Reverse Engineering, ‘Readily Ascertainable’, and the Burden of Proof: Lessons from the Comet Technologies Decision

The U.S. Court of Appeals for the Ninth Circuit in Comet Technologies USA, Inc. v. XP Power, LLC, overturned Comet Technologies’ $40 million trade secret verdict against XP Power and ordered a new trial, finding that the district court erroneously instructed the jury that the defendant bore the burden of proving that Comet’s trade secrets were readily ascertainable by proper means. The court held that the error was not harmless because the instructions were not accurate as a whole, and nothing in the jury’s verdict shed light on how it would have ruled under a correct instruction. The case is notable both for clarifying what “readily ascertainable” means and for spotlighting a burden-of-proof distinction between the Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA) that practitioners should not overlook.

Jury Verdict

Comet, a manufacturer of components used in the fabrication of computer chips, accused XP of misappropriating several trade secrets in violation of the federal DTSA and the CUTSA. Comet dismissed its state-law claims during trial “to streamline the case.” The district court instructed the jury that XP was not liable for misappropriation if XP proved, by a preponderance of the evidence, that the information could lawfully have been “obtained, discovered, developed, reverse-engineered, or compiled without significant difficulty, effort or expense.” In other words, that the trade secrets were “readily ascertainable.”

The jury awarded Comet $5 million and $15 million in unjust enrichment damages for misappropriation of two distinct trade secrets, plus $20 million in punitive damages, for a total award of $40 million. The court also entered a permanent injunction barring XP from using, disclosing, selling, or distributing the misappropriated trade secrets, and awarded Comet more than $17 million in attorney fees.

The Erroneous Jury Instruction

The Ninth Circuit not surprisingly found that the “readily ascertainable” instruction erroneously placed the burden on the defendant. The DTSA states plainly that a trade secret requires proof that “the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” Thus, according to the court, this jury instruction “erroneously flipped the burden of proof on an essential element of Comet’s claim.”

The Error was Not Harmless

The court concluded that the error was not harmless as it affected the jury’s verdict. It rejected Comet’s assertion that the verdict should stand because the instructions as a whole were accurate and the evidence was so strong that the jury probably would have ruled the same even if it had been properly instructed.

Concerning whether the instructions as a whole were accurate, the court disagreed with Comet’s contention that by proving a trade secret provides independent economic value, it proved “as a matter of logic that the information was “readily ascertainable.” The court explained that this theory “would effectively rewrite the DTSA, which defines a trade secret to require both independent economic value and lack of ready ascertainability as related but distinct statutory elements.”

The court also rejected Comet’s argument that the jury would more likely than not have reached the same result under a correct instruction. The jury’s findings that XP misappropriated certain trade secrets willfully and maliciously were supported by sufficient evidence, “but sufficiency is not enough to show an instructional error was harmless.” As the court put it, “[l]ack of readily ascertainability under the DTSA has nothing to do with the defendant’s real-world conduct. The jury had to decide whether XP or others could have reverse-engineered the alleged trade secrets, not whether XP had actually done so.” The jury heard conflicting evidence on that question, and “the jury’s finding about what actually happened does not tell us what the jury would have decided — under a correct instruction on the burden of proof — about what XP could have theoretically done to reverse-engineer any of the information. These two aspects of the jury’s verdict are distinct. One asks what XP did and the other what XP and others could have done.”

The court further held that even if some documents contained information that was not readily ascertainable, the error was still not harmless, in part because of Comet’s own trial strategy: Comet “chose to propose a bottom-line damages figure for each alleged trade secret rather than risk boring or confusing the jury with a more detailed component-by-component or document-by-document breakdown. With the benefit of hindsight, that understandable strategic choice created obstacles to a finding of harmless error. If the jury had arrived at the same verdict after being properly instructed, we would have applied much more forgiving standards of review on appeal.”

Reverse Engineering and ‘Readily Ascertainable’ Are Related But Not Identical Concepts

At several points, the court used “reverse engineer” and “readily ascertainable” almost interchangeably, for example, noting that “the jury had to weigh conflicting testimony from experts on what XP or others could have reverse-engineered,” and that the defense expert scored points about aspects of the trade secrets “actually consisting of information that could have been reverse-engineered or was otherwise publicly disclosed.” The concepts are closely related but not the same, and the distinction is worth noting.

To qualify as a trade secret, information must “derive independent economic value . . . from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” The plaintiff must prove that the information is not “readily ascertainable” meaning it cannot easily be found in widely available sources such as patents, trade journals, reference books, or other published material, and cannot easily be copied from a product already on the market. Under the DTSA, this is part of the plaintiff’s prima facie case, and defendants should therefore argue that the alleged trade secret is readily ascertainable. And it is ultimately up to the court to decide the question. This is a distinct concept from “reverse engineering,” as explained below. Even where a defendant did not reverse-engineer the alleged trade secret through proper means, the information may still be so easily deciphered that it counts as “readily ascertainable,” which, on its own, defeats a claim of trade secrecy.

The Supreme Court has defined it as “starting with a known product and working backward to divine the process which aided in its development and manufacture.” It is a widely accepted as a legitimate means of discovering trade secret information. Under the DTSA, reverse engineering is a carve-out from the definition of “improper means” and is not addressed in the “readily ascertainable” language of the trade secret definition itself. Reverse engineering is tied to the means of acquisition; “readily ascertainable” goes to whether the information qualifies as a trade secret at all, regardless of how or whether the defendant actually acquired it. Even where a defendant did not reverse-engineer the trade secret through proper means, the information may still be so easily deciphered that it is “readily ascertainable,” which on its own defeats trade secrecy. In contrast, it is also well established that the mere theoretical ability to reverse-engineer a product is not itself a defense to a misappropriation claim; the defense requires more, as discussed below.

The DTSA/CUTSA Burden-of-Proof Divide

While the DTSA and most jurisdictions place the burden on the plaintiff to establish all elements of trade secret protection, including that the information is not readily ascertainable, as part of its prima facie case, California law is different. In California, the defendant bears the burden of proving, as an affirmative defense, that the alleged trade secret was readily ascertainable. California dropped “not readily ascertainable” from its statutory definition of a trade secret because it believed requiring the plaintiff to prove this negative would impose too great a burden. The official comments to the statute make clear, however, that the identical standard remains available to the defendant as an affirmative defense.

The Ninth Circuit noted this crucial distinction and observed that Comet had voluntarily dropped its CUTSA claims to streamline the case for the jury. When the court pressed the parties on how that change should affect the “readily ascertainable” instruction, Comet asserted that this jury instruction should be removed entirely, “claiming quite erroneously that the ‘DTSA does not permit a defendant to avoid liability for misappropriation by showing that it could have found the information some other way.” The district court sided with XP and left the instruction in. Had Comet not dropped its CUTSA claim, the different burden of proof under California law might well have changed the outcome of the appeal. Although the DTSA and CUTSA are identical in most respects, this difference in burden of proof may have been outcome-determinative here.

Practical Considerations for a Reverse Engineering Defense

Because reverse engineering is tied to lawful means of acquisition, an entity relying on this defense should keep two considerations in mind. First, the entity must acquire the product (including software) targeted for reverse engineering through fair and honest means, such as purchase on the open market rather than through improper means. Second, the entity must not infringe any other rights of the trade secret owner in the process, including patent, copyright, and trademark rights.

Tread Carefully After Comet

Comet is a cautionary tale on two fronts. Substantively, it confirms that “readily ascertainable” and “reverse engineering” are related but analytically distinct concepts. The former asks whether information qualifies as a trade secret in the first place, while the latter is a carve-out concerning the lawfulness of how information was acquired. Procedurally, it confirms that under the DTSA, the burden of proving that information is not readily ascertainable rests with the plaintiff, not the defendant, which is the opposite of California’s rule, under which readily ascertainable is an affirmative defense that the defendant must prove. Practitioners litigating parallel DTSA and CUTSA claims should think carefully before dismissing state-law claims to “streamline” a case for trial. The failure to do so may potentially become outcome determinative.

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