Trade Secrets in United States

Definition of Trade Secrets

Trade secret protection arises under state common law and state statutes. In general, a trade secret is information that is not generally known to the public and is maintained as a secret, and it provides a competitive advantage or economic benefit to the trade secret holder.

Under the Uniform Trade Secrets Act (UTSA; see more below), a “trade secret” is defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

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

Some estates expands the concept. In the Ohio Revised Code (1333.61 Uniform trade secrets act definitions), for example, “Trade secret” means “information, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique, or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers, that satisfies both of the following:

(1) It 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.

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

The Restatement of Torts (1939) §757 (comment b) defines a trade secret as “any formula, pattern, device, or compilation of information which is used in business and which provides an opportunity to obtain an advantage over competitors who do not know or use it.”

For other meanings of trade secrets, read Trade Secrets in the Legal Dictionary here.

Practical Information

The formulas, manufacturing processes, and ideas used by a particular business to give it an advantage over its competition. The court reads into every contract of employment an implied term that the employee will not disclose to another, or use for his or her own benefit, trade secrets learned in the course of employment. If the employer feels that trade secrets are in danger of being appropriated, he or she may ask the court to issue an injuction (in U.S. law) to forbid the disclosure and use of these trade secrets. (Revised by Ann De Vries)

The Uniform Trade Secrets Act (UTSA)

The Uniform Trade Secrets Act was promulgated in 1979 and amended in 1985 by the Uniform Law Commissioners, a national group of law professors.

U.S. states and territories and the District of Columbia have enacted some form of the UTSA. Prior to the introduction of the Uniform Trade Secrets Act and its enactment by states, trade secret misuse or misappropriation was governed by the common law of torts. The Uniform Trade Secrets Act and other tools protect an employer’s trade secrets and proprietary information, which is fundamentally important. Patents, confidentiality agreements, and trade secrets are more than sufficient to protect legitimate company interests against former employees. Even without noncompete agreements, companies still have a disproportionate ability to litigate against the
individual.

Although substantial uniformity exists among those state trade secret laws based on the UTSA, the statute of limitations (SOL) for trade secret misappropriation varies by state. UTSA §6 sets the statute of limitations for trade secrets claims at 3 years, but many states have amended that section so that the statute of limitations varies from 3 to 5 years.

International Trade Secrets Protection and International Trade

Trade secret protection is no longer a national legal issue. The transnational trade and investment scenario has created the underpinnings for new legal developments in the protection of industries and business secret information. Especially, global investment has been the driving force for many of the changes. Industrialized nations were reluctant to invest abroad and expose their “secret knowledge”, until some level of trade secret protection was recognized among the members of the international community. Trade and investment agreements turned out to be the spark of the current stage in trade secret protection.

However, it is important to recognize that national systems for trade secret protection are not totally harmonized. TRIPS and NAFTA are just minimal legal standards for trade secret protection, leaving to individual countries enough room to approach the issue. The EU and Mercosur have not addressed the issue directly. The theoretical approaches from which trade secret protection arises, then, creates differences in national law. Therefore, international lawyers should be aware of those potential differences in order to render accurate legal opinions.

Lastly, it is still to be seen if some individual countries are capable of fulfilling their international responsibilities, especially by providing meaningful and effective enforcement mechanisms. Sometimes cultural values or philosophical differences and the particular level of technological development could undermine the efforts towards trade secret protection.

Misappropriation of Trade Secrets

The Restatement of Torts at §757 describes misappropriation (see in relation to trade secrets here) as follows:

“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, or
(c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his duty to the other, or
(d) he learned the secret with notice of the facts that it was a secret and that disclosure was made to him by mistake.”

Comments

The Uniform Trade Secrets Act replaces either old trade secret statutes or a long history of judge-made law, referred to as the “common law.” The UTSA has made uniform the definition of what a trade secret is as well as clarifying other aspects of the law, including how a trade secret is misappropriated and what remedies are available for violation of another’s trade secret. This uniformity is a good thing for businesses today that operate beyond their own state lines because of the certainty a stable body of law can bring to business relations with partners, customers, and competitors who may be located in different states.

The major contributions to the law that the UTSA brings is a consistent definition of what is included under trade secret protection. The definition of trade secret in the UTSA is as follows: “Information” that derives independent economic value, actual or potential, from not being generally well known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and which is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Examples of “information” under the UTSA are formulas, drawings, patterns, compilations, programs, devices, methods, techniques, or processes. Some states (such as Pennsylvania) specifically mention that customer lists are considered compilations and thus are also considered trade secrets.

The other aspect of the definition of trade secret is that one must make “reasonable efforts” to keep the trade secret a secret. For example, if a manufacturing process is a trade secret, there should be limited access to the area of the plant where the process is taking place. Formulas, customer lists, compilations, and the like should be made available to employees on a need-to know basis and should be kept in a safe place, not freely available to others. It takes constant vigilance on the part of management to maintain the trade secret. The consequence for laxity in this area will be the loss of the trade secret.

Author: David V. Radack

Trade Secrets in E-Commerce Law

Trade Secrets and the Legal Aspects of E-Commerce

Resources

See Also

• Online Tax
• Internet Law
• Internet Marketing
• Internet Privacy
• Internet Sales
• Internet Tax
• Keyword Advertising

Further Reading

Gurney BJ, Ferrentino JT, White AB 2013. Benefits of early discovery in defending trade secret misappropriation claims. NY Law J 249