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The first rule of trade secrets is not to talk about trade secrets. Trade secret protection lasts as long as the information remains confidential, unlike other intellectual property, such as trademarks, patents and copyrights, which must be disclosed in order to obtain protection. Trade secret protection sometimes ends through "normal" means (i.e., discovery or intentional disclosure). Most trade secret protection, however, is lost via misappropriation or unintentional means. Therefore, crucial tasks for corporate counsel are preventing and securing remedies for disclosure.
Legal trade secret protection is complex. It is primarily controlled by state law, typically embodied in the Uniform Trade Secret Act ("UTSA"). No comprehensive federal trade secret statute exists. Nevertheless, several federal laws may afford protection and remedies in limited situations. This article aims to provide an overview of trade secret elements, threats, protections and remedies in the United States.
Trade Secret Qualifications
Business information qualifies for trade secret protection if:
A holder must establish all elements to assert trade secret status. Typical protected trade secrets include research and development strategies and products, formulas, software, customer lists, manufacturing information, methods, techniques and processes. 2 The protected information must provide economic value that allows the holder to have a competitive advantage or achieve economic gains. Information that does not provide current economic value is not properly the subject of trade secret protection. The third element requires that the information not be commonly known in the industry or by the general public and not be "readily ascertainable by proper means." 3 Finally, a trade secret owner must undertake reasonable efforts to maintain its secrecy. Under the UTSA, the level of security measures required to meet the reasonableness standard is circumstance-dependent. Some examples of reasonable methods include limiting access to trade secret information through a physical barrier, such as a locked bank vault, or through a contractual limitation, such as a clause in an employment agreement or non-disclosure agreement.
Loss of Protected Status
Trade secret protection expires upon loss of confidentiality. Loss of trade secret protection may occur several ways, including intentional disclosure, lawful discovery or misappropriation. Intentional disclosure entails communicating protected information to the public in a written or verbal communication. Lawful discovery includes observing or obtaining information from a public source. One of the primary modes of discovery is reverse engineering. 4 Reverse engineering is the process of "starting with the known product and working backwards to divine the process which aided in its development or manufacture." 5 Importantly, the part, product or processes information that serves as the starting point for reverse engineering must have been obtained lawfully.
UTSA provides guidance on misappropriation and misuse of trade secrets. Misappropriation is the wrongful acquisition, wrongful use or wrongful disclosure of a trade secret. Misappropriation depends on "knowledge" and "improper means." Knowledge is defined by the UTSA as actual knowledge, or reason to have known that the information is a trade secret, 6 and improper means includes actual theft, bribery, breach of a duty to maintain secrecy, espionage or inducement thereof. 7 Wrongful acquisition occurs through wrongful receipt or possession. 8 Wrongful use or disclosure occurs if a person, without consent, either a) uses improper means to obtain the secret, b) knows the trade secret was obtained either by improper means or from a person who had a duty to maintain its secrecy, or c) knows that the trade secret was obtained by mistake. 9
Legal Protections and Remedies
Conclusion: Tying the Bow
Trade secret protection requires two things: identification and protection. Information identified as a trade secret must be subject to formal measures to protect secrecy. Protecting trade secrets requires constant vigilance. As with other aspects of corporate activity, it is a good practice to develop a trade secret usage and protection training program for employees. Contractual requirements should clearly identify the importance of employing appropriate protections in connection with trade secret usage. Successful implementation and monitoring of information-security protocols increases the likelihood of long-term protection.
The bottom line in managing trade secrets is to implement, utilize and monitor trade secret protection measures, or risk losing trade secret protection.
1 See Uniform Trade Secret Act §1(4).
2 See American Society of Industrial Security, Trends in Proprietary Information Loss 35-36 (2007), available at http://www.asisonline.org/newsroom/surveys/spi2.pdf.
3 UTSA §1(4).
4 In Kewanee Oil v. Bicron the United States Supreme Court declared reverse engineering to be a legal method of discovering trade secret information.
5 416 U.S. at 476.
6 UTSA §1(2).
7 UTSA §1.
8 UTSA §1(2).
9 UTSA §1(2).
10 UTSA §§2,3.
11 As of September 2009, Massachusetts, New Jersey, New York and Texas have not adopted the UTSA. In these states trade secret protection is a function of either individual state law or common law principles.
12 UTSA §1(3).
13 Not exceeding twice the recovery for actual loss or unjust enrichment.
14 UTSA §4.
15 UTSA §6.
16 UTSA §7.
17 For example, the California Code of Civil Procedure requires a heightened pleading standard for trade secret misappropriation claims.
18 18 U.S.C. §§ 1961-68.
19 18 U.S.C. § 1030.
20 18 U.S.C. §§ 1341, 1343.
21 18 U.S.C. §§ 2311-33.
22 18 U.S.C. § 1029.
23 18 U.S.C. § 1831-39.
24 See Fenwick & West LLP, Trade Secrets Protection: A primer and Desk Reference for Managers and In-House Counsel, available at http://www.fenwick.com/docstore/Publications/IP/Trade_Secrets_Protection.pdf.
About the Author
Joel Samuels is an associate at Axinn Veltrop & Harkrider LLP in New York City. He can be reached via email@example.com.