Trade Secret Subject Matter Outline

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 worked hard, used his imagination, and taken bold steps to gain an advantage over his competitors, he should be able to profit from his effort. Commercial Advantage can vanish once the competition learns of it, and law should protect the businessman’s efforts to keep his achievement secret

• Other possible factor:

  • Breach of confidence injured party may seek redress in court despite subject matter was discovered at little/ no costs/ that object of secrecy is not of great value to him

• Definition of trade secret: Restatement of Tort (1939) s.757 comment b

  • “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 formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.”

• Examples of trade secrets: not generally known/ available

  1. Research of product demand (something tangible) more likely if held in a hard form

  2. Business Plan to develop a new market became public upon entry

  3. Customer lists (not just the phone book) possible, may depend on whether the info is contained in hard form

  • Certain basic ideas/ concepts are incapable of protection as they were too well known to derive value from secrecy

    • e.g. Buffet v Klink relatively straightforward recipes for barbecued chicken and macaroni and cheese as trade secret

• Trade secret need not be novel

  • May have occurred to someone before or used by another but if it is not generally known or readily ascertainable to the competitors in an industry may still qualify for trade secret protection

  • Uniqueness is not an essential element, but must be separated from everyday knowledge

• Balance between preventing unfair competition and labor mobility

  • Want to allow employees to transfer skill from one job to another

  • But not to the point where they can appropriate others’ trade secret

  • “Law does not require a frontal lobotomy”

• Restatement of Tort: 6 factors to be considered in determining whether info constitutes a trade secret

  1. Extent to which is known outside the claimant’s business

  2. Extent to which it is known by employees and other involved in the business

  3. Extent of measures taken by claimant to guard the secrecy of the info

  4. Value of info to the business and its competitors

  5. Amount of effort or money expended by the business in developing the info

  6. Ease/ difficulty with which the info could be properly acquired/ duplicated by others

• Uniform Trade secret Act: info is not trade secret if it is “generally known” or “readily ascertainable by proper means”

  • Once a secret is readily available through public sources, it loess all trade secret protection D is then free to obtain the info from the public source or from P

(2) Reasonable Efforts to Maintain Secrecy P.61

• P must show that they have taken reasonable measures to protect the secrecy of their idea

• P cannot publicly disclose the secret and still expect to protect it + must generally include certain efforts to prevent theft or use of the idea by former employees

• Rockwell graphic System Inc. v DEV Industries Inc (US CA 7^th Circuit) (1991)

  • Facts: Rockwell, a manufacturer of printing presses used by newspapers, brought the suit against DEV Industries (a competing manufacturer), and against the president of DEV (ex-employee of Rockwell). D argued that P only made perfunctory/inadequate efforts to keep them secret hence not trade secret DC granted summary judgment finding no trade secret

  • Held: it is a trade secret

    • Absolute secrecy is not a requirement issue is whether P had undertaken a reasonable effort to keep the secret

  • Rationale: relevance of P’s effort to maintain secrecy

    • more effort indicate higher probability that P thinks its valuable to put resources/ money to maintain secrecy

    • greater precautions that P took to maintain the secrecy of the piece part drawings lower the probability that D obtained them properly + higher probability that it obtained them through a wrongful act

    • Here, employees removed piece part drawings form P’s premises without authorisation, in violation of their employment contracts and confidentiality agreement, using them in competition with P

  • Evidence of reasonable efforts:

    • Facility based security measures: P kept the piece part drawings in a place that are only accessed by limited employees, who signed agreement not to disseminate the drawings

    • Each drawing is marked saying it is confidential,

    • Outside vendors who are given copies of the piece part drawings have to sign confidentiality agreement

    • P decided not to patent it because P think others would not be able to do reverse engineering

  • Counter: no reasonable efforts:

    • Allowed employees to make copies (though required to destroy)

    • Vendor could make copies, despite confidentiality agreement to return the drawings (P did not enforce it as it did not want to be wasteful) merely disclosed to a limited number of outsiders for a particular purpose doesn’t forfeit trade secret protection

      • Imposes a duty of confidentiality on the part of the person whom to disclosure is made

    • P even permits unsuccessful bidders for a piece part contract to keep the drawings, on the theory that the high bidder this round may be the low bidder the next (ethical standard of a machine shop was considered before making it a vendor, hence no shop has ever abused the confidence reposed in it)

    • Merely treating a secret as a secret doesn’t mean that it is one, need to take reasonable effort to do so

• Reasonable efforts to maintain secrecy

  • Balance between the costs and benefits of precautions:

    • Fencing costs

    • Non-disclosure agreement

    • Loss of business

    • Value of secrecy

    • Deterring, delaying or excluding competitors

  • Based on a cost-benefit analysis

    • The more the owner of the trade secret spends on preventing the secret from leaking out

      • the more he demonstrates that the secret has real value deserving of legal protection he really was hurt as a result of the misappropriation of it + there really was misappropriation

      • BUT: the more that he spends, the higher his costs (direct/ indirect)

Whether additional benefit in security would have exceeded that cost

• “Only in the extreme case can what is a reasonable precaution be determined on the basis of a motion, because the answer depends on a balance of costs and benefits”

• Fact specific, depending on industry, what the secrets are

• Rationale of requiring both secrecy requirement and reasonable effort

  • Channeling requirement: only do it for things that can be kept as a secret

  • People would only rely on trade secret if they think it is viable to keep it as a secret

• Electro-Craft Corp v Controlled Motion

  • Merely having the intention is not enough P required to show that it had manifested that intention by making some effort to keep the info secret

  • Security: protection of info from discovery by outsiders

    • Whether P treated the info as secret

    • Obligation to inform its employees that certain info was secret

    • Whether document marked ‘confidential’

    • Whether Employee access to document restricted

    • Whether policy statement issued to outline what it considered secret

    • Informal tours given to vendors and customers without warnings as to confidential info; open house where public was invited to oberve manufacturing processes

(3) Disclosure of Trade Secret P.70

• Trade Secrets are protectable as long as it remained a secret

Types of Disclosures

• (i) Voluntary Disclosure by the Trade Secret Owner

  • When owner publishes the secret, e.g. in academic journal, public forum no longer a secret no longer protectable

  • Common form of disclosure: publication of an issued patent, required by patent law s.122 some patent applications must be published after 18 months to enable one of ordinary skill in the art to make it, obtaining a patent on an invention destroys trade secret protection inventor must choose either patent or trade secret protection

• (ii) Distributing a Product that Embodies the Trade Secret to the Public

  • Selling/ distributing a product embodying a trade secret to the public may risk the secret if it becomes readily accessible

  • Disclosure may occur even without sale of the product itself, if the secret is disclosed freely and without restriction during the manufacturing or development process

  • Disclosed if the secret is apparent from the product, to the buyers of the product

  • Not disclosed if secret in undecipherable (unable to be understood) from within the product, e.g. object code in a computer program

• (iii) Public Disclosure by a Third Party

  • Often occurs when third party had independently developed or discovered the secret trade secret owner will also lose his rights

• (iv) Inadvertent (Unintended) Disclosure

  • Truly accidental disclosure should not defat trade secret protection if reasonable precautions have been taken

  • But if the inadvertent disclosure is widespread, it would seem unfair + impractical to acquire the pubic to give back the secret

  • It is misappropriation for someone to disclose a secret that they have reason to know has been acquired by accident or mistake

  • Accidental acquisition was the result of the trade secret owner’s failure to take reasonable precautions to maintain the secrecy of the info

• (v) Government Disclosure

  • Government agencies sometimes require the disclosure of trade secrets by private parties to serve some other social purpose

  • E.g. requiring a food manufacture to label its product with an accurate list of ingredients

  • E.g. Federal Insecticide, Fungicide and Rodenticide Act: requires disclosure of contents of pesticides + other info, but:

    • limits public disclosure of info concerning manufacturing process and inert contents

    • provides for compensation to be paid to the inventors of trade secrets which the gov appropriates by public disclosure

• Trade Secret Owner

  • Advertent Lost

  • Disclosure of Product

    • TS apparent Lost

    • TS hidden (e.g. object code) depends

      • Reverse Engineering lost

    • Accidental others cannot knowingly disclose

• Others: TS owner can file complaint against Disclosure for disclosing his trade secret

  • But TS lost vis a vis the rest of the world

• Government: Defense procurement

Competing interests

• Employees: freedom to take new jobs

• Companies: protection for research

• Customers: vigorous competition

Policies underlying trade secret law

1. Commercial Morality

2. Protection for Innovation

3. Sharing of Knowledge

4. Protecting Commercial Privacy

5. Mobility of Labor

6. Free Competition

Summary

• Ownership of trade secret

  • Information (essentially any valuable information)

  • Secrecy: valuable because not generally known or readily ascertainable by those who could profit from it

• Secrecy need not be absolute. It’s okay to make limited disclosures to further the seller’s economic interest. (Fourtek) Reasonable efforts to maintain secrecy

• Cost-benefit analysis (Rockwell) Economic value from secrecy

17. Misappropriation of Trade Secret, Departing Employees

MML 78-131; Uniform Trade Secrets Act § 1; Restatement of Torts § 757; California Business & Professions Code § 16600

Misappropriation

• Acquisition or use of a trade secret is illegal only: where it is done through

  1. Improper means, or

  2. Breach of confidence most popular

  3. Accident or mistake

  4. Third-party liability

Uniform Trade Secret Act §1(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 had 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 [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

1) Improper Means

• E.I. du Pont deNemours & Co. v Christopher (5^th Cir. 1970)

  • Facts: D photographer hired by third party to take photos of P’s facility from the air P alleged it had developed a highly secret by unpatented process for producing methanol, the process that gave P competitive advantage over other producers, developed after expensive and time-consuming research, a secret which P had taken special precautions to safeguard those photos would enable a skilled person to deduce the secret process for making methanol

  • Restatement of Tort s.757 “One who discloses or uses another’s trade secret, without a privilege to do so, is liable to the other if

    • (a) he discovered the secret by improper means, or

    • (b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him”

  • Whether aerial photography of plant construction is an improper means of obtaining another’s trade secret

  • Held: to obtain knowledge of a process without spending the time and money to discover it independently is improper, unless the holder voluntarily discloses it or fails to take reasonable precautions to ensure it secrecy Violation of commercial morality

  • Here, P has valid cause of action to prohibit D from improperly discovering its trade secret and to prohibit the third party from using the improperly obtained info

    • D deliberately flew over P’s plant to get pictures of a process which P had attempted to keep secret

    • D delivered their pictures to third party who was certainly aware of the means by which they had been acquired and may be planning to use the info contained therein to manufacture methanol by P’s process

    • Third party has a right to use this process only if he obtains this knowledge through his own research efforts, but the third party has gained this knowledge solely by taking it from P at a time when P was making reasonable efforts to preserve its secrecy

  • Court: we should not require a person/ corporation to take unreasonable precautions to prevent another from doing that which he ought not do in the first place

    • While court expects P to put some expense to protect its secret from prying eyes, it did not require enormous expense (roof over unfinished building) to prevent a ‘school boy’s trick’

  • It is impossible to have a complete catalogue of improper means

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

    • Some act would be tort, crime, but what are the outer bounds of improper means?

    • Here: D did not engage in illegal/ fraudulent behaviour

    • ‘Improper’ depends on time, place, and circumstances

      • E.g. if someone can find out just by can climbing up a mountain it would be reasonable for Dupont to take precautions for that

    • Reasonable effort can change as technology develops

    • Prof: Usually improper mean is easily recognizable

    • If the trade secret owner take precaution court would be more readily finds misappropriation

  • But there must be breathing room for observing a competing industrialist

    • Permit people from finding out through legal ways

• Implication of Dupont: trade secret law prohibited conduct that is properly not otherwise tortious

• Deviousness in this case is reverse engineering (which is legal under Restatement and Uniform Act) But: reverse engineering generally refers to legally obtaining a product and taking it apart to see how it works (and not misappropriation of a trade secret)

2) Breach of Confidence

• Re-Statement (Third) of Unfair Competition s.41 “Confidential relationship is established when:

  • “(a) [Express] the person made an express promise of confidentiality prior to the disclosure of the trade secret; or

    • Written or oral agreement

  • (b) [Implied] the trade secret was disclosed to the person under circumstances in which the relationship between the parties to the disclosure or the other facts surrounding the disclosure justify the conclusion that, at the time of the disclosure,

    • (1) the person knew or had reason to know that the disclosure was intended to be in confidence, and

    • (2) the other party to the disclosure was reasonable in inferring that the person consented to an obligation of confidentiality”

    • Implied in fact (circumstances of interaction), or in law (creates certain relationship – trust/ fiduciary relationship)

    • Business Relationships

      1. Employer-employee most of the time

      2. Client-independent contractor sometimes, but not always

      3. Inventor-manufacturer

      4. Prospective customer/ purchaser-prospective seller

      5. Arm’s-length transaction parties negotiated, duty least inferred

• Smith v Dravo Corp (7^th Cir. 1953) P.83

  • Facts: Smith’s company Safeway Containers developed containers for ship and railways Smith died and his estate sought to sell his business D demonstrated an interest in the business and P sent detailed info to D, including patent applications, blue prints of designs, list of prospective users D rejected P’s offer D rapidly developed a product that incorporated most of the features of P’s design + sold many to prospective buyers of P (many buyers were prospective users disclosed by P to D). D’s container was 4 inches less in width could not use interchangeably with P’s product P ceased production and failed to be sold.

  • P claimed that D obtained, through a confidential relationship, knowledge of P’s secret designs, plans and prospective customers and then wrongfully breached that confidence by using the info to its own advantage and P’s detriment

  • Held: P’s info about how to design its containers remained a trade secret

  • Was D in a position of trust and confidence at the time of the disclosure?

    • D argue no breach of confidence: parties negotiated in arm’s length, no express confidential agreement product available for sale in open market (is it really a trade secret?)

    • But: there was an implied promise of trust by D

      • P disclosed their design solely to enable D to appraise it in consideration of purchasing the business + D knew and understood this limited purpose

      • But for the transactions, D would not have learned, from P, of the container design D shall not fraudulent abuse the trust reposed in him

      • D went beyond the limited purpose understood by the parties

  • Improper use by D of the secret info

    • D did not begin to design its container until after it had access to P’s plans.

    • D’s engineers admittedly referred to P’s patent application (to avoid infringement)

    • D created its product too quickly, obvious that something else gave them a head start

    • Evidentiary facts + striking similarity between D and P’s finished product were more than enough to convict D of improper use of the structural info obtained from P

  • Trade secret only valuable because it is a secret – owner would want to ensure the prospective buyer would not to disclose its secret, only use it for sole purpose to evaluating and use it should get express agreement on what is allowed to be used, and what is not allowed to be used

  • Trade secret extend to protect product that need not be identical

    • As long as it is derived something from trade secret, despite changes, still liable + no longer arm’s length transaction

• Breach of confidentiality: anytime an alleged trade secret owner share secret with someone else + the other knows impliedly/ expressly too broad, this case focused on whether there is a confidentiality Relationship

• Van Prods Co v General Welding & Frabricating Co (1965)

  • Starting point of deciding whether there was a trade secret should not be whether there is a confidential relationship, but whether there was a trade secret to be misappropriated

  • If there is a secret, a company that receives the secret in a business negotiation and then use it without paying is guilty of misappropriating that secret

• Omnitech Int’l v Clorox Co (1994)

  • Not an actionable use of a trade secret for D to evaluate it in the course of trying to decide whether to acquire the company or take a license to use the...

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