Distinguishing between continuing misappropriation of one trade secret and separate misappropriations of related trade secrets can be a daunting task. The Supreme Court of Colorado recently held that, for statute of limitations purposes, the distinction may be inconsequential where misuse occurs on disparate occasions but the proprietary information was disclosed to the same person at substantially the same time, and in furtherance of the same commercial venture. That constitutes misappropriation of a single trade secret.
Gognat developed proprietary information relating to the methodology for identifying and extracting reserves of oil and gas. In 1997, he shared this information with Ellsworth when they entered into a joint venture to develop reserves in western Kentucky. At about the same time, Ellsworth secretly formed MSD Energy, Inc. (MSD) for the same purpose.
By January 2001, Gognat knew that MSD was using his trade secrets in connection with acquiring leases in the same area of Kentucky as the joint venture. He demanded that the joint venture compensate him. Ellsworth assured him that his demand would be resolved fairly. Relying on that assurance, Cognat deferred filing a lawsuit against Ellsworth and MSD. That proved to be a big mistake.
In 2005, Gognat learned that MSD was using his proprietary information in connection with development of a different area of western Kentucky, and that MSD’s activities in the first area were more extensive than he had previously known. He filed suit against Ellsworth and MSD for misappropriation of trade secrets. The defendants moved for summary judgment based on Colorado’s three-year statute of limitations, contending that Cognat was aware four years earlier, in 2001, that Ellsworth and MSD were using the trade secrets. Gognat responded that until 2005 he did not know, and had no reason to suspect, that Ellsworth and MSD were using his trade secrets in the second area. The trial court granted the defendants’ motion to dismiss, and both the Court of Appeals and the Supreme Court affirmed. Gognat v. Ellsworth, 224 P.3d 1039 (Colo. App. 2009), aff’d, Case No. 09SC963 (Colo. Sup. Ct., June 6, 2011).
Colorado’s Trade Secrets Act is modeled after the Uniform Act. It defines a trade secret as all or part of proprietary information that the owner has taken measures to prevent from becoming available beyond those to whom the owner has given limited access. In the instance of separate acts of misappropriation with respect to related trade secrets, when does the statute of limitations begin to run? According to the Colorado Supreme Court, the misconduct of Ellsworth and MSD was one continuing misappropriation and, therefore, the cause of action accrued in 2001 when Gognat learned of the first instance of misuse. Further, the fact that what Gognat knew in 2001 may not have been sufficiently damaging to justify the cost of litigating is immaterial.
The Gognat decision teaches that litigation with respect to trade secret misuse must be initiated promptly after learning of misappropriation, even though accrued damages may be quite modest. Otherwise, the claim may be held to have been waived by the passage of time notwithstanding a substantial subsequent increase in the amount of resulting damages. Contact a trade secrets attorney at Seyfarth Shaw for assistance in determining whether a potential trade secrets misappropriation cause of action is time-barred.