#16474 - Trade Secret Subject Matter - Intellectual Property (IP) Law

16,17. Trade Secret - Subject Matter, Appropriation

MML 42-77; Uniform Trade Secrets Act § 1; Restatement of Torts § 757

Subject Matter

Essential elements to a trade secret claim

(1) subject matter must qualify for trade secret protection

• Information

• Information not generally known or readily ascertainable

• Reasonable efforts under circumstances to maintain secrecy

• Economic value from secrecy

(2) Misappropriation

• By improper means; or

• Breach of confidence

• Obligation not to disclose or appropriate the trade secret can arise by

  • express contract or

    • note: public policy limits scope and duration of the agreement

  • implied duty: e.g. employees have duty to protect their employer’s interest in their secret practices and info

• But: express immunity from suit for whistleblowers, employees and contractors who disclose suspected illegal activity to the gov and their attorney confidentiality (18 USC s.1833(b))

  • [added by Defend Trade Secret Act 2016]

Theoretical Justifications for Trade Secret Law

1. Utilitarian: property right

• If a party invents or discovers and keeps secret a process of manufacture, whether a proper subject of a patent or not (though no exclusive right to it as against public/ those who in good faith acquire knowledge of it), but he has property in it which a court of chancery will protect against one who, in violation of contract and breach of confidence, undertakes to apply it to his own use, or to disclose it to third persons

• Allow company to keep secret, since those secrets are often innovative incentive to create innovation

2. Promote commercial ethics - Unfair competition grounded in tort

   • Maintenance of commercial ethics/ morality, prevent illegitimate competition

     • But can court do a good job on what counts as ethical behaviour in different industries, difficult to draw line for morality

   • Whether P have any valuable secret, D knows the fact through a special confidence that he has accepted D stood in confidential relationship with P constitute a breach of trust court would not tolerate

3. Intellectual property right

   • Promote innovation and encourage efficient disclosure of secret

   • Aim is to punish and prevent illicit behaviour and to uphold reasonable standards of commercial behaviour

   • Encourage research and development, in areas where patent law does not reach

   • Despite a discovery may not be patentable, it doesn’t destroy the value of the discovery

• Aim to strike a balance between protecting the trade secret and benefiting the public: don’t want to make incentive so strong that it undermines people being able to use them in a beneficial way

Trade secret vs. patent

• Comparing to patent law, trade secret is

  • Protectable perpetually: no duration as long as secrecy is remained

  • Broader subject matter, almost any info can be qualified, as long as it is not generally known + properly protected, e.g. customer lists, not limited to high-tech matters

• But: weaker protection than patent law

  • Doesn’t preclude independent development or reverse engineering of that same information at risk that someone else would legitimately gain access to the secret

  • Not a right against the world

  • No formality: no application nor registration (copyright requires registration before suing)

  • No disclosure requirement: trade secret encourage people to keep the secret; patent law encourages disclosure

    • Tabor v Hoffman: interplay between trade secret and patent

  • Only protected by state law

• Federal preemption: trade secret vs. patent

  • Whether the law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” Hines v Davidowitz (1941)

• People prefer having a patent than trade secret?

  • Patent gives stronger protection

  • But if patentability is unclear may evaluate trade-off and choose trade secret over patent

  • Patent may be narrow/ invalid

  • May be able to keep a secret for longer time than a patent term

  • Trade secret also protects subject matter that are not entitled to patent law protection

• Improper use of disclosure of a trade secret was traditionally a common law tort

Sources of legal protection

• State Common Law

  • Restatement of Torts § 757 (1939)

  • Restatement of Unfair Competition (1995)

• State Statute

  • Uniform Trade Secrets Act (UTSA) 2019

    • 49 states and DC have adopted UTSA, but not always adopted uniformly thus if in these states dealing with common law, and no state statute governing

    • Note: not adopted by NY, Mass. And North Carolina

• Federal

  • Federal Economic Espionage Act criminal

    • Made trade secret misappropriation a federal felony

  • Federal Defense Trade Secret Act civil misappropriation claims soon
    

Uniform Trade Secrets Acts (amended 1985)

S.1 Definitions:

• (1) ‘Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.

  • Federal Defend Trade Secrets Acts 2016 “improper means does not include reverse engineering, independent derivation, or any other lawful means of acquisition”

• (2) "Misappropriation" means:

  • (i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

  • (ii) disclosure or use of a trade secret of another without express or implied consent by a person who

    • (A) used improper means to acquire knowledge of the trade secret; or

    • (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was

      • (I) derived from or through a person who has utilized improper means to acquire it;

      • (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

      • (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

    • (C) before a material change of his position, knew or had reason to know that it was a trade secret ad that knowledge of it had been acquired by accident or mistake.

Subject Matter

(1) Definition of Trade Secret

• UTSA s.1(4) "Trade secret" means “information, including a formula, pattern, compilation, program device, method, technique, or process, that:

  • (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

  • (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

• Duration: until the information is disclosed

• Essential elements to a trade secret claim

(1) subject matter must qualify for trade secret protection

• Info: must be a type of knowledge/ info that trade secret law was meant to protect

• Info must not be generally known/ readily ascertainable

• Holder of trade secret took reasonable precautions under the circumstances to prevent its disclosure - diligent in protecting info

• Economic value from secrecy: Trade secret is valuable enough to bother litigating

(2) Misappropriation

• By improper means; or

• Breach of confidence

• Trade secret P must prove that D acquired the info wrongfully - misappropriated the trade secret (through deception, skullduggery, outright theft)

• Metallurgical Industries Inc. v Fourtek, Inc. (US CA 5^th Circuit) (1986)

  • Facts: Thermo-O sold 2 zinc recovery furnaces to Metallurgical (P) for reclaiming carbide. M extensively modified the furnaces to make them perform better a former Thermo-O’s employee (now at Fourtek) begin manufacturing and selling zinc recovery furnaces using P’s modification process P brought suit for misappropriation of trade secret D argue info he obtained from working with D is too general to be legally protected + not trade secret as the basic zinc recovery process is publicized in the industry.

  • Held: remanded for re-trial, but court seems to accept that if industry doesn’t know the combination + limited disclosure + effort to keep it as a secret it is a trade secret.

  • Trade Secret

    1. Info not generally known: prior art/ novelty, leaks

       • Not public announcements

       • No need absolute secrecy, as long as

  • holder’s disclosure to others are limited;

    • Here, P only disclosed to 2 businesses with whom it was dealing

  • disclosure was made to further P’s economic interests

    • P tried to build a second furnace; to earn royalty payment from a licensee

      • Confidentiality is not a requisite, only a factor to consider

    • Non-disclosure agreements with employees, limited access, signs showing restrictive access, notices to Ds that it was confidential

    • Prof: would be good to have a confidentiality agreement, get non-disclosure agreement with everyone you disclose to, to show effort in keeping it a secret

    1. Info not readily ascertainable:

       • availability, ease of reverse engineering, non-obviousness

       • effort or money expended to develop info

    2. Reasonable efforts to maintain secrecy: precautions, security, NDAs

    3. Economic value: technology/ information

• Trade Secret must be a secret

  • Evidence: expert evidence to prove not generally known

  • Whether company is trying to protect it showing that it is a secret

  • including secret combinations of item which by themselves are publicly known,

  • scientific, technical, and business info (e.g. customer lists and business plans)

• No standard formula, court should weigh all equitable considerations

• Here, the court considered:

  • Cost of developing the secret device/process

    • P demonstrated the effort involved in making a complex manufacturing process work

  • Value the secret provides

    • If a businessman...