Data Center Business Deals Gone Bad, and the Risks of the “Known in the Industry” Defense

February 9, 2021 Articles

Exploring business partnerships often involves or even requires sharing highly confidential trade secret information. The data center industry is no exception, and its participants have in recent years faced litigation focused around the intellectual property used in data center construction.

Case Background: Digiport, Inc. and Data Centers Worldwide, Inc. vs. Foram Development BFC, LLC

One such case involved a dispute relating to a Miami, Florida data center. The case, Digiport, Inc. and Data Centers Worldwide, Inc. vs. Foram Development BFC, LLC, was originally disposed of at summary judgment until a Florida appeals court recently revived the lawsuit involving an allegation of theft of trade secrets. 

The case involves a business relationship that began in 2008. Digiport had approached Foram Group to engage in discussions and information sharing – in confidence, according to Digiport – so that Digiport could create a proposal to incorporate a data center into a building Foram Group was constructing. Digiport’s alleged trade secrets included “the combination of the data center, flexible internet connectivity and an on-site IT company under one roof for the benefit of the building’s tenants.” The defendant Foram provided relevant technical information about its building to the plaintiff, and the parties subsequently “explored the overall structure and design of the data center” together, with Digiport apparently providing more detailed plans for its design in light of the specifications Foram shared.

Foram ultimately did not engage Digiport for this work, instead hiring another company to design and install a data center in the building. After the project was completed and Foram began to market its space as offering many of the services Digiport had offered to provide, Digiport sued Foram in 2013 for trade secret misappropriation under Florida’s Uniform Trade Secret Acts, among other causes of action.

The “Known in the Industry” Defense Is Not a Silver Bullet Because It Is Highly Factual and Thus Unlikely to Carry the Day at Summary Judgment

Defendant Foram successfully argued before the trial court that Digiport’s claimed trade secret data center concept was not unique, but rather was based on features generally known in the industry. 

On review, the appeals court reversed the lower court’s grant of summary judgment in favor of Foram. In reversing the decision, the Florida Appeals Court noted that whether or not information constitutes a trade secret is typically a question of fact. The court also noted that even information that is publicly available in its individual components may be compiled in a unique way that adds value to the information, and thus qualify as a trade secret.

To date, at least 48 states and the District of Columbia have adopted some version of the Uniform Trade Secret Act (“UTSA”). A “trade secret” is defined in the UTSA as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Unique combinations of elements, even where the individual pieces are publicly known, can also be protected as combination trade secrets. See e.g. Capital Asset Research Corp. v. Finnegan, 160 F.3d 683, 686 (11th Cir. 1998) cited in Digiport’s opening appellate brief (“Even if all of the information is publicly available, a unique compilation of that information, which adds value to the information, also may qualify as a trade secret.”); see also Altavion, Inc. v. Konica Minolta Sys. Lab., Inc., 226 Cal. App. 4th 26, 47 (2014) (“even if some or all of the elements of Altavion’s design were in the public domain and thus unprotectable, the combination was a protectable trade secret if it was secret and had independent economic value”) (emphasis in original). The appeals court recognized this combination trade secret problem with Foram’s argument at summary judgment.

Specifically, Plaintiff Digiport had presented the lower court with evidence in the form of a declaration of its owner Marc Billings attesting that he was not aware of any other data center concept like this in any other building throughout the country at the time, as well as several internal emails between Foram Group’s agents in which they discussed marketing the current data center to potential tenants as a new and unique approach to office space. The appeals court found that the evidence presented at summary judgment, viewed in the light most favorable to the nonmoving party Digiport, did not conclusively resolve the issue of whether Digiport’s alleged trade secrets were actually known in the industry, and thus, a trial was needed to determine if Digiport had in fact possessed trade secrets.

The Defendant Foram claimed that a prior denial of a patent for Digiport’s concept rendered it generally known, and therefore not a trade secret, as a matter of law. But as the appeals court noted in its denial, “novelty in the patent law sense is not required for a trade secret.” And while pointing to a patent publication is one of many ways in which a defendant might provide evidence that information is generally known, a trade secret and a related patent applicant do not – without proof or admission of such – necessarily disclose the same information.

With the appellate court’s finding that Digiport’s evidence raises a factual issue as to whether it owns trade secrets, the parties now face the specter of a trial on Digiport’s FUTSA claim.

How Can Parties Better Protect Themselves When Exchanging Sensitive Information With Data Center Construction Partners?

As in other business situations, in order to protect both parties engaging in discussions to explore a possible deal to purchase, build, or procure a data center, parties entering such a discussion should undertake certain precautionary or protective measures, such as:

  • Taking a “need to know” approach with non-disclosure agreements (NDAs), and identifying types of individuals, or specific individuals, who will be able to access any information shared;
  • Using “clean rooms” – typically a virtual data room that allows both parties to put sensitive information into the system and control who may access it or make copies of it, and can also track who accesses the information, when, and for how long. These are especially valuable tools where there is a high degree of product or market overlap between the parties, and/or a low level of trust between the parties;
  • Including NDA expiration clauses so it is clear how long confidentiality obligations extend for (months, years, indefinitely until such time of a public disclosure, etc.);
  • Including “destroy on demand” provisions requiring destruction and certification of destruction by recipients of confidential information;
  • Keeping your eyes and ears open for potential breaches and/or misuse of your intellectual property and promptly seeking legal counsel;
  • Carefully documenting your own existing parallel efforts before entering into a situation where you may be receiving confidential information; and
  • Sharing, requesting, and accepting confidential information commensurate with the level of seriousness of discussions and likelihood of deal completion.

As we can learn from the Digiport case, it’s also important to bear in mind that, in the eventuality of a dispute over a breakdown or a deal gone bad, trade secret disputes are highly factual cases that are often not ripe for early disposition. Having careful documentation of the above steps, with the assistance and input of counsel, may thus be critical for either side of a potential trade secret dispute in the event that a dispute ultimately arises between the parties.

The Digiport case docket remains closed after entry of the circuit court’s order in January 2021, but we will be watching for the trial court’s next scheduling steps at the case moves towards trial given the factual issues at play.

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