TRADE SECRETS

TRADE SECRETS

A trade a secret is any piece of information that (a) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. By way of example, a trade secret may be a chemical formula, pattern, compilation, technique, plan, process, device, manufacturing tolerance, computer program, financial data, or vendor or customer information.

Much subject matter is capable of being protected either by a patent or by a trade secret. The types of protection tend to be mutually exclusive. A trade secret depends for its very existence on not being made public, while a patent is by its very nature a disclosure of the subject matter to the public. Patents last only about twenty years from their effective patent application filing dates, while trade secrets last indefinitely, as long as conditions (a) and (b) above obtain.  The legal costs associated with acquiring a patent are much larger than those of protecting a trade secret; the mostly nonlegal, administrative costs in keeping a trade secret protected can be much more substantial than those of a US patent. It is possible to reverse-engineer a trade secret (from public information) without infringement, while it is not possible to do so with a patent. The scope of protection granted by a patent can be much broader than that afforded by a trade secret. On the other hand, the kinds of subject matter protectable as trade secrets, such as financial data and many computer-related inventions, are more diverse than those protectable by patents, and a trade secret does not have to be tested for novelty or nonobviousness.  For more information on patents, see the separate article here.

What Determines a Trade Secret’s Protected Status?

The law of trade secrets typically is mostly judge-made law and varies from state to state, although there is a Uniform Trade Secrets Act (UTSA) which has been adopted by most states.  The UTSA has now been joined by the Defend Trade Secrets Act, signed into law in May, 2016 and for the first time creating a federal civil cause of action for trade secret misappropriation.  More on the DTSA can be found here.  The trade secret case law discusses several considerations in determining whether information has the protected status of a trade secret. The level of protection given to confidential business information varies with the extent the information is known by the public, the expenses incurred in the information’s acquisition, and its potential value to competitors. The more widely known the information is to either the public or to others in the industry, the less likely that the information will be held by a court to be a trade secret. If the information is possessed by only certain employees of a company, there is a better chance that the information will be considered protectable. The more likely it is that the information would yield a commercial advantage to competitors, or the greater the expenses incurred in the information’s development or acquisition, the more likely it will be considered a trade secret.

Independent Origination and “Reverse Engineering” of a Trade Secret

Assuming that a trade secret is found to exist, liability will attach to its unauthorized use or disclosure. But if someone, without any access to the trade secret, independently originates the information, there will be no trade secret misappropriation. Absent a contract to the contrary, a person may even, without liability under trade secret law, “reverse engineer” a trade secret from a publicly available product or publicly available information. Many computer software license agreements have clauses in them which prohibit the reverse engineering of the licensed software.

Protection of Trade Secrets

The owner of valuable information should do two things to protect it as a trade secret.  First, the owner should have a written agreement with each person who may come into contact with it to keep the information confidential and to use it only for authorized purposes. These agreements extend to employees, contractors, and licensees (if the trade secret is to be used by a third party, such as a piece of computer software).  Second, the owner should put physical and electronic security in place, “reasonable” in the circumstances, to prevent the unauthorized use or disclosure of the information.

Remedies for the Misappropriation of Trade Secrets

Anyone who has acquired a trade secret by inappropriate means, e.g. without the owner’s consent and from an otherwise confidential source, may be liable for monetary damages for the greater of either (1) the losses caused by the owner’s business due to misappropriation, or (2) the financial gain realized by the misappropriator of the trade secret. A court may also enjoin the defendant from further use of the trade secret, either indefinitely or for that period of time which the defendant would have had to spend to reverse-engineer the trade secret in question.  In most instances, the owner will have the option of filing an action in U.S. district court and invoking the DTSA, possibly making available to it double damages, attorneys’ fees and the possibility of an ex parte seizure order.