Licensing Terms Can Undermine Efforts to Protect Trade Secrets

A company claiming trade-secret misappropriation must show that it took reasonable measures to keep secret its information. The U.S. Court of Appeals for the Second Circuit’s recent decision in Turret Labs USA, Inc. v. CargoSprint, LLC, No. 21-952, 2022 WL 701161 (2d Cir. Mar. 9, 2022), confirms that licensing terms can directly affect the reasonable-measures analysis.

Turret Labs USA, Inc., licensed its software under an agreement that authorized the licensee to give access to other users. CargoSprint—a third party without a license—gained access to the software. Turret Labs sued CargoSprint and its CEO, alleging that they improperly accessed the software, reverse-engineered it, and created their own competing product. Turret Labs asserted federal and common-law misappropriation claims.

The Second Circuit held that, because Turret Labs’ license authorized non-licensees to access the software, Turret Labs had not taken reasonable measures to protect its trade secrets, and the court affirmed dismissal of the claims. “[W]here an alleged trade secret consists primarily, if not entirely, of a computer software’s functionality—functionality that is made apparent to all users of the program—the reasonableness analysis will often focus on who is given access, and on the importance of confidentiality and nondisclosure agreements to maintaining secrecy.”

The Second Circuit reached that conclusion despite Turret Labs’ allegations that it had taken other security measures, including keeping the software’s “physical servers . . . in monitored cages within a data center with restricted access” and limiting software access “to those with usernames and passwords approved by” the licensee. The court found that those measures were “largely irrelevant” because Turret Labs allowed the licensee to give others access and to “view and replicate” the software’s “functionality.”

The decision underscores the importance of limiting access to trade secrets and carefully drafting licenses to define who may access products and information and under what circumstances.