Zillow Case Shows Danger of Unprotected Trade Secrets During Business NegotiationsMay 08, 2015 Court Cases
As I mentioned in a prior post on real estate investment vehicles’ use of intellectual property, the real estate industry is not immune from legal disputes arising from that “other” type of property: intellectual property – specifically trade secrets.
A recent case involving Zillow in the federal Northern District of California illustrates the point. In that case, Zillow, one of the nation’s most recognizable online real estate information marketplaces, was accused of trade secret misappropriation by Top Agent Network, Inc., a competing online real estate information dissemination service.
Score the early rounds of this battle to Zillow.
Top Agent is a private online community and web application available to the top ten percent of real estate agents in certain local markets, focusing on “Upcoming Listings” – properties for sale that do not yet appear on the Multiple Listing Service (MLS), which is available to all registered real estate agents.
Top Agent’s complaint accused Zillow of misappropriating Top Agent’s trade secrets. According to the complaint, executives from Top Agent and Zillow began communicating in early 2014. Top Agent expressed interest in Zillow’s potential investment in the company. Zillow’s executive verbally assured Top Agent that all information provided by Top Agent would be kept confidential and used solely to evaluate a potential investment, but no non-disclosure agreement (NDA) was signed.
Top Agent set up an account for Zillow’s executive, allowing him to access Top Agent’s member-only content, including its “Upcoming Listings,” and the executives discussed Top Agent’s features, membership model, and business strategy. Through its account access, Zillow viewed dozens of pages within Top Agent’s private web application and opened more than a hundred member posts.
But Zillow eventually informed Top Agent that it would not be investing in the company. Soon after, Zillow launched its own “Upcoming Listings” product, which Top Agent alleged contained all of the core features of Top Agent’s service.
In addition to trade secret misappropriation, Top Agent also asserted claims under the federal Computer Fraud and Abuse Act, California’s Computer Data Access and Fraud Act, and an assortment of other claims.
The District Court’s Order
On Zillow’s motion, the District Court dismissed all but one claim – breach of oral contract.
Top Agent’s complaint failed to state a trade secret misappropriation claim, the court held, because Top Agent failed to adequately identify the alleged trade secrets.
The court started with the familiar statutory definition of a trade secret under the California Uniform Trade Secrets Act:
- information, including a formula, pattern, compilation, program, device, method, technique, or process, that
- derives independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use, and
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
The court found that Top Agent only described its alleged trade secrets in “broad strokes,” without sufficient detail. Top Agent’s complaint alluded to the manner in which its “Coming Soon” feature was developed and implemented, the strategy behind the feature, and the identity of Top Agent member agents who made listing posts. Nothing in the complaint, the court held, showed how Top Agent’s information amounted to more than non-protectable ideas, features, and functions of design and operation (as opposed to protectable facts or “empirical data”). The court also held the complaint failed to describe Top Agent’s reasonable efforts to maintain the secrecy of its web content.
The court dismissed the Computer Fraud and Abuse Act claim on the ground that Top Agent had plainly given Zillow “authorization” to access its site (noting that how Zillow used information gained from that access was beyond the scope of the statute). The court likewise dismissed the Computer Data Access and Fraud Act because Zillow had “permission” to access Top Agent’s site.
The court dismissed all the remaining claims (other than breach of oral agreement) on the grounds of preemption, since they were all based on “the same nucleus of facts” as the trade secret claim.
The court’s dismissal order was “with leave” to amend, meaning Top Agent will have a chance to amend its complaint to more specifically describe its trade secrets and to show how its other claims arise from rights separate from trade secret law.
This early victory for Zillow, however, reinforces two lessons:
- Companies should have a very clear understanding of their trade secret inventory, and should be able to articulate how the information meets the statutory requirement of a trade secret as well as the reasonable efforts undertaken to protect them. There is a lot of “gray” in this area of the law, and it helps to have clarity before dealing with potential business partners or adversaries.
- Companies possessing trade secrets should always enter into a written NDA before sharing trade secrets with an outsider as part of any business relationship. Failing to obtain an NDA might constitute a per se failure use reasonable efforts to protect the trade secrets.