A recent case out of Colorado raises interesting issues about the definition and scope of a trade secret and the potential for the statute of limitations barring an action for trade secret misappropriation when the misappropriation of a single trade secret occurs over a period of years.

In Cognat v. Ellsworth, No. 09SC963, the plaintiff, Timothy Cognat, brought suit against a number of defendants for trade secret misappropriation under Colorado law.  As alleged, Cognat had entered into a joint venture with Chet Ellsworth and disclosed to Ellsworth proprietary information described as “a methodology for identifying and extracting reserves of oil and natural gas in western Kentucky.” Cognat alleged that Ellsworth disclosed his proprietary information to one of the other defendants, Stephen Smith, who Ellsworth allegedly unilaterally brought into the joint venture in 2001.  Cognat threatened to bring suit at that time, but he was assured by Ellsworth and Smith that the differences between the parties would be resolved. Apparently, based on these assurances, Cognat refrained from suing. Cognat claimed though that the defendants downplayed their commercial success using Cognat’s trade secrets between 2001 and 2005 so that he would not need to be compensated. Later, in 2005, Cognat learned that the defendants had separately acquired leases in two parts of Kentucky for exploration allegedly using Cognat’s trade secrets.  Cognat filed his lawsuit against the defendants in December 2005.

The defendants moved for summary judgment, arguing that Cognat was aware of their alleged misappropriation prior to 2001 and his claim was therefore time barred by Colorado’s three year statute of limitations. Cognat opposed the motion, arguing that while he was aware of the defendants’ use of the trade secrets in 2001 or perhaps earlier, he was not aware of their later misappropriation in a different geographical section of Kentucky and therefore, a different trade secret was involved due to differences in geological and engineering techniques applicable to that geography. The trial court granted summary judgment for the defendants, finding the claim barred by the statute of limitations, which was affirmed by the court of appeals.

On appeal to the Colorado Supreme Court, the central issue for the Court was whether Cognat’s claim involved a single trade secret or two separate trade secrets. If Cognat’s claim involved only one trade secret, then under Colorado law, the claim would be barred. Colorado’s statute specifically requires that a claim for misappropriation be brought within three years after the misappropriation is discovered, or by the exercise of reasonable diligence should have been discovered. Importantly, the statute specifies that a “continuing misappropriation” constitutes a single claim.” Accordingly, under the Colorado statute, if a defendant repeatedly misappropriates the same trade secret over the course of years and such conduct is known by the plaintiff and yet no action is taken, then the misappropriation is deemed “continuing” and the claim is barred if brought outside of the three year limitations period.

In considering the matter, the Court discussed the difficulty of determining whether a claim involves a single or multiple trade secrets.

“Because the term ‘trade secret’ is defined, in pertinent part, to include the whole, as well as any portion or phase, of any valuable and secret scientific or technical information, the words of the statute themselves mandate that any particular part of such information be considered a trade secret, but they do not permit different portions or phases of one trade secret to be classified as different trade secrets. Because, however, virtually any two pieces of information can be conceived of as constituent elements of some greater whole, arbitrariness in the differentiation of designs, processes, procedures, formulas, or improvements can be avoided only by applying a level of abstraction appropriate to the purposes of Act.”

For the Court, while the Colorado statute raises a bit of a conundrum as to defining the trade secret, it also provides the answer. The issue of the scope of the trade secret will by necessity be determined by the court based on a review of “the totality of the circumstances, with reference to the purposes of the statute.” And, according to this Court, the statute requires some predisposition to treating a trade secret as a whole, rather than dividing it into parts:

“But both the specific provisions and overall structure of the Act militate against dividing into multiple trade secrets a single body of proprietary information disclosed to the same person, at substantially the same time, and in furtherance of the same commercial venture.”

Of course, the Colorado statute has significant differences from the trade secret statutes other states, including North Carolina.  For example, North Carolina’s statute does not include an explicit reference to “continuing misappropriation” with its statute of limitations.  Nor does the North Carolina statute define the trade secret as the “whole or any portion or phase” as the Colorado statute does.  Accordingly, many of these sticky issues in Cognat are not confronted under the North Carolina Trade Secrets Protection Act.

Putting to the side the interesting question of how one defines a trade secret, the Cognat case does remind us once again that the owner of a trade secret puts much in jeopardy by failing to take prompt legal action when misappropriation is discovered.  It is becoming all too common today that parties fail to take appropriate legal action to protect their rights based upon assurances that the other party will make amends in the future.  See Snooze You Lose:  Vigilance Required in Protecting Trade Secrets. Clearly, the lesson to be learned here is not to rely on such vague assurances.  The party misappropriating the trade secret must be confronted and the misappropriation must be stopped.  If not, the value of this intellectual property will likely be lost, a court will likely not step in and grant an injunction to prevent further harm and the statute of limitations will likely begin to run.