Trade secret

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information not generally known or reasonably ascertainable by others by which a business can obtain an economic advantage over competitors or customers.^[1] In some jurisdictions, such secrets are referred to as "confidential information" but are generally not referred to as "classified information" in the United States, since that refers to government secrets protected by a different set of laws and practices.

Definition

The precise language by which a trade secret is defined varies by jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that, although subject to differing interpretations, are common to all such definitions: a trade secret is information that:

• Is not generally known to the public;
• Confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being publicly known, not just from the value of the information itself);
• Is the subject of reasonable efforts to maintain its secrecy.

These three aspects are also incorporated in the TRIPS Agreement in Article 39.^[2]

By comparison, under U.S. law, "A trade secret, as defined under 18 U.S.C. § 1839(3) (A), (B) (1996), has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being publicly known".^[3]

Value

Trade secrets are an important, but invisible component of a company's intellectual property (IP). Their contribution to a company's value, measured as its market capitalization, can be major.^[4] Being invisible, that contribution is hard to measure.^[5] Patents are a visible contribution, but delayed, and unsuitable for internal innovations. Having an internal scoreboard provides insight into the cost of risks of employees leaving to serve or start competing ventures.

Protection

In contrast to registered intellectual property, trade secrets are, by definition, not disclosed to the world at large. Instead, owners of trade secrets seek to protect trade secret information from competitors by instituting special procedures for handling it, as well as technological and legal security measures.^[6] Legal protections include non-disclosure agreements (NDAs), and work-for-hire and non-compete clauses. In other words, in exchange for an opportunity to be employed by the holder of secrets, an employee may sign agreements to not reveal their prospective employer's proprietary information, to surrender or assign to their employer ownership rights to intellectual work and work-products produced during the course (or as a condition) of employment, and to not work for a competitor for a given period of time (sometimes within a given geographic region). Violation of the agreement generally carries the possibility of heavy financial penalties which operate as a disincentive to reveal trade secrets. However, proving a breach of an NDA by a former stakeholder who is legally working for a competitor or prevailing in a lawsuit for breaching a non-compete clause can be very difficult.^[7] A holder of a trade secret may also require similar agreements from other parties he or she deals with, such as vendors, licensees, and board members.

As a company can protect its confidential information through NDA, work-for-hire, and non-compete contracts with its stakeholders (within the constraints of employment law, including only restraint that is reasonable in geographic- and time-scope), these protective contractual measures effectively create a perpetual monopoly on secret information that does not expire as would a patent or copyright. The lack of formal protection associated with registered intellectual property rights, however, means that a third party not bound by a signed agreement is not prevented from independently duplicating and using the secret information once it is discovered, such as through reverse engineering.

Green Chartreuse liqueur protected by confidential information of the ingredients

Therefore, trade secrets such as secret formulae are often protected by restricting the key information to a few trusted individuals. Famous examples of products protected by trade secrets are Chartreuse liqueur and Coca-Cola.^[8]

Because protection of trade secrets can, in principle, extend indefinitely, it therefore may provide an advantage over patent protection and other registered intellectual property rights, which last only for a specific duration. The Coca-Cola company, for example, has no patent for the formula of Coca-Cola and has been effective in protecting it for many more years than the 20 years of protection that a patent would have provided. In fact, Coca-Cola refused to reveal its trade secret under at least two judges' orders.^[9]

Misappropriation

Companies often try to discover one another's trade secrets through lawful methods of reverse engineering or employee poaching on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws, and penalties can be harsh.^[10] The importance of that illegality to trade secret law is: if a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), then the secret is generally deemed to have been misappropriated. Thus, if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for having acquired it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. Under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)

History

Roman law

Commentators starting with A. Arthur Schiller assert that trades secrets were protected under Roman law by a claim known as actio servi corrupti, interpreted as an "action for making a slave worse" (or an action for corrupting a servant). The Roman law is described as follows:

[T]he Roman owner of a mark or firm name was legally protected against unfair usage by a competitor through the actio servi corrupti ... which the Roman jurists used to grant commercial relief under the guise of private law actions. "If, as the writer believes [writes Schiller], various private cases of action were available in satisfying commercial needs, the state was acting in exactly the same fashion as it does at the present day."^[11]

The suggestion that trade secret law has its roots in Roman law was introduced in 1929 in a Columbia Law Review article called "Trade Secrets and the Roman Law: The Actio Servi Corrupti", which has been reproduced in Schiller's, An American Experience in Roman Law 1 (1971). See Trade Secrets and Roman Law: The Myth Exploded, at 19. However, the University of Georgia Law School professor Alan Watson argued in Trade Secrets and Roman Law: The Myth Exploded that the actio servi corrupti was not used to protect trade secrets p. 19. Rather, he explained:

Schiller is sadly mistaken as to what was going on. ... The actio servi corrupti presumably or possibly could be used to protect trade secrets and other similar commercial interests. That was not its purpose and was, at most, an incidental spin-off. But there is not the slightest evidence that the action was ever so used. In this regard the actio servi corrupti is not unique. Exactly the same can be said of many private law actions including those for theft, damage to property, deposit, and production of property. All of these could, I suppose, be used to protect trade secrets, etc., but there is no evidence they were. It is bizarre to see any degree the Roman actio servi corrupti as the counterpart of modern law for the protection of trade secrets and other such commercial interests.^[11]

19th century

Trade secret law as we know it today made its first appearance in England in 1817 in Newbery v. James,^[12] and in the United States in 1837 in Vickery v. Welch.^[13][14] While those cases involved the first known common law causes of action based on a modern concept of trade secret laws, neither involved injunctive relief; rather, they involved damages only.^[14] In England, the first case involving injunctive relief came in 1820 in Yovatt v Winyard,^[15] while in the United States, it took until the 1866 case Taylor v. Blanchard.^[16][17]

Trade secrets law continued to evolve throughout the United States as a hodgepodge of state laws. In 1939, the American Law Institute issued the Restatement of Torts, containing a summary of trade secret laws across states, which served as the primary resource until the latter part of the century. As of 2013, however, only four states—Massachusetts, New Jersey, New York, and Texas—still rely on the Restatement as their primary source of guidance (other than their body of state case law). It has also been recently theorized that the doctrine of trade secrets should protect competitively valuable, personal information of company executives, in a concept known as "executive trade secrets".

Current regulation

European Union

The EU adopted a Directive on the Protection of Trade Secrets on 27 May 2016.^[18]

Commonwealth jurisdictions

In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an equitable right rather than a property right (with the exception of Hong Kong where a judgment of the High Court indicates that confidential information may be a property right). The Court of Appeal of England and Wales in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd^[19] held that the action for breach of confidence is based on a principle of preserving "good faith". See Breach of confidence in English law.

The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd:^[20]

• The information itself must have the necessary quality of confidence about it;
• That information must have been imparted in circumstances imparting an obligation of confidence;
• There must be an unauthorized use of that information to the detriment of the party communicating it.

The "quality of confidence" highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as breaking and entering), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them.

A successful plaintiff is entitled to various forms of judicial relief, including:

• An injunction
• An account of profits or an award of damages
• A declaration

United States

Although trade secrets law evolved under state common law, prior to 1974, the question of whether patent law preempted state trade secrets law had been unanswered. In 1974, the United States Supreme Court issued the landmark decision, Kewanee Oil Co. v. Bicron Corp., which resolved the question in favor of allowing the states to freely develop their own trade secret laws.^[21]

In 1979 several U.S. states adopted the Uniform Trade Secrets Act (UTSA), which was further amended in 1985, with approximately 47 states having adopted some variation of it as the basis for trade secret law.^[22] Another significant development is the Economic Espionage Act (EEA) of 1996 (18 U.S.C. §§ 1831–1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C. § 1831(a), criminalizes the theft of trade secrets to benefit foreign powers.The second, 18 U.S.C. § 1832, criminalizes their theft for commercial or economic purposes. (The statutory penalties are different for the two offenses.) The EEA was extended in 2016 to allow companies to file civil suits in federal court.^[23]

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA), 18 U.S.C.§§1839 et seq., which for the first time created a federal cause of action for misappropriating trade secrets.^[24] The DTSA provides for both a private right of action for damages and injunction and a civil action for injunction brought by the Attorney General.^[25] The statute followed state laws on liability in significant part, defining trade secrets in the same way as the Uniform Trade Secrets Act as "all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) 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." However, the law contains several important differences from prior law. First, because it is a federal law, trade secret cases can be prosecuted in federal courts with concomitant procedural advantages. Second, it provides for the unusual remedy of preliminary seizure of "property necessary to prevent the propagation or dissemination of the trade secret," 18 U.S.C. §1836. Third, it provides for remedies to include royalties in appropriate cases and exemplary damages up to two times the actual damages in cases of "willful and malicious" appropriation, 18 U.S.C. §1836(b)(3). The DTSA also clarifies that a United States resident (including a company) can be liable for misappropriation that takes place outside the United States, and any person can be liable as long as an act in furtherance of the misappropriation takes place in the United States, 18 U.S.C. §1837. The DTSA does not preempt or supplant state laws, but provides an additional cause of action. The DTSA provides the courts with broad injunctive powers. 18 U.S.C. §1836(b)(3). Because states vary significantly in their approach to the "inevitable disclosure" doctrine,^[26] its use has limited, if any, application under the DTSA, 18 U.S.C.§1836(b)(3)(A).^[27][28]

Comparison to other types of intellectual property law

In the United States, trade secrets are not protected by law in the same manner as patents or trademarks. Specifically, trademarks and patents are protected under federal statutes, the Lanham Act and Patent Act, respectively. In contrast, trade secrets are protected under state laws, and most states have enacted the Uniform Trade Secrets Act (UTSA), except for Massachusetts, New York, and North Carolina. One of the differences between patents and trademarks, on the one hand, and trade secrets, on the other, is that a trade secret is protected only when the secret is not disclosed.

Comparison with trademarks

To acquire rights in a trademark under U.S. law, one must simply use the mark "in commerce".^[29] It is possible to register a trademark in the United States, both at the federal and state levels. (Registration of trademarks confers some advantages, including stronger protection in certain respects, but it is not required in order to get protection.)^[29] Registration may be required in order to file a lawsuit for trademark infringement. Other nations have different trademark policies and this information may not apply to them. Assuming the mark in question meets certain other standards of protectibility, it is protected from infringement on the grounds that other uses might confuse consumers as to the origin or nature of the goods once the mark has been associated with a particular supplier. (Similar considerations apply to service marks and trade dress.) By definition, a trademark enjoys no protection (qua trademark) until and unless it is "disclosed" to consumers, for only then are consumers able to associate it with a supplier or source in the requisite manner. (That a company plans to use a certain trademark might itself be protectible as a trade secret, however, until the mark is actually made public.)

Comparison with patents

To acquire a patent, full information about the method or product has to be supplied to the patent office and upon publication or issuance, will then be available to all. After expiration of the patent, competitors can copy the method or product legally. The temporary monopoly on the subject matter of the patent is regarded as a tradeoff for thus disclosing the information to the public.

One popular misconception held by many is that trade secret protection is incompatible with patent protection. It is typically said that if one applies for a patent one can no longer maintain a trade secret on the invention, but this is an oversimplification.^[30] It is true that in order to obtain a patent one must disclose your invention so that others will be able to both make and use the invention, and, to obtain a patent in the United States, any preferences must likewise be disclosed.^[31] What is typically not appreciated though is that the critical time for satisfying this disclosure requirement is at the time the application is filed. In many if not most situations, improvements will be made to an invention even after filing of the patent application, and additional information will be learned. None of this additional information must be disclosed and can instead be kept as a secret.^[32] Virtually all patent licenses include clauses that require the inventor to disclose any trade secrets they have. Frequently it is this information not disclosed in the patent that is the most commercially viable. Thus, patent licensors should take steps to continue to maintain trade secrets as secrets, otherwise they will be lost. Accordingly, before disclosing any secrets not already protected by an issued patent the licensor will use a non-disclosure agreement.

Compared to patents, the advantages of trade secrets are that a trade secret is not limited in time (it "continues indefinitely as long as the secret is not revealed to the public", whereas a patent is only in force for a specified time, after which others may freely copy the invention), a trade secret does not imply any registration costs,^[33] has an immediate effect, does not require compliance with any formalities, and does not imply any disclosure of the invention to the public.^[33] The disadvantages of trade secrets include that "others may be able to legally discover the secret and be thereafter entitled to use it", "others may obtain patent protection for legally discovered secrets", and a trade secret is more difficult to enforce than a patent.^[34]

Criticism

Trade secret regulations that mask the composition of chemical agents in consumer products have been criticized for allowing the trade secret holders to hide the presence of potentially harmful and toxic substances. It has been argued that the public is being denied a clear picture of such products' safety, whereas competitors are well positioned to analyze its chemical composition.^[35] In 2004, the National Environmental Trust tested 40 common consumer products; in more than half of them they found toxic substances not listed on the product label.^[35]

Cases

• Data General Corp. v. Digital Computer Controls, Inc., 297 A.2d 433 (Del. Ch. 1971): protection and disclosure of design documents.
• Rivendell Forest Prods. v. Georgia-Pacific Corp., 28 F.3d 1042: trade secrets and software systems.
• IBM v. Papermaster (No. 08-9078, 2008 U.S. Dist): Mark Papermaster moving from IBM to Apple computer in 2008.
• Du Pont de Nemours and Company v. Kolon Industries Incorporated, Nos. 10-1103, 10-1275. U.S. Court of Appeals for the Fourth Circuit. Argued Oct. 26, 2010–March 11, 2011.^[36] trade secrets case involving Kevlar fiber, resulting in award to DuPont of ~US$920 million.^[37][38][39]
• Silvaco Data Systems v. Intel Corp. addressed the question of whether possession of software object code can result in misappropriation of trade secrets
• Christou v. Beatport, LLC constituted that MySpace profiles could be held as trade secrets.

See also

• Biswamohan Pani, charged in 2008 with stealing $1 billion worth of trade secrets from Intel
• Data breach
• Data General Corp. v. Digital Computer Controls, Inc. addressing secrecy given widespread disclosure
• Glossary of legal terms in technology
• Trade secrets in Canada

Notes

Further reading

• Eiichiro Kubota: Protection of Trade Secrets in Japan. A.I.P.P.I. (Journal of International Association for the Protection of Intellectual Property of Japan) 36(5), 231 - 238 (2011), ISSN 0385-8863
• Economic Espionage and Trade Secrets, U.S. Attorneys' Bulletin (2009).
• "Chapter 15: Trade Secrets and Confidential Relations". The Law of Unfair Business Competition. Baker, Voorhis. 1909. 
• Protecting trade secrets under the Uniform Trade Secrets Act. Greenwood Publishing Group. 1996. ISBN 978-1-56720-016-4. 
• Rockman, Howard B. (2004). "25.3: Nature of a Trade Secret". Intellectual property law for engineers and scientists. Wiley-IEEE. ISBN 978-0-471-44998-0. 
• Becker, Susan J. (2005). "Chapter 13: Trade Secrets and Confidential Commercial Information". Discovery from Current and Former Employees. American Bar Association. ISBN 978-1-59031-485-2. 
• Epstein on intellectual property. Aspen Publishers Online. 2004. ISBN 978-0-7355-0319-9. 
• "Trade Secrets". International guide to privacy. American Bar Association. 2004. ISBN 978-1-59031-333-6. 
• Snider, Jerome G.; Ellins, Howard A. (2006). "Chapter 8: Trade Secrets and Business Strategy". Corporate Privileges and Confidential Information. Law Journal Press. ISBN 978-1-58852-087-6. 
• "Chapter 7: Misappropriation of Trade Secrets". Business torts & unfair competition. American Bar Association. 1996. ISBN 978-1-57073-294-2. 
• "Chapter 4: Misappropriation of Trade Secrets (Massachusetts focused)". Intellectual Property Practice. MCLE, Inc. (chapter by Russell Beck). November 2004. ISBN 1-57589-291-X. 

External links

• Economic Espionage - FBI Launches Nationwide Awareness Campaign
• Teaching industry how to protect trade secrets and national security, FBI