Your Confidential Business Information Was Published. Can It Still Be A Trade Secret?

Under certain circumstances, publication of an alleged trade secret is not enough to make it “generally known” in the sense that it may no longer be considered a trade secret. How is that possible and what are those circumstances?

A recent Federal Circuit decision, Masimo Corp. v. True Wearables, Inc., No. 2021-2146 (January 24, 2022), sheds light on the complexities of litigating trade secrets cases. The facts of Masimo are all too common: a former Chief Technology Officer (Dr. Lamego) leaves the company (Masimo) and starts a new company (True Wearables) that sells a competing product.

In this case, the technology at issue was pulse oximeters. The alleged trade secret was the so-called “TSS” algorithm used to calculate the concentration of total hemoglobin in the pulse oximeters. Dr. Lamego developed the TSS algorithm while working for Masimo and led Masimo’s efforts to keep it a trade secret.

Years later, Masimo sued Dr. Lamego and True Wearables, alleging breach of contract and misappropriation of trade secrets under federal (the Defend Trade Secrets Act (DTSA)) and California law. During the litigation, Masimo became aware that Dr. Lamego disclosed the TSS algorithm in a True Wearables’ patent application that would soon publish. Masimo immediately moved for a preliminary injunction (PI) to prevent publication of its trade secret in that application. The district court granted the PI in large part because it found that Masimo’s California trade secret misappropriation claim was likely to succeed, notwithstanding the fact that the TSS algorithm was already disclosed in an Institute of Electrical and Electronics Engineers (IEEE) article that had been cited over 1,200 times.

You may rightly be asking yourself: how can Masimo have a trade secret for an algorithm disclosed in a scientific paper cited over 1,200 times? The answer is two-fold, premised on the nuances of California trade secret law. First, the IEEE article that disclosed the TSS algorithm related to statistics, not signal processing in medical devices. The court found Masimo could maintain its trade secret (for a particular application in an unrelated field) because it was not generally known to those who could economically benefit from it. Second, under California law, the fact that a trade secret may be “readily ascertainable” is not a defense to the existence of trade secret. Instead, it is only a defense to misappropriation. But that defense was not available to Dr. Lamego.¹ Masimo therefore obtained a PI to prevent publication of the TSS algorithm via True Wearables’ patent application.

While perhaps unusual, this decision illustrates the nuances of trade secret law. Below are some helpful hints for a company that plans to protect its intellectual property (IP) using trade secrets.

Have a clear strategy to protect secrecy. While patents are published documents, trade secrets should not be published. The ruling in Masimo will not shield everyone. If a company desires to protect its IP with both patents and trade secrets, a clear strategy to prevent publication of trade secrets via patent documents is crucial. Be sure to clearly define the trade secret(s). Take care to review patent filings to ensure that the clearly-defined trade secrets are not disclosed therein.

Similarly, because trade secret litigation is largely a public proceeding, it is important to understand the risks of publishing the trade secret via the litigation. Although the critical documents in this case are sealed and the IEEE publication was not specifically identified, a careful review of the case documents that are available informed the public that the TSS algorithm is used to calculate the concentration of total hemoglobin in the pulse oximeters. And within days of the Federal Circuit decision, the IEEE article was identified and linked on social media, making Masimo’s trade secret readily ascertainable to competitors and providing them with defenses to misappropriation under federal and state law. In other words, Masimo’s use of the TSS algorithm to calculate the concentration of total hemoglobin in the pulse oximeters likely is no longer a trade secret despite the fact that Masimo obtained a PI preventing the publication of True Wearables’ patent.

Understand the differences between federal and state law. Masimo was granted a PI in large part because it was likely to succeed in pursuing its California trade secrets claim. Under federal law, a trade secret may not exist if it is “readily ascertainable.” But under California law, the fact that a trade secret may be “readily ascertainable” is only a defense to misappropriation; it does not extinguish the secret. This distinction allowed Masimo to pursue its state law claim.

Have a plan in place for key employee departures. Masimo sued Dr. Lamego and True Wearables nearly four years after Dr. Lamego’s departure. That is a long time, during which critical evidence could have been lost. While that doesn’t appear to have happened here, it is important to have a plan to preserve as much evidence as possible when key employees leave the company. At a minimum, consider imaging the company devices for key executives and technical and sales people and maintaining a proper chain of custody for those imaged devices. It also is important to include a discussion about protecting trade secrets during employee on-boarding and conduct exit interviews where employees acknowledge they are returning all company IP.

With the passage of the DTSA and questions about the ever-changing patent eligibility landscape, companies are increasingly protecting their intellectual property with trade secrets. Maintaining a broad and varied portfolio of IP makes perfect sense, but Masimo emphasizes that litigants should conduct a thoughtful analysis of the advantages—and potential pitfalls—before filing a trade secrets case.

¹ Dr. Lamego could not defend against alleged misappropriation by arguing he ascertained the trade secret by reviewing the IEEE publication because he developed the trade secret and acknowledged it as such while at Masimo.