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Informal Measures Inadequate to Safeguard Trade Secret

Posted by James Juo | Oct 09, 2023 | 0 Comments

In Pauwels v. Deloitte LLP, No. 22-21-cv, — F.3d — (2d Cir. Oct. 6, 2023), the Second Circuit held that Andre Pauwels failed to establish that an investment valuation model that he had developed as a contactor to the Bank of New York Mellon Corp. (“BNYM”) was a trade secret.

Pauwels created his valuation tool in 2014 to help BNYM evaluate potential energy-sector investments and monitor existing ones. BNYM employee later shared spreadsheets derived from his model with Deloitte, which Deloitte then reverse-engineered.

BNYM terminated its relationship with Pauwels in 2018 after confronting them about his spreadsheets being given to Deloitte. Pauwels then sued BNYM and Deloitte in 2019 for misappropriation of trade secrets, unjust enrichment and other claims.

Reasonable Measures to Safeguard Secrecy?

Mr. Pauwels had received oral assurance from two BNYM employees, Sarmasti and Hegedus, that the “Pauwels Model and Pauwels Model Spreadsheets were confidential and proprietary and that they would not be shared outside of BNYM.” But he did not receive such assurances of confidentiality from three others at BNYM to whom he sent the Pauwels Model Spreadsheets.

This severely undercuts Pauwels's assertion that he took reasonable measures to safeguard the secrecy of the Pauwels Model and the spreadsheets. See, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1002 (1984) (“If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the trade secret, his property right is extinguished.”); Defiance Button, 759 F.2d at 1063 (“[T]he owner is entitled to such protection only as long as he maintains the [alleged trade secret] in secrecy; upon disclosure, even if inadvertent or accidental, the information ceases to be a trade secret and will no longer be protected.”).

The Court also noted the two BNYM employees' oral agreement was “at most an informal understanding” and did not support the inference that these individuals had the authority to bind all of BNYM to a non-disclosure agreement.

In any event, the alleged agreement was an inadequate measure to safeguard the secrecy of the model or spreadsheets because the agreement did not prevent Sarmasti or Hegedus from circulating those materials throughout the entirety of BNYM, including to individuals from whom Pauwels received no such promises.

Furthermore, there were no allegations that Pauwels had password-protected, encrypted, or expressly labeled the Pauwels Model Spreadsheets—from which the Pauwels Model could be and ultimately was reverse engineered—as “confidential.”

Reasonable measures to safeguard a trade secret include encrypting the alleged trade secret and requiring recipients to agree to confidentiality. InteliClear, LLC v. ETC Glob. Holdings, Inc., 978 F.3d 653, 660 (9th Cir. 2020); Universal Processing LLV v. Weile Zhuang, No. 17-cv-10210, 2018 WL 4684115, at *3 (S.D.N.Y. Sept. 28, 2018) (concluding that the plaintiff failed to take reasonable measures to safeguard the secrecy of an alleged trade secret, even where the plaintiff used “passwords, security timeouts and confidentiality policies and non-disclosure agreements,” in part because the defendant had access to files with the alleged trade secret that “were not encrypted”); Broker Genius, Inc. v. Zalta, 280 F. Supp. 3d 495, 521 (S.D.N.Y. 2017) (software was not a trade secret in part because the plaintiff did not “mark its training materials, emails about the software's functionalities, or the software itself with confidentiality legends.”).

The Court affirmed that Pauwels failed to adequately plead the existence of a trade secret, so that claim was dismissed. But the unjust enrichment claim was remanded back to the district court because misappropriation is not an element of a claim for unjust enrichment under New York law and thus did not necessarily rise or fall with a claim of trade secret misappropriation. Briarpatch Ltd., L.P v. Phoenix Pictures, Inc., 373 F.3d 296, 306 (2d Cir. 2004); Nakamura v. Fujii, 677 N.Y.S.2d 113, 116 (1st Dep't 1998) (“To state a cause of action for unjust enrichment, a plaintiff must allege that it conferred a benefit upon the defendant, and that the defendant will obtain such benefit without adequately compensating plaintiff therefor.”); Alpert v. M.R. Beal & Co., 79 N.Y.S.3d 142, 143 (1st Dep't 2018) (elements of unjust enrichment were met when the plaintiff, an employee of the defendant-employer, “rebuilt a [department of the firm], and . . . brought significant new clients to the firm, for which [the plaintiff] received no incentive compensation”).

The attorneys at Thomas P. Howard, LLC litigate trade secret cases nationwide including in Colorado.

About the Author

James Juo

James Juo is an experienced intellectual property attorney. He has successfully litigated various intellectual property disputes involving patents, trademarks, copyrights, and trade secrets. He also has counseled clients on the scope and validity of patent and trademark rights.


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