Not the Cadillac of Trade Secrets, But Still Deserving of Protection

Joel R. Leeman

By Joel Leeman. A member of our Litigation Practice Group

January 2012 IP Update

A federal court has endorsed a Rolls-Royce strategy for putting a genie back in a bottle.  In this case, the genie was a manual of procedures for the repair and overhaul of helicopter engines that Rolls-Royce wished to protect as a trade secret, but which had once been in general circulation with scant effort to keep it confidential.  As a result, the manual had been widely available to the engine-repair industry for some time.

To correct the situation, Rolls-Royce instituted a practice of issuing updates to the repair procedures only to its Authorized Maintenance Centers (“AMC’s”), requiring them to sign nondisclosure agreements and adding a confidentiality legend on each page of each document updating the repair procedures. In AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., the Eighth Circuit Court of Appeals found these actions sufficient to confer trade secret protectability on Rolls-Royce’s updated procedures.

The repair and overhaul procedures developed by Rolls-Royce had been approved by the Federal Aviation Administration.  Any repair shop wishing to work on an engine must, by regulation, adhere to an FAA-approved procedure.  Thus, a repair shop would face great expense in engineering its own procedures and getting the FAA to approve them. The easier route, by far, was to get a copy of the updated Rolls-Royce manual.

Although not an AMC, AvidAir managed to acquire a version of the updated manual. In 2002, Rolls-Royce demanded that AvidAir stop using its manual, claiming trade secret protection.

In 2003, responding to a Rolls-Royce complaint, the FAA found that AvidAir was not following Revision 13, the latest iteration of the manual.  Since this deficiency jeopardized the company’s ability to provide certified repairs, AvidAir contrived to get a copy of Revision 13 from an AMC and adjusted its procedures accordingly.  Rolls-Royce then sued AvidAir for theft of its trade secrets.

Both parties agreed that the case was governed by the Uniform Trade Secret Act, which defines a trade secret as information (including compilation) that:

  1. Derives independent economic value from not being generally known or legitimately accessible to persons who can obtain economic value from its disclosure; and
  2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The trial judge in Missouri held that Revision 13 was in fact a protectable trade secret, although earlier revisions, available before Rolls-Royce tightened its safeguards, did not qualify as secrets.  The jury awarded damages to Rolls-Royce, and the judge ordered AvidAir to return the trade secret material to Rolls-Royce but did not forbid the company from continuing to overhaul helicopter engines as long as it relied on publicly known procedures.

On appeal, AvidAir contended that the revised manual provided no independent economic value because it reflected no engineering advances in helicopter-engine repair and contained only a trivial amount of information that was not available from earlier public versions.

This argument did not achieve lift. The Eighth Circuit observed that the “existence of a trade secret is determined by the value of a secret, not the merit of its technical improvements.” Compilations are valuable because the effort and expense behind them give a “competitive advantage.”

Although the manual consisted mostly of publicly available information compiled by Rolls-Royce, along with a lesser amount of newly released proprietary information, it is still “valuable” because it enables repair shops to gain regulatory approval of their overhaul procedures. Just as important, if a repair shop possesses the manual, it can avoid the “burdensome expense of reverse engineering the updated specifications.”

The appeals court drew a contrast with patent laws, which offer protection based on novelty and nonobviousness. Trade secret laws, however, are “meant to govern commercial ethics” and to prevent valuable information “from being misappropriated despite reasonable efforts to keep it secret.”  Intellectual advances are not a prerequisite to trade secret protection.

The court did not hover for long over AvidAir’s other key argument, that the repair protocols could be easily reverse-engineered, which, it argued, demonstrated that Rolls-Royce did not take reasonable measures to maintain their secrecy. If that were true, said the court, isn’t it curious that AvidAir repeatedly tried, but failed, to obtain the information without Rolls-Royce’s approval?

The company’s preference for taking Rolls-Royce’s information rather than compiling it on its own from publicly available sources “belies its claim that the information in the documents was readily ascertainable or not independently valuable.”

Reasonable efforts to maintain secrecy do not need to be “overly extravagant, and absolute secrecy is not required.” The court was satisfied that Rolls-Royce had labeled its manual with a proprietary legend and distributed it only to parties which had signed a confidentiality agreement.

Referring to the AMC that leaked information to AvidAir, the court held that “misplaced trust in a third party who breaches a duty of confidentiality does not necessarily negate efforts to maintain secrecy.”

The AvidAir decision offers these useful reminders:

  1. A trade secret derives most of its value from the fact that it is secret and requires effort to compile;
  2. The fact that a trade secret may be reverse-engineered does not render it unprotectable; and
  3. Ethical business conduct is at the heart of trade secret law.

A practical lesson from this case is that even if technical information has fallen into the public domain, the addition of even a small amount of new confidential information may make the new compilation protectable, especially if the revised compilation is a document that has obtained regulatory approval.

There is no assurance that courts in other federal circuits will adopt as lenient a view of trade secrets as the Eighth Circuit has. Yet one principle is likely to be widely accepted: Even in an era in which technology can accelerate the spread of misappropriated secrets, protection remains available to those who have reasonable safeguards in place.