Trade Secret Basics

Trade secrets protect information. Unlike other intellectual property areas, trade secrets are (unsurprisingly) not meant for public disclosure. They are not meant to promote the progress of science or the useful arts. Rather, trade secrets are commercial in nature and are based on the freedom to contract.

Among the areas of intellectual property law, trade secret law is relatively straightforward. However, differences among state laws as well as federal law warrant attention to detail for any business considering enforcement of its trade secret rights.

What is a Trade Secret?

A trade secret is information that is not generally known to all, that has actual or potential independent commercial value, and that is maintained in secret through reasonable efforts by the trade secret owner. Only when all three factors are present may information be a trade secret.

Until May 2016, trade secrets were only enforceable by state law. With the signing of the Defend Trade Secrets Act of 2016 (DTSA), federal law now also enforces trade secrets. The DTSA primarily reflects the Uniform Trade Secrets Act, a model statute that the vast majority of states and the District of Columbia have adopted in some form.

What Can Be Protected?

Trade secret law protects information with commercial value, including formulas, patterns, compilations, programs, devices, methods, techniques, or processes. Classic examples of a trade secret include a customer list or a commercially valuable recipe (e.g., Coca-cola’s cola recipe).

To be a trade secret, information does not need to be strictly novel. It does, however, need some “modicum of originality” such that it is beyond everyday knowledge.

What Are The Legal Requirements For Protection?

Unlike for patents, copyrights, and trademarks, there is no registration or application available to obtain legal protection for a trade secret. A trade secret, after all, is a secret. No government agency administers, records, or registers trade secrets.

Nonetheless, a trade secret must satisfy three requirements to qualify for legal protection: (1) it cannot be generally known to all; (2) it must have actual or potential independent commercial value; and (3) reasonable efforts must be taken to keep the information a secret.

NOT KNOWN TO ALL. The first factor requires the information to be secret. Generally, this means that the information is undisclosed or limited to a few independent people.

Absent misappropriation, once a trade secret is public, it generally loses protection – in other words, it cannot be enforced. The secrecy of a trade secret can be destroyed through a variety of ways, for example, by distribution (such as providing the secret to vendors without restriction), commercial sale (especially if the secret is easily reverse-engineered), publication (such as by someone who discovered the secret), accident (such as forgetting confidential documents on the train), or government mandate (such as labeling requirements by the U.S. Food and Drug Administration). Ownership of a valid trade secret is one of the key elements to obtaining trade secret protection. Therefore, keeping the information secret is crucial.

COMMERCIAL VALUE. The second factor requires value in both information and secrecy. In other words, in addition to being valuable in and of itself, the information must derive its commercial value from its secrecy. It is the secrecy of the information that gives the trade secret owner a competitive advantage. For example, suppose a manufacturer of XYZ-widgets figures out a manufacturing process that cuts the time to make the widgets by one-half of the average industry time. The process is valuable in and of itself because it is time-efficient. If the manufacturer keeps that process secret – i.e., no other industry players know the process – then it is also valuable because it provides a competitive advantage. As the only one who knows and is implementing the process, the manufacturer is cutting production costs, increasing volume, and benefiting from economies of scale. The information is thus commercially valuable.

REASONABLE EFFORTS. The third factor requires the trade secret owner to use “reasonable efforts” in maintaining the secrecy of the information. This factor varies case-by-case because trade secrets come in various forms and the protections to keep them safe vary based on company, industry practice, and other factors.

One early but famous case drawing the line at what efforts would be reasonable involved industrial espionage. Aerial photographers took photos of a company’s plant that was under construction and sold it to a competitor. The company had a highly secret process in producing methanol that gave it a competitive advantage, and although the plant was under construction, an expert would have been able to figure out the secret process by viewing the photos of the plant from above. The company thus sued the photographers. In their defense, the photographers essentially claimed that the company’s process was not secret because it was visible to the public from above. However, the judge was not persuaded. Building a roof over the entire plant during construction would be too costly – i.e., unreasonable.

Less dramatic examples would include making sure that access to the trade secret is restricted, protected by contract, and monitored. In assessing reasonable efforts, courts generally look for non-disclosure or confidentiality agreements, limits to access, trade secret marking, and other precautionary measures.

How Are Trade Secret Rights Enforced?

As of May 2016, trade secret rights are enforceable in both state and federal court. DTSA, the new federal trade secrets law, does not preempt state law, but it provides trade secret owners the option to sue in federal court among other benefits.

Trade secret rights can only be enforced in court where there is wrongdoing – i.e., misappropriation. Trade secret misappropriation comes in three forms: improper acquisition, improper disclosure, and improper use.

IMPROPER ACQUISITION. Improper acquisition is where a person has taken a trade secret knowing that the trade secret was acquired wrongfully. Examples include theft, deception, fraud, and breach of contract. Improper acquisition also includes bribing or inducing others to wrongfully acquire the trade secret. A common scenario of improper acquisition is where an employee takes a trade secret from his or her employer in disregard of a non-disclosure agreement. Even without an express contract, such an act may be unlawful if the circumstances give the employee reason to know that such an acquisition of the information was improper.

IMPROPER DISCLOSURE. Improper disclosure is where a person, without authorization, publishes a trade secret knowing that the information was wrongfully acquired or knowing or having reason to know that the information should be secret. This can occur where a person comes upon a document marked “secret” or “confidential” and then nonetheless publishes the document’s content on the Internet.

IMPROPER USE. Improper disclosure is where a person, without authorization, uses a trade secret knowing that the information was wrongfully acquired or knowing or having reason to know that the information should be secret. This generally occurs where a person learns about the trade secret and uses it for his or her business. For example, a person enlists a technical employee of a big technology company to start a new business in the same industry. The employee knows the big company’s secret algorithm, which would be helpful to the new business, and the person uses that algorithm to launch the business. In such a case, the person could be sued for improper use of a trade secret.

Under each form of misappropriation, express knowledge is not necessary. A trade secret owner can still enforce its rights if the circumstances surrounding the trade secret suggest that the trade secret was acquired by improper means.

Note that, because knowledge to some extent is required to prove misappropriation, claims against reverse engineering necessarily fail. Unlike patents, trade secret law only protects against misappropriation. If a competitor independently figures out information that is a trade secret – e.g., by buying a product and then taking it apart to find out how it was made or by referencing information in the public domain – then no legal protection will be given.

Remedies

Like in the case of other intellectual property, remedies for trade secret misappropriation include legal and equitable remedies. For legal remedies, an owner can receive actual loss such as lost profits from the sales that the owner would have made but for the misappropriation, compensation for the loss of the trade secret, or unjust enrichment (i.e., any profits the defendant made resulting from the misappropriation). “Exemplary damages” are available for willful and malicious acts of misappropriation.

Equitable remedies primarily include injunctions. Because trade secrets are highly sensitive in nature, a plaintiff may request from the court a temporary restraining order or preliminary injunction to ensure that the information is kept secret throughout the litigation.

Federal law provides remedies in addition to those of state law. The DTSA allows for an ex parte seizure of property in “extraordinary circumstances” to prevent further disclosure of the trade secret. A court will only enter an order for seizure if, among other conditions, the defendant would “destroy, move, hide, or otherwise make such matter inaccessible to the court.”

Defenses

Outside challenging the three elements of a trade secret (i.e., secrecy, commercial value, and reasonable efforts), a common argument against a trade secret claim is the argument that the information was acquired via proper means. Because trade secret law only protects against misappropriation of trade secrets, the lack of misappropriation dooms a trade secret lawsuit.

Defenses arguing for proper means of appropriation generally involve independent invention, including reverse engineering, or appropriation through public means.

INDEPENDENT INVENTION. The key to this defense is that the information used to reverse engineer or independently create the secret was acquired lawfully. For some courts, using prior knowledge or experience to guide one’s reverse engineering is permissible.

PUBLIC MEANS. This defense relies on the argument that the information was already available in public sources. A defendant can claim that the information was available in a prior publication or that the defendant saw the information in public use or display.

With the passing of the DTSA, there is now whistleblower immunity for those who confidentially disclose a trade secret to the government or in court papers. The DTSA protects those who (1) either directly or indirectly discloses in confidence a trade secret to the federal, state, or local government for the sole purpose of reporting or investigating a suspected violation of law or (2) discloses a trade secret in a complaint or other court filing that is made under seal (i.e., out of the public’s view). The law permits employees (including contractors and consultants) to disclose trade secrets in retaliation suits against their employer involving their disclosure of a suspected violation of law. Note that an employer must provide immunity notice provisions in its employment or IP contracts to obtain exemplary damages or attorney fees in trade secret litigation against an employee.

Overall, trade secret law appears relatively simpler than the other areas of intellectual property, especially given that there is no available registration or application process and thus no government body overlooking trade secrets. This means that maintaining a trade secret could be relatively less expensive in some respects and worthy of consideration for certain types of assets. Consideration of each area of intellectual property law, including its nuances, is strongly encouraged to determine which type of protection is suitable for each type of business asset.



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