Fourth Circuit Holds a Trade Secret’s Value Must Not Merely Be Commercial, but Must Come From Its Secrecy

At a Glance

The Fourth Circuit’s decision in Synopsys, Inc. v. Risk Based Sec., Inc., No. 22-1812, 2023 WL 4009505 (4th Cir. June 15, 2023), highlights that trade-secret plaintiffs must prove that their secret information is not just commercially valuable, but that it's commercially valuable because it is secret.

Summary

Both parties in this case are in the business of identifying vulnerabilities in source code for open-source software so that those vulnerabilities can be corrected. Risk Based Security, Inc. (RBS) spent years identifying and disclosing open-source-code vulnerabilities. In 2011, RBS acquired a then-publicly available database of vulnerabilities, which RBS then made private while investing in expanding the content. RBS licensed the updated database to its competitors and others.

Through a subsidiary, Synopsys, Inc., was one of RBS’s licensees. While the license agreement was in place, Synopsis’s subsidiary created a database that also managed and stored information about open-source-code vulnerabilities. Once RBS learned of this, it revoked the license agreement and sued the subsidiary in state court. RBS later added Synopsys as a defendant; but before it did, Synopsys filed a declaratory judgment action in federal court asserting that Synopsys did not misappropriate RBS’s trade secrets. (The state court action was still pending as of the date of the Fourth Circuit’s opinion.)

After discovery in the federal action, the district court granted Synopsys’s motion for summary judgment, finding that RBS failed to show that its alleged trade secrets derived any value from being kept secret and that RBS had not taken reasonable efforts to protect its purported trade secrets. On appeal, the Fourth Circuit focused on the first issue, and agreed with the district court that RBS did not show its trade secrets derived value from being kept secret.

RBS tried to show value by pointing to two things: First, the acquisition price that an acquirer had recently paid for RBS. Second, the fact that most of RBS’s revenue (at least 90%) came from licensing its database of vulnerabilities. The Court of Appeals affirmed the finding that neither piece of evidence was sufficient. Although RBS’s evidence may have showed commercial value, the appellate court held, RBS did not show that any of that value was tied to the secrecy of the information.

Key Takeaway

This case is a reminder to trade-secret plaintiffs that the value of a trade secret must be derived from its secrecy and not merely because the trade secret has some commercial value. As the Fourth Circuit held: “Not everything with commercial value constitutes a trade secret.” This does not mean that a trade-secret plaintiff must distill the value down to a precise dollar figure — but it does need to show that the value is tied back to the secrecy.