Keeping It Under Wraps: Trade Secret Protection - ABA YLD 101 Practice Series

By Joel R. Samuels

Introduction

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:

  • it is information,
  • it has economic value,
  • it is not generally known, and
  • reasonable efforts are undertaken to maintain its secrecy. 1

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

  • State Law
    The Uniform Trade Secret Act provides civil liability for misappropriation of trade secrets in the form of injunctive relief and damages for actual losses and unjust enrichment 10 and has been adopted by 46 states. 11 The UTSA applies to individuals and corporate or legal entities. 12 In cases of "willful and malicious" misappropriation, exemplary damages 13 and attorneys' fees may be awarded. 14 The UTSA has a three-year statute of limitations from the date the misappropriation is discovered, or should have been discovered with reasonable diligence. 15

    The UTSA only displaces state laws that provide civil remedies for trade secret misappropriation; 16 it does not provide for criminal liability. Accordingly, some states enforce supplemental state laws that provide criminal liability. Finally, some state laws provide additional procedural requirements for the assertion of civil claims involving theft of trade secrets. 17
  • Federal Law
    No comprehensive federal trade secret law exists. An injured party may seek relief under one or more of several laws that provide remedies for activities that may be related to the trade secret misappropriation. Acts providing remedies for such activities include Racketeer Influenced Corrupt Organizations Act, 18 Computer Crimes Statute, 19 Mail and Wire Fraud Act, 20 National Stolen Property Act, 21 Fraud in Connection with Access Device, 22 and the Economic Espionage Act ("EEA"). 23 The application of any of these laws requires a highly fact-dependent inquiry. 24

    The EEA comes closest to a federal trade secret act. Section 1831 of the EEA provides civil and criminal remedies for misappropriation of trade secrets ("economic espionage") that benefits a foreign government. Violators are subject to fines up to $500,000 or 15 years imprisonment for individuals and fines up to $10,000,000 for organizations.

    Section 1832 provides protection from general misappropriation of trade secrets. The EEA prohibits actual theft, attempt and conspiracy with respect to misappropriation of trade secrets. Liability is imposed upon a showing of: 1) the offender's intent to convert a trade secret, 2) that the stolen information is "related to, or included in a product placed in interstate or foreign commerce" and 3) the offender's intent to injure the owner of the trade secret.

    While providing both civil and criminal liability, the EEA does not provide a private right of action. The Attorney General may seek civil injunctive relief and/or fines in U.S. District Courts. Conviction of an individual offender may result in imprisonment up to ten years and/or criminal forfeiture of property related to the theft of trade secrets. The EEA has extraterritorial application if 1) the offender is a citizen of the United States, a permanent resident alien, or an organization incorporated in the United States, or 2) an act "in furtherance of the offense" is committed in the United States. The EEA does not preempt any other federal or state law governing trade secret misappropriation.

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.

Suggested reading:

  • R. Mark Halligan, Protection of U.S. Trade Secret Assets: Critical Amendments to the Economic Espionage Act of 1996, 7 J. Marshall Rev. Intell. Prop. L. 656 (2008).
  • Katarzyna A. Czapracka, Antitrust and Trade Secrets: The U.S. and the E.U. Approach, 24 Santa Clara Computer & High Tech. L.J. 207 (2008).
  • WorldWide Trade Secrets Law (Terrence F. MacLaren ed., 1993).

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.

Resources

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About the Author

Joel Samuels is an associate at Axinn Veltrop & Harkrider LLP in New York City. He can be reached via jrs@avhlaw.com.

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