Articles

To Sue or Not to Sue Under the New Massachusetts Trade Secret Law

Trade secret litigation often involves very high stakes disputes between competing businesses.  These “bet the company” cases can push one party out of business, simply because of the cost of the litigation, and regardless of whether that company or an employee stole any secrets.  While the new Massachusetts trade secret law expands the types of trade secrets that can be protected, it also requires more robust disclosure requirements and contains two-way fee shifting provisions. Accordingly, companies should rethink pure litigation for competition trade secret claims.

The new Massachusetts law, G.L. c. 93, § 42 et seq., went into effect on October 1, 2018 and largely tracks the federal Defend Trade Secrets Act and prior existing Massachusetts common law. One of the significant changes from prior Massachusetts law, however, is that the new law explicitly protects not only information that provides “actual” economic advantage, but also information that has “potential” economic advantage. In other words, a plaintiff does not need to prove that the protected trade secret is currently in use, only that it has potential economic value. This greatly expands the type of information that can be classified as a trade secret under the statute.

Moreover, a plaintiff may now seek an injunction not only for “actual”, but also for “threatened” misappropriation of trade secrets. For example, it will be easier for a plaintiff to enjoin a former employee from working for a competitor where the plaintiff can demonstrate that the disclosure of its trade secrets by the former employee to the new company was inevitable even if it did not happen yet. This provision is broader than the federal Defend Trade Secrets Act, which only allows a plaintiff to “restrict,” rather than enjoin, employment with a competitor based on threatened misappropriation. The Massachusetts statute also allows the court to order a “reasonably royalty” paid in lieu of ceasing conduct.

This injunctive relief provision appears to allow a company to obtain, in effect, a non-compete against a former employee merely by establishing threatened misappropriation. It remains to be seen how courts will interpret this provision of the new law, given the new non-compete legislation that also took effect on October 1st, and that imposes numerous requirements on non-compete agreements. For example, to be enforceable under the new law, non-compete agreements must be signed by both parties, after an opportunity to review with counsel, and must include garden leave or mutually agreed upon consideration. It also prohibits non-compete agreements with whole categories of workers, including those under eighteen or those who are non-exempt from overtime. Through the trade secrets statute’s injunctive relief provision, however, companies can enjoin former employees from working for a competitor notwithstanding the existence or legality of a non-compete. In this way, the trade secret law may roll back some of the protections for employees contained in the new non-compete law.

While the definition of a protectable trade secret and the ability to enjoin conduct has expanded, the new law also codifies a heightened pleading standard for trade secret claims, and requires early and detailed identification of those trade secrets. A plaintiff must describe the “circumstances of the alleged misrepresentation” with “reasonable particularity,” along with the “nature of the trade secrets and the basis for their protection.” Then, prior to commencing discovery, the plaintiff must “identify the trade secret with sufficient particularity” to allow the court to control the scope of discovery and for defendants to prepare their defenses. These changes will make it harder for plaintiffs, especially litigation for competition plaintiffs, to set forth good faith claims. It will also make plaintiffs think twice before suing, as their own trade secrets will be exposed from the start.

Finally, the new statute contains a prevailing party fee-shifting provision, allowing both plaintiffs and defendants to recover attorney’s fees if a claim was brought or defended in bad faith, or if the misappropriation was willful or malicious. This provision eliminates the need to bring a Chapter 93A claim with a claim for misappropriation, and avoids the Chapter 93A jurisdictional requirement that the allegedly unlawful conduct occur primarily in Massachusetts. It also makes it easier for defendants to recover from plaintiffs who bring claims purely to try to drive defendants out of business.

In conclusion, the new trade secret law brings Massachusetts generally in line with the federal law and 48 other states (New York is still holding out). Companies need to be familiar with the new law so they can structure their employment and non-disclosure agreements accordingly, identify their trade secrets, and take appropriate measures to keep them confidential. Companies should be wary, however, about both the expanded reach of the new law, as well as the more onerous proof required to bring claims for trade secret misappropriation.