[co-author: Cassandra Mirarchi]
On June 17, 2024, the Federal Circuit issued a precedential opinion reversing a preliminary injunction imposed in a trade secret case, explaining that the district court abused its discretion by, inter alia, failing to fully analyze the requirements for trade secret protection under the Defend Trade Secrets Act (“DTSA”).1 In particular, the district court’s decision was criticized for broadly defining trade secrets to include “any and all Confidential Information” and for deciding that requiring precision as to the precise protectable information would have been “unfair” at the preliminary injunction stage of the case.2 On appeal, the Federal Circuit Panel explained that the district court erred by using too broad of a definition of trade secrets because the DTSA requires identification of specific trade secrets.3 The Panel explained that a more thorough identification of the particular information that is to be classified as a trade secret and an analysis of whether reasonable means were taken to protect the information is required.4 Furthermore, the trade secret owner must prove misappropriation by the defendant and that the information has independent economic value to establish the existence of a trade secrets violation under the DTSA.5 Since this analysis is necessary to establish a plaintiff’s likelihood of success on the merits at the preliminary injunction stage, the Panel reversed the district court’s preliminary injunction order.6
Background
Insulet Corp. (“Insulet”) and EOFlow, CO. Ltd. (“EOFlow”) are two medical device manufacturers, both of which manufacture insulin pump patches.7 In 2023, Insulet filed a lawsuit against EOFlow in the District of Massachusetts, alleging violations of the DTSA.8
Insulet alleged that EOFlow misappropriated Insulet’s trade secrets in developing the EOPatch 2, a next generation insulin pump patch, after hiring four former Insulet employees around 2017.9 EOFlow began developing the EOPatch 2 in 2017, and received regulatory approval in 2019 in South Korea and in 2022 in Europe.10 In early 2023, Medtronic, another medical device company, considered acquiring EOFlow.11 Insulet believed this acquisition would cause irreparable harm to their business if EOFlow shared Insulet’s purportedly trade secret information with Medtronic, prompting Insulet to file suit.12
The district court issued a preliminary injunction in October 2023 that stopped EOFlow from “manufacturing, marketing, or selling” any product developed relying on Insulet’s alleged trade secrets.13
The Federal Circuit’s Analysis
The Panel decided that the district court “failed to identify any trade secret with sufficient particularity” and had therefore abused its discretion in issuing the preliminary injunction.14 The district court’s preliminary injunction order defined “trade secret” as “‘any and all Confidential Information of Insulet’” and “‘any information that contains, derives from, or incorporates such Confidential Information.’”15 The Panel stated that this definition was “severely overbroad” in light of the DTSA’s definition of trade secrets, which encompasses only information that the owner has taken “reasonable measures to keep . . . secret,” and that “derives independent economic value” from not being “generally known to” or “readily ascertainable through proper means by” anyone to whom the information would be valuable.16 For example, the injunction prohibited EOFlow from disclosing its own “‘design drawings and specifications’” without identifying which particular drawings and information contained Insulet’s intellectual property.17 This “hazy grouping of information” was not sufficiently specific regarding “what, if anything, was deserving of trade secret protection.”18 While the district court stated that “‘it would be unfair to require at this stage perfection as to the precise number and contours of the trade secrets at issue,’” the Panel disagreed because such vague analysis does not meet the burden required to demonstrate a likelihood of success on the merits.19 Thus, the Panel decided that Insulet failed to show a likelihood of success because it failed to identify “at least one, specifically defined, trade secret.”20
In addition, the Panel determined that the district court failed to adequately consider whether Insulet took reasonable measures to keep the relevant information secret.21 Per the DTSA, a trade secret owner must take “reasonable measures” to keep information secret in order to benefit from trade secret protections.22 The district court had decided that Insulet took reasonable steps such as password protection, nondisclosure agreements, and labeling documents as confidential to protect “‘some substantial set of information,’” but the Panel explained that the DTSA requires more specificity.23 The district court had failed to “probe with particularity” which information was eligible for trade secret protection.24 The Panel considered the district court’s analysis to be “too general” to support a conclusion that reasonable measures were taken to protect potential trade secrets.25 In short, because the trade secrets were not specifically identified, the Panel could not determine whether the steps taken to protect them were in fact reasonable.26 A proper analysis would have assessed whether the plaintiff “took reasonable measures to protect specific information” rather than the entire class of information.27
In addition, the district court failed to properly assess whether EOFlow misappropriated Insulet’s alleged trade secrets.28 Misappropriation is defined under the DTSA as “acquisition of a trade secret of another by a person who knows… that the trade secret was acquired by improper means.”29 For example, to be eligible for trade secret protection, information cannot be either generally known or ascertainable through proper means.30 The DTSA further clarifies this by identifying conduct which does not constitute improper means of acquisition.31 For example, if the information is publicly available, such as through reverse engineering or disclosures in a patent application, there cannot be misappropriation.32 The Panel explained that the district court misconstrued the importance of reverse engineering to trade secret protection because the district court stated that the “‘mere possibility that something could be reverse engineered without more is not enough to defeat a trade secret claim.’”33 Similarly, the Panel chastised the district court for concluding that Insulet’s disclosures in patent applications related to its insulin pumps were irrelevant based on the district court’s statement that “‘[t]his is not a patent case.’”34 The Panel determined that both of these statements by the district court were erroneous.35 Particularly given the widespread public availability of Insulet’s product, including “tear-down videos” and Insulet’s own publication of “‘core components’” on the internet, it was error for the district court to not consider the possibility of reverse engineering in its assessment of Insulet’s likelihood of success.36 Likewise, the Panel explained that information that is publicly available via patent disclosures is “unlikely” to possess the “‘minimal novelty’” required to merit trade secret protection because matters of general knowledge within an industry cannot be appropriated as trade secrets under the DTSA.37
Additionally, the Panel explained that the district court “did not sufficiently evaluate” whether the information Insulet sought to protect had independent economic value, which is a “‘key factor’” in determining whether information qualifies as a trade secret.38 Under the DTSA, a trade secret must derive “independent economic value” from “not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from [its] disclosure or use.”39 Stated differently, information which may be reverse engineered or which may already be a matter of public knowledge loses its value and is not eligible for trade secret protection because a trade secret’s value is derived from its exclusivity. If the information was obtained through proper means, EOFlow gained value not from the disclosure of a trade secret, but through its own efforts. Therefore, because the district court failed to analyze whether the information at issue was ascertainable through proper means, it necessarily failed in its evaluation of independent economic value.40
Further, the Panel explained that the district court erred by issuing the injunction despite acknowledging that Insulet had failed to demonstrate knowing misappropriation on the part of EOFlow.41 The DTSA requires that the offending party “knew or had reason to know” that trade secret knowledge was misappropriated.42 The Panel explained that despite instituting the “sweeping” injunction at issue, the district court recognized that Insulet had not sufficiently established that EOFlow “knowingly benefitted from” the asserted trade secret information, and instead Insulet admitted that there could be an innocent explanation for EOFlow’s conduct, which cut against a conclusion that there was knowing misappropriation.43 The Panel explained that EOFlow’s “suspiciously accelerated” product development following the hiring of Insulet employees was not sufficient to bypass a showing of misappropriation or the other factors for issuing an injunction.44
In addition to Insulet’s failure to establish a likelihood of success on the merits, the Panel also noted that the district court did not adequately address other preliminary injunction factors concerning a showing of irreparable harm and public interest.45
The Decision’s Impact and Takeaway
This decision emphasizes a few key considerations for trade secrets cases under the DTSA. First is the level of specificity required when defining and identifying protectable trade secrets—the decision demonstrates that trade secrets must be identified with a relatively high level of specificity if one is going to rely on trade secret protection. It is not enough to rely on generalizations that all “confidential” information would constitute a trade secret. Second, the decision emphasized the need to analyze whether reasonable precautions were taken to keep the identified trade secret information a secret. Third, to be a trade secret, it is important to have a basis for showing that the information derives independent economic value from being kept secret. In sum, the Federal Circuit’s decision demonstrates some of the factors that a party must be ready to address when asserting a trade secrets misappropriation claim under the strictures of the DTSA.46
1 Insulet, Corp. v. EOFlow, Co. Ltd., No. 2024-1137, slip op. at 12 (Fed. Cir. June 17, 2024).
2 Id. at 8.
3 Id. at 8-9.
4 Id. at 9.
5 Id. at 10-11.
6 Id. at 11-12.
7 Id. at 2.
8 Id. at 3.
9 Id.
10 Id.
11 Id.
12 Id.
13 Id. at 3-4.
14 Id. at 11-12.
15 Id. at 8.
16 Id. (quoting 18 U.S.C. §1839(3)(A)).
17 Id. at 9.
18 Id.
19 Id. at 8-9.
20 Id.
21 Id. at 9.
22 Id. at 8.
23 Id. at 9.
24 Id.
25 Id.
26 Id.
27 Id.
28 Id. at 10.
29 18 U.S.C. § 1839(5)(A).
30 Insulet, slip op. at 10.
31 18 U.S.C. § 1839(6)(B).
32 Insulet, slip op. at 10-11.
33 Id.
34 Id. at 11.
35 Id. at 10-11.
36 Id. at 10.
37 Id. at 11 (citing Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475-76 (1974); Allstate Ins. Co. v. Fougere, 79 F.4th 172, 179 (1st Cir. 2023)).
38 Id.
39 18 U.S.C. § 1839(3)(B).
40 Insulet, slip op. at 11.
41 Id. at 12.
42 18 U.S.C. § 1839(5)(ii).
43 Insulet, slip op. at 12.
44 Id.
45 Id. at 13-14.
46 Id. at 9-11.
