Trade Secrets

A discussion of trade secret protection often includes a comparison to patent protection. Although trade secrets are potentially unlimited in duration, what can be overlooked is that public use of a trade secret can forever bar the owners right to a patent internationally, and in the United States can bar the owner's right to a patent if a patent application is not submitted within one year of the disclosure. Trade secrets also do not protect against a competitor independently discovering or reverse engineering the trade secret, where patent protection may afford better protection. So, the best way to determine which form of protection is better for protecting your technology is to compare the limitations of both strategies.

Definition of a Trade Secret

Trade secrets are defined at both the state and federal levels. Thirty-eight states have adopted the Uniform Trade Secret Act ("UTSA") which defines a trade secret in two parts -- depending on your location and interstate sales, other states can have quirky laws that you should be aware of. The first part of the UTSA definition requires that information to be protected by trade secret obtain "independent economic value" from not being discoverable by others. The second part requires the owner of the trade secret to use reasonable efforts to keep the information secret. Similarly, the Restatement of Torts defines a trade secret as "[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. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving material, a pattern for a machine or other device, or a list of customers."

By contrast, a trade secret, as defined under federal law has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being publicly known. 18 U.S.C. § 1839 (3) (A), (B) (1996). Although this provision relates to espionage and interstate or foreign theft of trade secrets, it could apply to your information depending on your business activities.

How Strong is a Trade Secret?

Courts typically consider six factors when determining whether certain information is a trade secret:

1. The extent to which the information is known outside the owner's business. The greater the knowledge outside the business, the less likely it is that courts will consider the information to be a trade secret.
2. The extent to which the information is known by the owner's employees or others involved in the owner's business. The more employees who know the information, the less likely it is that courts will consider the information to be a trade secret.
3. The extent of measures taken to keep the information secret. The greater the security measures taken, the more likely it is that courts will concider the information to be a trade secret.
4. The value of the information to the owner and the owner's competitors. The more valuable the information, the more likely it is that courts will consider the information to be a trade secret.
5. The amount of money and effort expended by the owner in developing the information. The more money and effort expended, the more likely it is that courts will consider the information to be a trade secret.
6. The relative ease or difficulty for another to acquire the information. The easier it is to acquire the information, the less likely it is that courts will consider the information to be a trade secret.

See J. Westby. Trade Secrets, American Bar Ass'n (2004).

Looking at these factors, many business practices can be analyzed with a more critical focus with respect to trade secret protection: Does it make sense to store your technical data on the "cloud" such as Amazon®, Google™, or Microsoft® products? Does it make sense to reduce your laboratory notebooks only to electronic formats that cannot be "locked"? Does it make sense to employ technicians or consultants without non-compete agreements or non-disclosure agreements ("NDAs")? The answers, of course, are "it depends," but do not overlook these and other questions before presuming that your technology is protected by trade secret merely because you wish it were so.

Enforcement of Trade Secrets

Enforcement of trade secrets can be made under several theories including "misappropriation" and breach of a valid NDA (also known as a confidentiality agreement, confidential disclosure agreement, etc.). The UTSA defines misappropriation as:

1. 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
2. disclosure or use of a trade secret of another without express or implied consent by a person who
   1. used improper means to acquire knowledge of the trade secret; or
   2. at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was
      1. derived from or through a person who has utilized improper means to acquire it;
      2. acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
      3. derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
   3. 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.

Remedies for Misappropriation and Breach of Confidentiality Agreements

Remedies for misappropriation of trade secrets include: 1) injunctive relief or a royalty for future use, 2) monetary damages (including the trade secret owner's actual loss, the misappropriating party's unjust enrichment, and a reasonable royalty), and 3) exemplary monetary damages and attorneys fees if the misappropriation is found to be "willful and malicious." Other contract damages may be available depending on the provisions of a breached NDA or non-compete agreement.

So, is your technical information available for protection as a trade secret? If so, what are the circumstances surrounding the protected information that could weaken that protection? Compare the protections and remedies available under trade secret protection to that under patent protection before making a firm decision as to which strategy makes the best sense for you.