Trade secret misappropriation has become an increasingly prominent issue in today’s business environment. In Colorado, companies can seek legal recourse through both state and federal laws to protect their confidential business information from misuse. This guide explores trade secret misappropriation laws in Colorado, focusing on claims under the Colorado Uniform Trade Secrets Act (CUTSA) and the federal Defend Trade Secrets Act (DTSA). We will also examine key issues commonly encountered in trade secret cases and the remedies available to plaintiffs.
1. Understanding Trade Secrets
Before delving into the legal frameworks for misappropriation, it is important to define what constitutes a trade secret.
What Is a Trade Secret?
Under both the Colorado Uniform Trade Secrets Act (CUTSA) and the Defend Trade Secrets Act (DTSA), a trade secret is broadly defined as any confidential business information that:
- Derives independent economic value from not being generally known or easily ascertainable by others.
- Is subject to reasonable efforts to maintain its secrecy by the business owner.
Examples include proprietary software, customer lists, business strategies, formulas, manufacturing processes, and marketing plans. If information is accessible through legal means or is publicly available, it does not qualify as a trade secret.
2. Legal Framework for Trade Secret Misappropriation Claims
A. Colorado Uniform Trade Secrets Act (CUTSA)
The Colorado Uniform Trade Secrets Act, enacted in 1986, governs the protection of trade secrets at the state level. Under CUTSA, a party can bring a civil action against any individual or entity that improperly acquires, discloses, or uses trade secrets without permission. CUTSA defines “misappropriation” in three main ways:
- Acquisition of a trade secret through improper means such as theft, bribery, or breach of a duty of confidentiality.
- Disclosure or use of a trade secret by someone who acquired it through improper means.
- Disclosure or use of a trade secret by someone who knew or should have known it was obtained improperly.
B. Defend Trade Secrets Act (DTSA)
At the federal level, the Defend Trade Secrets Act (DTSA), enacted in 2016, provides businesses with the option to bring trade secret misappropriation claims in federal court. The DTSA largely mirrors CUTSA in its definition of trade secrets and misappropriation but adds an important layer of protection, as it allows for federal jurisdiction and uniformity across states. Under the DTSA, companies can seek both injunctive relief and monetary damages.
One of the DTSA’s notable provisions is the ability to file civil seizure orders, allowing courts to seize property to prevent the disclosure or transfer of misappropriated trade secrets.
3. Key Issues in Trade Secret Litigation
Trade secret litigation often involves several complex and contested issues. Below are some of the key factors that businesses and their legal teams must navigate when pursuing trade secret misappropriation claims.
A. Establishing the Existence of a Trade Secret
The first challenge in any trade secret litigation is proving that the information in question qualifies as a trade secret. To do this, plaintiffs must demonstrate that the information:
- Is valuable due to its secrecy.
- Was subject to reasonable efforts to maintain its confidentiality (e.g., through non-disclosure agreements, limited access, and password protections).
Defendants often argue that the information was not a secret, either because it was publicly available or because the plaintiff failed to take appropriate measures to protect it.
B. Misappropriation
To succeed in a trade secret claim, plaintiffs must show that the defendant acquired, disclosed, or used the trade secret through improper means. Common ways in which trade secrets are misappropriated include:
- Departing employees who take confidential information with them to a competitor.
- Third-party hackers who steal trade secrets via cyberattacks.
- Business partners or vendors who misuse confidential information shared during negotiations or collaborations.
One common defense in these cases is the argument that the alleged misappropriation involved independently developed information or reverse-engineering of a product rather than theft of a trade secret.
C. Statute of Limitations
In Colorado, the statute of limitations for trade secret claims under CUTSA is three years from the date the misappropriation is discovered or should have been discovered with reasonable diligence. The DTSA also imposes a three-year statute of limitations. Failure to file a claim within this window can result in the dismissal of the case.
D. Preemption of Other Claims
CUTSA preempts common-law claims such as breach of fiduciary duty, unfair competition, or unjust enrichment if they arise from the same facts as a trade secret misappropriation claim. However, claims based on different facts may proceed alongside a CUTSA claim. Navigating these issues can be legally complex, as courts will carefully scrutinize whether the additional claims are independent or duplicative.
4. Available Remedies for Trade Secret Misappropriation
When a company prevails in a trade secret misappropriation case, several remedies may be available under both state and federal law.
A. Injunctive Relief
Injunctive relief is often the first remedy sought by plaintiffs in trade secret cases. Courts can issue:
- Preliminary or temporary injunctions to stop the defendant from further using or disclosing the trade secret during the litigation.
- Permanent injunctions to prevent ongoing or future use of the trade secret once the case is resolved.
In some cases, Colorado courts may also order “inevitable disclosure” injunctions, which prevent a former employee from working for a competitor if their new job would inevitably lead to the disclosure of trade secrets, even without direct evidence of misappropriation.
B. Monetary Damages
Plaintiffs can recover a range of damages in trade secret litigation, including:
- Actual damages for economic losses suffered due to the misappropriation.
- Unjust enrichment damages, calculated based on the defendant’s profits from using the misappropriated trade secrets.
- Reasonable royalty payments, if the plaintiff opts for this remedy in lieu of other damages.
In cases involving willful or malicious misappropriation, courts may award punitive damages of up to two times the actual damages. Additionally, the prevailing party may recover attorney’s fees under both CUTSA and DTSA if the court finds that the opposing party engaged in bad faith litigation.
C. Civil Seizure (Under DTSA)
A unique feature of the DTSA is the option for plaintiffs to seek ex parte civil seizure orders. These orders allow a court to seize property to prevent the dissemination of trade secrets, without the defendant’s prior knowledge. This remedy is intended for use only in extraordinary circumstances, where there is a significant risk that the defendant will destroy or hide the evidence before the case proceeds.
5. Best Practices for Protecting Trade Secrets in Colorado
To minimize the risk of trade secret misappropriation and strengthen future litigation claims, Colorado businesses should adopt proactive measures, including:
- Implementing non-disclosure agreements (NDAs) for employees, contractors, and partners.
- Conducting regular security audits to ensure trade secrets are properly protected.
- Limiting access to trade secrets on a need-to-know basis.
- Using encryption and cybersecurity measures to safeguard sensitive information.
- Educating employees about the importance of confidentiality and the legal consequences of misappropriation.
Conclusion
The Colorado Uniform Trade Secrets Act (CUTSA) and the federal Defend Trade Secrets Act (DTSA) provide robust mechanisms for protecting confidential business information. However, trade secret litigation can be complex, with challenges related to proving the existence of a trade secret, establishing misappropriation, and navigating procedural issues like preemption and statutes of limitations. Plaintiffs who successfully prove misappropriation can recover a variety of remedies, including injunctive relief, monetary damages, and, in federal cases, civil seizure orders. Understanding the legal landscape and implementing preventive measures, businesses can better protect their competitive edge and navigate the risks of trade secret misappropriation. The same understanding can lead to successful defense of trade secret claims or limiting the economic upside for a business to pursue them.