rights can be easily lost.  Unlike a patent or copyright, there is no general right to exclude third parties from using the trade secret. 

Instead, trade secret law focuses on the means of obtaining access to the protected information.  To illustrate, a competitor who buys the trade secret owner’s product off the shelf and reverse engineers it can use whatever it learns in its business, even in competing with the trade secret owner.

On March 3rd the Southern District of New York granted summary judgment in favor of the defendant in a trade secret case, Big Vision Pvt. Ltd. v. E.I. du Pont de Nemours & Co., 1 F.Supp.3d 224 (2014).  The decision highlights the difficulty of maintaining and enforcing trade secrets.  District judge Katherine Polk Failla’s 94-page opinion is a primer for counsel seeking to advise trade secret holders.