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Trade Secret Subject Matter Outline

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Trade Secret 16,17. Trade Secret - Subject Matter, Appropriation
MML 42-77; Uniform Trade Secrets Act § 1; Restatement of Torts § 757
Subject Matter
Essential elements to a trade secret claim
(1) subject matter must qualify for trade secret protection

Information

Information not generally known or readily ascertainable

Reasonable efforts under circumstances to maintain secrecy

Economic value from secrecy
(2) Misappropriation

By improper means; or

Breach of confidence-

Obligation not to disclose or appropriate the trade secret can arise by

express contract or
 note: public policy limits scope and duration of the agreement

implied duty: e.g. employees have duty to protect their employer's interest in their secret practices and info
But: express immunity from suit for whistleblowers, employees and contractors who disclose suspected illegal activity to the gov and their attorney confidentiality (18 USC s.1833(b))
o [added by Defend Trade Secret Act 2016]

Theoretical Justifications for Trade Secret Law

1. Utilitarian: property right

If a party invents or discovers and keeps secret a process of manufacture, whether a proper subject of a patent or not (though no exclusive right to it as against public/ those who in good faith acquire knowledge of it), but he has property in it  which a court of chancery will protect against one who, in violation of contract and breach of confidence, undertakes to apply it to his own use, or to disclose it to third persons

Allow company to keep secret, since those secrets are often innovative  incentive to create innovation

2. Promote commercial ethics - Unfair competition grounded in tort

Maintenance of commercial ethics/ morality, prevent illegitimate competition
 But can court do a good job on what counts as ethical behaviour in different industries, difficult to draw line for morality

Whether P have any valuable secret, D knows the fact through a special confidence that he has accepted  D stood in confidential relationship with P  constitute a breach of trust 
court would not tolerate

3. Intellectual property right

Promote innovation and encourage efficient disclosure of secret

Aim is to punish and prevent illicit behaviour and to uphold reasonable standards of commercial behaviour

Encourage research and development, in areas where patent law does not reach

Despite a discovery may not be patentable, it doesn't destroy the value of the discovery
- Aim to strike a balance between protecting the trade secret and benefiting the public: don't want to make incentive so strong that it undermines people being able to use them in a beneficial way 1 Trade Secret

Trade secret vs. patent
- Comparing to patent law, trade secret is

Protectable perpetually: no duration as long as secrecy is remained

Broader subject matter, almost any info can be qualified, as long as it is not generally known +
properly protected, e.g. customer lists, not limited to high-tech matters
- But: weaker protection than patent law

Doesn't preclude independent development or reverse engineering of that same information  at risk that someone else would legitimately gain access to the secret

Not a right against the world

No formality: no application nor registration (copyright requires registration before suing)
o No disclosure requirement: trade secret encourage people to keep the secret; patent law encourages disclosure
 Tabor v Hoffman: interplay between trade secret and patent

Only protected by state lawFederal preemption: trade secret vs. patent

Whether the law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress" Hines v Davidowitz (1941)People prefer having a patent than trade secret?
o Patent gives stronger protection

But if patentability is unclear  may evaluate trade-off and choose trade secret over patent

Patent may be narrow/ invalid

May be able to keep a secret for longer time than a patent term

Trade secret also protects subject matter that are not entitled to patent law protectionImproper use of disclosure of a trade secret was traditionally a common law tort

Sources of legal protection
- State Common Law

Restatement of Torts § 757 (1939)
o Restatement of Unfair Competition (1995)
- State Statute

Uniform Trade Secrets Act (UTSA) 2019
 49 states and DC have adopted UTSA, but not always adopted uniformly  thus if in these states dealing with common law, and no state statute governing
 Note: not adopted by NY, Mass. And North Carolina
- Federal

Federal Economic Espionage Act  criminal
 Made trade secret misappropriation a federal felony

Federal Defense Trade Secret Act  civil misappropriation claims soon

2 Trade Secret
Uniform Trade Secrets Acts (amended 1985)
S.1 Definitions:
- (1) 'Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.
o Federal Defend Trade Secrets Acts 2016 "improper means does not include reverse engineering,
independent derivation, or any other lawful means of acquisition"
- (2) "Misappropriation" means:
o (i) 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

(ii) disclosure or use of a trade secret of another without express or implied consent by a person who
 (A) used improper means to acquire knowledge of the trade secret; or
 (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was
 (I) derived from or through a person who has utilized improper means to acquire it;
 (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
 (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
 (C) 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.
Subject Matter
(1) Definition of Trade Secret
- UTSA s.1(4) "Trade secret" means "information, including a formula, pattern, compilation,
program device, method, technique, or process, that:
o (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."
- Duration: until the information is disclosedEssential elements to a trade secret claim
(1) subject matter must qualify for trade secret protection

Info: must be a type of knowledge/ info that trade secret law was meant to protect

Info must not be generally known/ readily ascertainable

Holder of trade secret took reasonable precautions under the circumstances to prevent its disclosure - diligent in protecting info

Economic value from secrecy: Trade secret is valuable enough to bother litigating
(2) Misappropriation

By improper means; or

Breach of confidence

3 Trade Secret

oTrade secret P must prove that D acquired the info wrongfully - misappropriated the trade secret
(through deception, skullduggery, outright theft)

Metallurgical Industries Inc. v Fourtek, Inc. (US CA 5th Circuit) (1986)
o Facts: Thermo-O sold 2 zinc recovery furnaces to Metallurgical (P) for reclaiming carbide. M
extensively modified the furnaces to make them perform better  a former Thermo-O's employee (now at Fourtek) begin manufacturing and selling zinc recovery furnaces using P's modification process  P brought suit for misappropriation of trade secret  D argue info he obtained from working with D is too general to be legally protected + not trade secret as the basic zinc recovery process is publicized in the industry.
o Held: remanded for re-trial, but court seems to accept that if industry doesn't know the combination + limited disclosure + effort to keep it as a secret  it is a trade secret.
o

Trade Secret 1) Info not generally known: prior art/ novelty, leaks
 Not public announcements
 No need absolute secrecy, as long as

holder's disclosure to others are limited;
 Here, P only disclosed to 2 businesses with whom it was dealing

disclosure was made to further P's economic interests
 P tried to build a second furnace; to earn royalty payment from a licensee
 Confidentiality is not a requisite, only a factor to consider
 Non-disclosure agreements with employees, limited access, signs showing restrictive access, notices to Ds that it was confidential
 Prof: would be good to have a confidentiality agreement, get nondisclosure agreement with everyone you disclose to, to show effort in keeping it a secret 2) Info not readily ascertainable:
 availability, ease of reverse engineering, non-obviousness
 effort or money expended to develop info 3) Reasonable efforts to maintain secrecy: precautions, security, NDAs 4) Economic value: technology/ information

o

Trade Secret must be a secret

Evidence: expert evidence to prove not generally known

Whether company is trying to protect it  showing that it is a secret

including secret combinations of item which by themselves are publicly known,
o scientific, technical, and business info (e.g. customer lists and business plans)
No standard formula, court should weigh all equitable considerations

o o

Here, the court considered:
o Cost of developing the secret device/process
 P demonstrated the effort involved in making a complex manufacturing process work

Value the secret provides

4 Trade Secret

o

If a businessman worked hard, used his imagination, and taken bold steps to gain an advantage over his competitors, he should be able to profit from his effort.
Commercial Advantage can vanish once the competition learns of it, and law should protect the businessman's efforts to keep his achievement secret
Other possible factor:
o Breach of confidence  injured party may seek redress in court despite subject matter was discovered at little/ no costs/ that object of secrecy is not of great value to himDefinition of trade secret: Restatement of Tort (1939) s.757 comment b

"A trade secret may consist of any 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 materials, a pattern for a machine or other device, or a list of customers."Examples of trade secrets: not generally known/ available

1. Research of product demand (something tangible)  more likely if held in a hard form

2. Business Plan to develop a new market  became public upon entry

3. Customer lists (not just the phone book)  possible, may depend on whether the info is contained in hard form

Certain basic ideas/ concepts are incapable of protection as they were too well known to derive value from secrecy
 e.g. Buffet v Klink relatively straightforward recipes for barbecued chicken and macaroni and cheese as trade secret
Trade secret need not be novel

May have occurred to someone before or used by another  but if it is not generally known or readily ascertainable to the competitors in an industry  may still qualify for trade secret protection

Uniqueness is not an essential element, but must be separated from everyday knowledge
Balance between preventing unfair competition and labor mobility

Want to allow employees to transfer skill from one job to another

But not to the point where they can appropriate others' trade secret

"Law does not require a frontal lobotomy"--

Restatement of Tort: 6 factors to be considered in determining whether info constitutes a trade secret

1. Extent to which is known outside the claimant's business

2. Extent to which it is known by employees and other involved in the business

3. Extent of measures taken by claimant to guard the secrecy of the info

4. Value of info to the business and its competitors

5. Amount of effort or money expended by the business in developing the info

6. Ease/ difficulty with which the info could be properly acquired/ duplicated by others
Uniform Trade secret Act: info is not trade secret if it is "generally known" or "readily ascertainable by proper means"
o Once a secret is readily available through public sources, it loess all trade secret protection  D is then free to obtain the info from the public source or from P

5 Trade Secret
(2) Reasonable Efforts to Maintain Secrecy P.61
- P must show that they have taken reasonable measures to protect the secrecy of their idea
- P cannot publicly disclose the secret and still expect to protect it + must generally include certain efforts to prevent theft or use of the idea by former employeesRockwell graphic System Inc. v DEV Industries Inc (US CA 7th Circuit) (1991)
o Facts: Rockwell, a manufacturer of printing presses used by newspapers, brought the suit against
DEV Industries (a competing manufacturer), and against the president of DEV (ex-employee of
Rockwell). D argued that P only made perfunctory/inadequate efforts to keep them secret 
hence not trade secret  DC granted summary judgment finding no trade secret

Held: it is a trade secret
 Absolute secrecy is not a requirement  issue is whether P had undertaken a reasonable effort to keep the secret

Rationale: relevance of P's effort to maintain secrecy
  more effort  indicate higher probability that P thinks its valuable to put resources/
money to maintain secrecy
  greater precautions that P took to maintain the secrecy of the piece part drawings 
lower the probability that D obtained them properly + higher probability that it obtained them through a wrongful act
 Here, employees removed piece part drawings form P's premises without authorisation,
in violation of their employment contracts and confidentiality agreement, using them in competition with P
o Evidence of reasonable efforts:
 Facility based security measures: P kept the piece part drawings in a place that are only accessed by limited employees, who signed agreement not to disseminate the drawings
 Each drawing is marked saying it is confidential,
 Outside vendors who are given copies of the piece part drawings have to sign confidentiality agreement
 P decided not to patent it because P think others would not be able to do reverse engineering

Counter: no reasonable efforts:
 Allowed employees to make copies (though required to destroy)
 Vendor could make copies, despite confidentiality agreement to return the drawings (P
did not enforce it as it did not want to be wasteful)  merely disclosed to a limited number of outsiders for a particular purpose  doesn't forfeit trade secret protection
 Imposes a duty of confidentiality on the part of the person whom to disclosure is made
 P even permits unsuccessful bidders for a piece part contract to keep the drawings, on the theory that the high bidder this round may be the low bidder the next (ethical standard of a machine shop was considered before making it a vendor, hence no shop has ever abused the confidence reposed in it)
 Merely treating a secret as a secret doesn't mean that it is one, need to take reasonable effort to do soReasonable efforts to maintain secrecy

Balance between the costs and benefits of precautions:
 Fencing costs 6 Trade Secret Non-disclosure agreement
 Loss of business
 Value of secrecy
 Deterring, delaying or excluding competitors

Based on a cost-benefit analysis
 The more the owner of the trade secret spends on preventing the secret from leaking out
 the more he demonstrates that the secret has real value deserving of legal protection  he really was hurt as a result of the misappropriation of it + there really was misappropriation
 BUT: the more that he spends, the higher his costs (direct/ indirect)
Whether additional benefit in security would have exceeded that cost
 "Only in the extreme case can what is a reasonable precaution be determined on the basis of a motion, because the answer depends on a balance of costs and benefits"
 Fact specific, depending on industry, what the secrets are

Rationale of requiring both secrecy requirement and reasonable effort
 Channeling requirement: only do it for things that can be kept as a secret
 People would only rely on trade secret if they think it is viable to keep it as a secret
Electro-Craft Corp v Controlled Motion

Merely having the intention is not enough  P required to show that it had manifested that intention by making some effort to keep the info secret

Security: protection of info from discovery by outsiders
 Whether P treated the info as secret
 Obligation to inform its employees that certain info was secret
 Whether document marked 'confidential'
 Whether Employee access to document restricted
 Whether policy statement issued to outline what it considered secret
 Informal tours given to vendors and customers without warnings as to confidential info;
open house where public was invited to oberve manufacturing processes

(3) Disclosure of Trade Secret P.70
- Trade Secrets are protectable as long as it remained a secret
Types of Disclosures
- (i) Voluntary Disclosure by the Trade Secret Owner

When owner publishes the secret, e.g. in academic journal, public forum  no longer a secret 
no longer protectable

Common form of disclosure: publication of an issued patent, required by patent law s.122 
some patent applications must be published after 18 months  to enable one of ordinary skill in the art to make it, obtaining a patent on an invention destroys trade secret protection  inventor must choose either patent or trade secret protection
- (ii) Distributing a Product that Embodies the Trade Secret to the Public

Selling/ distributing a product embodying a trade secret to the public may risk the secret if it becomes readily accessible

Disclosure may occur even without sale of the product itself, if the secret is disclosed freely and without restriction during the manufacturing or development process

Disclosed if the secret is apparent from the product, to the buyers of the product

Not disclosed if secret in undecipherable (unable to be understood) from within the product, e.g.
object code in a computer program 7

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