Intellectual Property - Trade Secrets

Trade Secret definition

Information that

1. has economic value from not being generally known or readily ascertainable, and

2. the owner takes reasonable steps to keep it secret

rewards secrecy, not disclosure

Examples of Trade Secret

• computer software

• sales information

• customer information

• manufacturing formulas

The law

Mainly state law - Uniform Trade Secrets Act (UTSA adopted by 48 states, except NY and MA)

Defend Trade Secrets Act - Creates a federal civil cause of action for trade secrets affecting interstate commerce

Advantages of Trade Secret

1. Provides indefinite future protection (no definite time limit)

2. No registration or filing costs

3. No public disclosure required

4. Can protect customer lists, algorithms, and processes

5. No Novelty requirement

Disadvantages of Trade Secrets

1. No protection against reverse engineering or independent creation

2. One leak and the secret is gone forever

3. Protection prohibits only the disclosure or use of the trade secret by one to whom the secret was disclosed in confidence

Example of a NON trade secret

Information that is not generally known by the public but is known by different manufacturers in the same industry likely does not qualify as a trade secret 

What's a secret

Information which is not generally known, and not readily ascertainable

If generally known OR readily ascertainable, then it is not a trade secret.

The Two Part test

1. Secret Value

   1. derives independent economic value specifically from not being generally known

2. Reasonable efforts

   1. owner must take real steps to protect secret — not just claim intent

why are protection plans necessary

So employees are made aware of the TS status and employees are reminded of their confidentiality obligations

• protection is reactive — it only exists once misappropriation is proven

Types of Protection Plans

• Written policy

• confidentiality agreement

• restricted access

• document labeling (RED confidential sign)

• exit interviews

• review before publications

Passive Disclosure

Carelessly leaving documents containing trade secrets in open view when business associates from another company visit your facility

• leaving a folder out somewhere

Active Disclosure

During a guided tour of the facility when a tour guide reveals the nature of a project/process the company is working on

• never discuss at lunch, elevator, hallway, or train because you never know who is listening

When does something have value? (6)

1. Clear or obvious value to plaintiff's business

2. Expert testimony says so

3. Costly to develop or maintain

4. Others license the use of it

5. Security measures to protect it are expensive

6. Trade secret was improperly acquired

How to lose trade secret protection

Public disclosure

By yourself (e.g., publishing information, sell product where secret is apparent from the product, inadvertent disclosure)

By another (e.g., independent creation, reverse engineering)

Does not matter whether disclosure was reasonable, accidental, or in breach of a duty of confidentiality

Trade Secret Misappropriation (two ways)

1. acquisition of a trade secret through IMPROPER means

2. Disclosure or use of a TS without consent; UNAUTHORIZED use

Misappropriation through improper means

• Breach of a confidential relationship

• Theft or bribery

• espoinage

• Inducement of a breach of duty to maintain secrecy

Misappropriation by disclosure or unauthorized use

if you posses, disclose, or use a TS that you know or have a reason to know is not intended to be revealed to you

• using/sharing a secret you know wasn’t meant for you; it applies even if you received by accident

NOT misappropriation if

• Independent creation/development

• reverse engineering

• information is found on the product

Direct Evidence

TS owner can demonstrate that action has already been taken or words have already been spoken (RARELY exists)

• directly proves a fact — eyewitness, video or audio, written confession

Circumstantial Evidence

Implies something occurred but does not directly prove it (assumption)

• There is an intent of a party to elicit wrongful disclosure

• Wrongful disclosure is inevitable despite intentions

Ex) Possessing stolen property, DNA at crime scene, a motive to commit crime

based on circumstantial evidence a court can …

Issue an injunction prohibiting the misappropriation of TS solely based on circumstantial evidence that indicates such activity is imminently likely to occur

Types of Trade secret disclosures

• Voluntarily disclosure by owner

  • publication of academic journals or public forum

  • filing for a patent

• product distribution

  • selling product that embodies the secret

Remedies Available for the misappropriation

• statutory damages

• injunctive relief

• damages

• exemplary damages

• attorney fees

Injunctive relief

remedy that allows the owner of a TS to obtain a court order prohibiting the actual or threatened misappropriation of TS

• A company learns that a former employee is about to disclose its secret process; an injunction aims to stop that

Damages

measured by the actual loss + unjust enrichment of the misappropriator; if no calculation is made, measured by the imposition of a reasonable royalty

Exemplary damages

• A remedy that is intended to deter the defendant from engaging in similar conduct 

• up to 2x for willful conduct

Attorney fees

A bad faith claim of misappropriation, a bad faith resistance to a motion to terminate an injunction, or a finding of willful and malicious appropriation are exceptional circumstances 

Noncompete agreement

Enforceable/lawfu only if

1. Ancillary to a legitimate contract

   1. Secondary agreement that is tied to a lawful main business deal (can’t sell a bakery and open one 2 miles down for 2 years )

2. Protects a legitimate business interest

3. Reasonable in Scope

Reasonableness standard in contract law

only if scope is no broad than necessary to protect the promisee’s legitimate interest

• balancing test: weigh the interest being protected against the burden on restricted party and public interest

• no fixed formula

Sale of Business contracts

• protects the goodwill the buyer paid for, along w/ building and inventory

• time and geography must be no broader than necessary to protect that good will

ex) barring a grocery seller from competing in Kalispell, MT for one year is reasonable — statewide for a year is not.

Employee contracts

must protect the employer w/out being unreasonably excessive to the employee

time: rarely enforced beyond two year, even one year can fail in fast moving industries

geography/customers: cannot excess the employers market area or the customers the employee served

Activity restrictions

restrictions can also target the type of work, not just the time or place

• a marketer moving to a competitors finance role poses little threat to the employer

blue pencil rule

most courts rewrite an overly broad noncompete to reasonable terms rather than just voiding it

• willingness to strike unreasonable clauses from a non-compete agreement, leaving the rest to be enforced

Where TS meets with NIL economy

• NIL valuation algorithms

• recruiting and compliances DBs

• biometric & performance data

• roster and analytics models

Negative Know How

valuable knowledge about what doesn’t work —> failed approaches “blind alleys.” Knowing that a method fails can save a competitor the time and money of trying it.