Until relatively recently, trade secret protection had been based on common law principles; namely, trade secrets had been protected under contract, quasi-contract, and property theories. Protection of trade secrets under contract theories includes instances in which there existed an express contract concerning non-disclosure or use of a trade secret, or there existed a confidential relationship giving rise to a duty no to disclose or use the trade secret – such as an employer-employee relationship. The quasi-contract basis of trade secret protection includes avoidance of unjust enrichment from trade secret misappropriation. And the property theory, the “property” ceases to exist upon disclosure of the trade secret.
Perhaps the most widely used common law definition of a trade secret was found in the Restatement of Torts, § 757 comment b (1939):
[A trade secret is] [a]ny 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.
The Restatement also lists six factors to be considered in determining the existence of a trade secret:
- the extent to which the information is known outside the business;
- the extent to which it is known by employees and other involved in his business;
- the extent of measure taken by him to guard the secrecy of the information;
- the value of the information to him and to his competitors;
- the amount of efforts or money expended by him in developing the information; and
- the ease or difficulty with which the information could be properly acquired or duplicated by others.
These factors are “[t]he most-cited listing of the objective criteria for determining the existence of a trade secret.” M. Jager, Trade Secrets Law § 5.05 (1995). Note that this definition is still widely used in spite of he decision of the authors of the Restatement (Second) of Torts (1979) to omit any discussion of trade secrets.
In recent years, trade secret law has become largely statutory. The Uniform Trade Secret Act (UTSA) has now been adopted (sometimes with modifications) in 42 states. M. Jager, supra, at § 3.05 (1996). Washington adopted the UTSA as of January 1, 1982. RCW 19.108 et seq.
The UTSA defines a trade secret as 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.
ELEMENTS OF A TRADE SECRET
Under both the old Restatement of Torts and the current statutory definition, to establish the existence of a trade secret one much show that the information or item alleged to be a trade secret is:
- of an appropriate subject matter to be protected as a trade secret;
- not a matter of common knowledge in the trade and not readily ascertainable by proper means;
- of value; and
- the object of reasonable precautions taken under the circumstances to maintain secrecy.
Protectable Subject Matter
Under the common law and the Washington statutory definition, almost any knowledge or information used in conjunction with one’s business may be held as a trade secret. Specific examples include:
- Formulas for chemicals, drugs, cosmetics, foods, et cetera.
- Industrial Processes. E.I.. duPont de Nemours & Company, Inc. v. Christopher, 431 F.2d 1012 (5th Cir. 1970).
- Know-how, i.e., technical information relating to the practical application of patented or unpatented inventions.
- Blueprints, such as for a building or machinery.
- Computer software, to the extent it cannot be reverse engineered.
- Sources of supply, pricing information, identity of vendors or suppliers, and customer lists.
In addition and contrary to common belief, trade secrets are not limited to technical items, know-how and related matters, but include a wide variety of business information (i.e., employee benefit information and financial statements and projections). Under the Washington statute, a trade secret can include information that has commercial value from a negative standpoint (e.g., knowledge that a particular process cannot be used to produce a certain product).
Not Generally Known or Readily Ascertainable
Trade secret protection is available only for information not generally known (i.e., secret information), and is not available for information which is common knowledge. And in addition to not being generally known, a trade secret must not be readily ascertainable by proper means. The comments to the UTSA indicates that information is “readily ascertainable” if it’s available in trade journals, reference books or other published materials.
Note that secrecy is not lost if the possessor of the information disclosed it to another in confidence or under an express or implied obligation not to disclose it. Accordingly, information can be disclosed, for example, to prospective purchasers of the trade secret, or to employees involved in a manufacturing process which utilizes the trade secret, without destroying the trade secret. These types of disclosures comport with commercial reality.
Independent Economic Value
To be protectable, the trade secret information must provide a competitive advantage over others who are unaware of the secret information. Earlier decisions required that for a trade secret to have value, the information must be regularly used in the proponent’s business. This requirement, which could post a problem during research and development, has been rejected by the UTSA.
Reasonable Efforts to Maintain Secrecy
The requirement that the possessor of a trade secret must make reasonable efforts to maintain secrecy is based on the rationale that if the possessor does not treat the information as a trade secret, then the law also should not. The degree of secrecy required is that which is reasonable under the circumstances and may include:
- advising employees of the existence of trade secrets;
- limiting access to the trade secret on a “need-to-know-basis”;
- controlling plant access;
- central control of blueprints and drawings;
- use of security guards; and
- locked storage of laboratory notebooks.
TRADE SECRET MISAPPROPRIATION
Under the common law, liability for trade secret misappropriation required acquisition by another by improper conduct or unfair means together with the use or disclosure by such person to the trade secret owner’s detriment. Under the UTSA, the definition of misappropriation is much broader; it can include simple acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means – no subsequent or impending use of the trade secret is required.
The UTSA specifies that “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Again, one of the broadly stated policies behind trade secret law is the maintenance of standards of commercial ethics. Thus, improper means could include otherwise lawful conduct which is improper under the circumstances; e.g., an airplane overflight used as aerial reconnaissance to determine the competitor’s plant layout during construction of the plant. E.I. duPont de Nemours & Co., Inc. v. Christopher, 431 F.2d 1012 (CA5, 1970).
1. Injunctive Relief
Once it has been established that a trade secret has been misappropriated, injunctions to enjoin further use of a trade secret generally have been issued by the courts. This remedy is expressly provided under the UTSA. Under the common law, there were several different views concerning the duration of prohibitory injunction. Under one doctrine, the defendant could be permanently enjoined from using the misappropriated trade secret, even if it later became public knowledge. Allen-Qualia Co. v. Shellmar Products Co., 87 F.2d 104 (7th Cir. 1936). This view was based on the theory that the defendant by her own inequitable conduct had permanently deprived herself of the right to employ the trade secret. Under a second doctrine, the injunction is terminated once the information becomes available to the public. Conmar Products Corp. v. Universal Slide Fastener Co., 172 F.2d 150 (2d. Cir. 1949). And under a third doctrine, the duration of the injunction is limited to the period of time it would have taken the defendant either by reverse engineering or by independent development to develop its product or process without the use of the trade secret. K-2 Ski Company v. Head Ski Co., Inc., 506 F.2d 471 (9th Cir. 1974).
UTSA adopts the K-2 rule; injunctive relief terminates once a trade secret ceases to exist – however, the injunction may be continued for an additional length of time to eliminate any commercial advantage derived from the misappropriation. As such, the maximum duration of an injunction is the period of time it would have taken the defendant to lawfully discover the trade secret either through independent development or reverse engineering.
2. Damages and Attorney’s Fees
The UTSA provides that in addition to or in lieu of injunctive relief, damages of the actual loss caused by the misappropriation may be awarded. In addition to damages, the complainant may recover the unjust enrichment resulting from the misappropriation, provided that such amount is not taken into account in computing the actual loss. If willful or malicious misappropriation is found, the court can award exemplary damages in an amount not to exceed twice actual damages, together with recovery for unjust enrichment. In such circumstance, the court may also award attorney’s fees. The comments to the UTSA indicate that the patent laws are followed in determining whether attorney’s fees should be provided.
3. Statue of Limitations
The UTSA specifies that an action for misappropriation must be brought within three years after the misappropriation is discovered or reasonably should have been discovered.
BRIEF COMPARISON WITH PATENT LAW
- specific and limited by statute (machines, articles of manufacture, processes, and compositions of matter)
- applies to broad range of intellectual property and business information
- must be useful
- must be novel
- must not be obvious
- must be potentially useful
- must not be generally known
- need not be novel or obvious
- defined strictly by language of the “claims”
- often difficult to define with equal precision, but can be as broad as the “equities” of a particular case require
- any disclosure must be limited and controlled
- defined by narrow but specific statute
- monopoly granted
- varies depending upon circumstances and court; based on many theories
- protection only against “unfair” users; none against those who independently discover or reverse-engineer
- 20 years from filing
- potentially unlimited
- policing infringement
- protecting from unauthorized disclosure or use
- policing infringement
- independent discovery or inadvertent disclosure
- difficult to prove theft
- licensing and/or sale easier
- licensing more difficult, and requires policing of licensee security measures