This is a short update to a previous post, Zillow Case Shows Danger of Unprotected Trade Secrets During Business Negotiations, posted on May 8, 2015.

In that post, we described a trade secrets lawsuit filed against Zillow by a competing online real estate information company, Top Agent Network.  Zillow prevailed in an early skirmish in that case when the District Court issued an order dismissing Top Agent’s core trade secrets claim.  The court held that Top Agent failed to allege sufficient detail showing that its alleged trade secrets were, in fact, trade secrets instead of mere non-protectable ideas, features, and functions of design and operation.

But the dismissal order allowed Top Agent leave to amend (i.e., to try to state a proper trade secrets claim).  Top Agent amended, and now its trade secrets claim is back.  Score round 2 in this bout to Top Agent.

The amended trade secret claim

In its amended complaint, Top Agent specified its alleged trade secrets in far greater detail.

The amended complaint focuses on slides distributed at a March 12, 2014 meeting between Top Agent and Zillow executives.  Those slides, according to the complaint, included “internal metrics concerning client engagement, market penetration, members’ use of information on [Top Agent’s] private web pages, and the size of its homebuyer secondary market; the frequency with which members in different markets open their emails; the percentage of home sales made by [Top Agent] member agents in three geographic areas and member statistics from those markets; and market research survey results indicating how clients specifically use [Top Agent] in advancing their businesses.”

The amended complaint further alleged that all of the above information was kept confidential (through confidentiality provisions in employment agreements) and had economic value.

Finally, Top Agent alleged Zillow misappropriated its trade secrets by using the aforementioned metrics and market data without Top Agent’s permission, after Zillow assured Top Agent that the information would be kept confidential.

Zillow filed a motion to dismiss Top Agent’s amended complaint.

The District Court’s Order

This time around, the District Court ruled that Top Agent stated a valid claim for trade secret misappropriation.  Whereas Top Agent’s first complaint failed to specify what constituted its trade secrets (with the allegations sounding more like non-protectable ideas, features, and functions), the amended complaint provided the necessary details and focused on protectable metrics and market data.

As to misappropriation, the court acknowledged that Top Agent’s allegations remained “somewhat conclusory,” in that they fell short of “chronicling in precisely what manner such data proved integral to the development of” Zillow’s competing product offerings.  But, the court held, “to impose such a steep hurdle prior to discovery would be inappropriate.”

The court also upheld Top Agent’s claim for breach of oral contract, which alleged that Zillow broke its verbal promise to keep Top Agent’s information confidential.

The court dismissed, without leave to amend, Top Agent’s fraud and unfair competition claims on the grounds that they were superseded by the California Uniform Trade Secrets Act.

Takeaway

The main lesson from this case, as stated in our prior post, remains that companies should be acutely aware of their trade secrets, and should always obtain a written NDA before sharing those secrets.

Top Agent’s failure to properly articulate its trade secrets in its original complaint and its failure to obtain a written NDA turned out to not be fatal to its case, but it forced the case into an early defensive posture, which is never good for a plaintiff.

We’ll continue to monitor this case for developments.

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.

The complaint

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:

1. information, including a formula, pattern, compilation, program, device, method, technique, or process, that
2. 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
3. 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.

Moving forward

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.