trade secret
Trade Secret Law is a form of private IP law under which creators establish contractual limitations or build “legal fences” that afford protection from misappropriation.
Subject matter eligible for protection
Business or technical information of any sort
Information must be secret to be protected by trade secret laws
Owner of a trade secret must take reasonable steps to maintain secrecy.
No definite term of protection but may only be protected for as long as it is kept a secret.
No state agency that issues or registers trade secrets
Courts will find misappropriation in 2 circumstances
Where the secrets were obtained by theft or other improper means
Disclosed in violation of an express or implied agreement to keep the information secret
Does not protect against “reverse engineering”, independent discovery or invention.
Trade Secrets
Definition
“A trade secret may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device or a list of customers.” - Restatement of Torts Section 757, Comment B (1939)
May consist of any formula, pattern, device, or compilation of information which is used in one’s business; AND
Which provides an opportunity to obtain an advantage over competitors; AND
Competitors do not know or use the information (it is a secret).
Justifications for trade secret protections
Property rights
Unfair competition grounded in tort law
Property Rights Justification
Ruckelshaus v. Monsanto Co.
Trade secrets have many characteristics of more tangible forms of property
Assignable, can form the res of trust, and passes to a trustee in bankruptcy
Treatment as property rights vested in the trade secret “owner” is consistent with a view of trade secrets law as providing an additional incentive to innovate beyond that provided by patent law
Encourages innovation beyond what a patent can protect
“It is the policy of the law, for the advantage of the public, to encourage and protect invention and commercial enterprise”
Justice Gray
First asks whether there is a property right to be protected at all?
Tort Law Justification
Trade secret law has long been grounded in what has been termed “commercial morality”
Must protect for breaches of confidence
Encourages good faith dealings in commerce
Aimed at deterring immoral acts in commerce
Focuses on the infringement
i.e. did the defendant do something wrong?
Contracts
Many trade secret cases arise out of a duty explicitly stated in a contract (license or employment agreement)
Trade secrets may be valuable because they give parties something to transact over
Trade secret law establishes a right to protect that information against misuse once it is disclosed even in the absence of an express contract
Modern Trade Secret Protections
State statutes are generally the basis for trade secret laws
Other IP protections are federal
The Uniform Trade Secrets Act (UTSA) unified trade secret protection notwithstanding its predominately state law foundation
Federal law defines secrecy somewhat broadly, but still is narrower than the UTSA
Limits the reach of the law to only certain types of information
Defend Trade Secrets Act (2016) and Economic Espionage Act (1996)
Concurrent jurisdiction from federal laws, but the more robust system came from the states
Rockwell Graphic v. DEV Indus.
Facts
RGS and DEV were competing manufacturers
When RGS needed parts sometimes they would buy them from outside vendors
RGS provided the vendors with a piece-part drawing to get the exact part that they needed
Rather than patenting these drawings they kept them in a vault
They required all engineers to keep it private
Fleck and Peloso worked at RGS and then later Fleck became president of DEV and Peloso was fired for being caught by security trying to steal the drawings in the vault
Peloso then went to work for DEV.
Rockwell sued DEV and Fleck, alleging misappropriation of trade secrets and other claims.
During discovery, Rockwell learned DEV possessed 100 of Rockwell’s confidential piece-part drawings.
DEV claimed to have obtained Rockwell’s drawings lawfully. DEV also argued that Rockwell’s piece-part drawings were not protectable trade secrets, because Rockwell provided the drawings to numerous vendors and did not strictly control possession or copying of the drawings.
The district court granted summary judgment to DEV, finding that Rockwell did not take reasonable steps to maintain the secrecy of the drawings.
Rule
The owner of a trade secret does not forfeit protection by providing the trade secret to outside vendors
Analysis
RGS took protections to protect their trade secret
Made employees sign NDAs
Kept plans in a vault
Only gave plans to necessary vendors, who were required to sign NDAs and confidentiality agreements
No disclosure, or limited disclosure (including confidentiality and NDAs)
Physical precautions
Restrict access using a locked vault, security guards, or signs prohibiting entrance to an area
Stamp documents “confidential” or “trade secret”
Design products to protect against reverse engineering (so that someone cannot reasonably ((ass)certain the secret)
Conduct exit interviews with departing employees and remind them of their agreement to maintain confidentiality of trade secrets
Get a protective order during any type of litigation and file documents containing trade secrets under seal
Maintaining total secrecy can be expensive or unreasonable
Trade Secret Claim & Elements
Subject Matter: The subject matter involved must qualify for trade secret protection
It must be the type of information or knowledge that trade secret law was meant to protect and it must not be generally known to all
Reasonable Efforts: The holder of the trade secret must have taken reasonable precautions under the circumstances to prevent disclosure
Cost of obtaining trade secret protections will vary depending upon what the reasonable efforts are to keep the information a secret
Economic Value: Information derives actual or potential independent economic value
Not Generally Known: Competitors or others who can benefit from it do not know about it
Wrongfulness: The defendant acquired the information wrongfully
i.e the defendant misappropriated the trade secret
Not readily ascertainable through proper means
Reverse engineering is okay as long as the secret is ascertained through proper means (such as a product that is sold on the open market)
Limitation
Express immunity for whistleblowers, employees, and contractors who disclose suspected illegal activity to the government and to their attorney confidentially
Duration/Disclosure of Trade Secrets
Duration
As long as a trade secret remains secret, it is protectable
Ends when a secret becomes generally known to those in the industry
Trade secrets do not last for a specific term of years
They last until and unless the secret is made public
Voluntary Disclosure
Patents
Academic journals
Exception: When someone else publicizes the trade secret after stealing it
Distributing a Product that Embodies the Trade Secret to the Public
If a product possesses a trade secret, the publicized sale may jeopardize the secret if it becomes readily available
Even if not readily available, could be jeopardized during the manufacturing or development process
Question on if the secret has been disclosed turns on whether the secret is apparent from the product
Secrets contained in an indecipherable form within the product are considered secret even when the product is sold
Whether or not it does depends on how easy it is to discern the secret from the product
Does not protect against reverse engineering
Public Disclosure by a Third Party
Commonly occurs when someone other than the trade secret owner has independently developed or discovered the secret
Inadvertent Disclosure
Truly accidental disclosures should not defeat trade secret protection if reasonable precautions have been taken
Though the case law is sparse on this
Government Disclosure
Government agencies sometimes require the disclosure of trade secrets by private parties in order to serve some other social purpose
Misappropriation of Trade Secrets
Acquisition or use of a trade secret is illegal only in two situations:
Where it is done through improper means
Where it involves a breach of confidence
Elements:
P owns a valid and protectable trade secret
This information was a trade secret at the time of misappropriation
D improperly acquired, disclosed, or used the P’s trade secret(s)
P was harmed or D was unjustly enriched by the conduct
D’s improper acquisition, disclosure, or use of P’s trade secret was a substantial factor in causing P’s harm or D’s unjust enrichment (i.e. causation)
Improper Means
Use of physical force to take trade secret
Breaking into an office to steal a trade secret
Fraudulent misrepresentation
Tapping of telephone wires
Eavesdropping
Other espionage
A complete catalog is not possible
Means which fall below the generally accepted standards of commercial morality and reasonable conduct
E. I. du Pont deNemours & Co. v. Christopher
Rule: The discovery of trade secrets by any improper means is wrongful and constitutes a cause of action
Facts:
Christopher (defendant) was hired by an unknown third party to take aerial photographs of a DuPont (plaintiff) methanol plant under construction in Texas.
The plant contained equipment to produce methanol using a new process invented by DuPont, which it was carefully keeping secret.
The plant was unfinished, and Christopher could see the equipment from the airplane.
DuPont argued that Christopher's photographs contained enough information to enable a skilled person to discover its secret methanol-making process.
DuPont sued Christopher for misappropriation of trade secrets.
Christopher filed a motion to dismiss the case for failure to state a claim.
The court denied Christopher's motion to dismiss.
Christopher appealed the decision.
Reasoning:
No need for trespass, illegal conduct, or breach of a confidential relationship for trade secret appropriation to be wrongful.
Texas adopted the Restatement of Torts (1939), which allows for a cause of action if a trade secret is acquired by "improper" means.
Proper ways to discover trade secrets include reverse engineering or independent research.
It is improper to ascertain a competitor's secret process when they are taking reasonable precautions to keep it confidential.
Christopher argued that flying in public airspace, taking pictures, and sharing them with a third party, without breaching confidentiality or trespassing, should not be considered misappropriation.
However, DuPont took reasonable precautions to protect its methanol-making process.
Christopher's method of obtaining the trade secret was deemed improper under the Restatement.
Christopher's actions were considered improper industrial espionage, making him liable for misappropriation.
Confidential Relationships
A confidential relationship is established if:
The person made an express promise of confidentiality prior to the disclosure of the trade secret; or
The trade secret was disclosed to the person under circumstances in which the relationship between the parties to the disclosure or other facts surrounding the disclosure justify the conclusions that, at the time of the disclosure,
The person knew or had reason to know that the disclosure was intended to be in confidence, and
The other party to the disclosure was reasonable in inferring that the person consented to an obligation of confidentiality
Departing Employees
Fundamental clash of rights between the employee’s mobility and ability to pursue gainful employment and a former employer’s protection of its trade secrets
Courts must also consider the economic factors
Since trade secret requires an assessment of the competitive advantage a particular item of information affords a business
Elements:
Value of the information to its owners and competitors
The ease or difficulty with which the information may be properly acquired or duplicated
Confidentiality and Use of Trade Secrets
Nearly all employees are required to sign confidentiality (or nondisclosure) agreements
Agreements generally recite that the employee will receive confidential information during their employment and that they need to undertake steps to keep that information secret
There is a confidential relationship in most employee cases
Even when there is no express nondisclosure, courts have implied one
Employers sometimes attempt to limit an employee’s use of information that does not constitute a trade secret
The majority of courts have held that “reasonable” contract restrictions on use or disclosure of information by employees are enforceable even in the absence of a protectable trade secret
Ownership of Employee Inventions
The Common Law Obligation to Assign Inventions
At common law, if there is no contract, ownership of inventions was determined according to an employee’s status under a long line of common law cases
Employees Hired to Invent
Employer owns the invention
Employees Who Invent on the Employer’s Time or Using Its Resources
Employee owns the invention, but the employer is compensated by receiving a limited right to practice the invention
Employee’s Independent Invention
Employee owns the invention
Assignment Agreements
Many companies require employees to assign inventions made during their employment to the employer
These agreements are generally enforceable
In some cases, assignment agreements extend to all inventions made by an employee regardless of whether the employer’s facilities were used, etc
Inevitable Disclosure Doctrine
Disclosure of trade secret is “inevitable” so the court should enjoin the former employee from working for the competitor
Threat of misappropriation if employee has high-level position and extensive knowledge of specific plans and processes (PepsiCo v. Redmond (7th Cir. 1995))
Comes up in cases where the trade secret misappropriation is difficult to prove
Remedy
Court may grant a limited injunction preventing employment with competitor
Rejected by California courts and other states that favor employees but if misappropriation is likely, court may issue a limited injunction
Federal DTSA did not adopt this rule
To prove threatened misappropriation, need evidence of conduct and intent
Remedies
Injunctions
Winston Research Corp. v. 3M Corp.
Rule: An injunction is appropriate for a misappropriation of a trade secret for as long as it would take a third party competitor to develop a similar product after public disclosure of the secret information
Facts:
Mincom (plaintiff) created a new and improved “servo” system that enhanced the functionality of tape players and recorders.
Before the machine went to market, Johnson, who led Mincom’s research and development program, left the company and started Winston Research Corp. (Winston) (defendant).
Winston hired former Mincom technicians and, within just over a year, created a machine with the same functionality as Mincom’s machine.
Mincom sued Winston for misappropriation of trade secrets.
The district court found that Winston had misappropriated Mincom’s trade secrets.
The district court granted Mincom a two-year injunction, preventing Winston from selling its newly created machine.
The two-year duration was based on the reasoning that Mincom's trade secret would soon be public once the machine went to market, and it would take about two years for a third-party competitor to develop a similar machine based on that information.
Mincom appealed, seeking a permanent injunction and money damages.
Winston appealed, seeking to have the injunction vacated.
Reasoning:
An injunction is appropriate for a misappropriation of a trade secret for as long as it would take a third-party competitor to develop a similar product after the secret information is publicly disclosed.
A permanent injunction is against public policy because it would prevent employees of the trade secret holder from fully utilizing their skills and knowledge.
Denying an injunction entirely would unfairly reward the misappropriating party by giving them an undue advantage over other competitors before the secret becomes public.
In this case, a temporary injunction is appropriate for as long as it would take a competitor of Mincom to reproduce a similar machine after Mincom's machine goes public.
The court agrees with the district court's finding that two years is an appropriate time period for the injunction.
The court also determines that money damages are inappropriate.
Awarding money damages, such as those based on Winston's future profits, while enjoining Winston from selling the machines, would be inconsistent.
Head Start Injunction
What is the best length of time for an injunction?
Has a trade secret been disclosed/when will it be disclosed to the public?
What is the approximate period it would require a legitimate competitor to develop a successful product after public disclosure of the secret information by reverse engineering?
Damages and Disgorgement
The UTSA provides for damages adequate to compensate for infringement
Also allow for the disgorgement of defendant’s profits from the misappropriation to the extent they are not taken into account in the damages award
Damages
A plaintiff is entitled to recover as damages any economic losses they suffer as a result of the infringement
Plaintiff must prove the harm, it is not enough to speculate that the plaintiff would have succeeded in a new market but for the infringer’s competition
Can recover for the value of the trade secret only if the defendant’s acts destroyed the secret
Disgorgement
Plaintiff can also recover for unjust enrichment
Designed to deter misappropriation by depriving a defendant of ill-gotten gains, even if those gains exceed what the plaintiff itself could have made
A jury trial may be available on damages, but this is equitable relief decided by a judge
Royalties
Even if an injunction is not possible and a plaintiff can’t show lost profits, courts may allow the defendant to continue using the former secret but require them to pay a “reasonable royalty”
State/Federal Criminal Trade Secret Statutes
Misappropriation of trade secrets is not only a tort, in some circumstances it is a crime