June 29, 2009

TRADE SECRET LAW

TRADE SECRETS“(T)rade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industry…The future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property.” - Rockwell Graphics

Examples of Trade Secrets

formula for a sports drinksurvey methods used by professional pollstersrecipes a new invention for which a patent application has not yet been filedmarketing strategiesmanufacturing techniquescomputer algorithms Examples of Trade Secrets That Should Be Protected

Practical Importance of Trade Secrets

Protect valuable information that cannot be sheltered under other forms of IP law, such as formula for Cokeprotect ideas that offer a business a competitive advantage, thereby enabling a company or individual to get a head start on the competition -- for example, an idea for a new type of product or a new website keep competitors from learning that a product or service is under development and from discovering its functional or technical attributes -- for example, how a new software program works

Practical Importance (cont.)

protect valuable business information such as marketing plans, cost and price information and customer lists -- for example, a company's plans to launch a new product line protect "negative know-how" -- that is, information you've learned during the course of research and development on what not to do or what does not work optimally -- for example, research revealing that a new type of drug is ineffective, or protect any other information that has some value and is not generally known by your competitors -- for example, a list of customers ranked by how profitable their business is.

What do courts consider in determining if a trade secret exists?

Courts usually consider the following three factors in determining whether you have a trade secret:

(1) Is the information deemed to be a "trade secret" valuable to the business?

(2) What steps have been taken to keep the information secret?

(3) To what extent do employees and others involved in the business know about the information? What about people outside the business?

Trade Secret Law

Sources of law

(1) Misappropriation of Trade Secrets (Uniform Trade Secrets Act) and

(2) Contract Law – confidentiality or nondisclosure agreement

TRADE SECRETSState Law Protection

Uniform Trade Secrets ActUnlike patents, copyrights and trademarks, trade secrets are protected under state law

Uniform Trade Secrets Act - Model Act Amended in 1985

41 states have enacted statutes modeled after UTSA

2 states (AL and MA) have separate state statutes protecting trade secrets

7 states protect trade secrets under the common law

Basics ofUniform Trade Secrets Act

In those states which have enacted UTSA statutes, the statutes displace conflicting tort, restitutionary, and other law of the State providing civil remedies for misappropriation of trade secrets

HOWEVER:

The statutes do not affect:Contractual remedies, whether or not based

upon misappropriation of a trade secretOther civil remedies that are not based upon

misappropriation of a trade secretCriminal remedies, whether or not based

upon misappropriation of a trade secret

Basics of theUniform Trade Secrets Act

“Trade secret” defined as:

information, including a formula, pattern, compilation, program, device, method, technique, or process, that:derives independent economic value from not

being generally known or readily ascertainable by proper means by other persons and;

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

Basics ofUniform Trade Secrets ActProvides cause of action for “misappropriation” of trade secrets

3 year statute of limitations - action must be brought within 3 years after misappropriation is discovered or should have been discovered

Elements of Misappropriation Claim

(1) Info must be trade secret; (2) reasonable steps to keep secret; (3) Misappropriation

(continued)

Misappropriation:

disclosure or use of a trade secret of another without express or implied consent by a person who: Improperly acquired trade secretAt the time of disclosure or use, knew or

had reason to know that his knowledge of the trade secret was:

Obtained from improper meansAcquired under a duty to maintain

secrecy

Examples: Improper Means

Observing neighbor’s laptop on airplane

Overhearing conversation at restaurant

Eavesdropping on biochemists as they walk

Impersonation of puzzled undergraduate

Going through a company’s trash

Basics ofUniform Trade Secrets Act

In an action under the act, a court is authorized to preserve the secrecy of an alleged trade secret by:granting protective orders in connection

with discovery proceedingsholding in-camera hearingssealing the records of the actionand ordering any person involved in the

litigation not to disclose an alleged trade secret without prior court approval.

TRADE SECRETSWays of Losing Trade Secret

Protection

Disclosing it to persons not bound by an agreement to maintain confidentiality

Reverse engineering

Failure to maintain reasonable security precautions in workplace

Property Side of Trade Secrets

A trade secret must be a secret

A trade secret must have value

How do we know if it is a secret?

The court looks into:The measures the company took to keep

the information secretThe cost to the company of keeping the

information secretThe number of people who know the secretThe subjective belief that the trade secret

is in fact a secret

How do we know if the secret has value?

The court may consider:Expert witness testimonyWhether the information is common

knowledge

“Secrecy” in a Trade Secret

Secrecy must be “substantially secret,” it does not have to be absolute. Metallurgic.

One must take “reasonable means” to protect one’s secret. Dupont & Rockwell.

Liability for Using or Disclosing Another’s Trade

SecretOne is liable for using or disclosing another’s trade secret if: One uses improper means to discover the trade

secret The disclosure or use constitutes a breach of

confidential relationship

One is not liable if: One discovers the trade secret by reverse

engineering One discovers the trade secret independently

Economic Espionage Act of 1996

EEA, sec.1831, makes it illegal for a foreign entity to knowingly steal, copy, receive secrets

Punishment is up to 15 years in prison and a substantial fine Individuals: $500,000. Organizations: $10 million!

EEA, sec.1832, makes it illegal for anyone to convert a TS “that is related to or included in a product…in interstate or foreign commerce…” Individuals: $500,000. Organizations: $5 million! Forfeit of all proceeds derived from such a violation

(sec. 1834).

Enforcement Example Thus far has been used in the most egregious cases

First published opinion directly addressing Congress’ intent of the EEA: U.S. v. Hsu, 155 F.3d 189 (3rd Cir. 1998) Mr. Hsu, an employee of a paper company, met with an undercover FBI

agent in LA. Mr. Hsu allegedly asked the agent to find a Bristol-Myers Squibb employee willing to sell secrets related to their cancer drug, Taxol.

A meeting was arranged, where Mr. Hsu met with undercover FBI agents, where he was arrested.

At trial, Mr. Hsu wanted to see whether the info was in fact a trade secret. The court rejected his argument, noting that the EEA makes it illegal to attempt or conspire to steal TS. In this respect, the actual info he was attempting to buy was irrelevant.

Employment Relation and Contract Considerations

Employee Confidentiality, or non-disclosure,

Agreements

“I agree that I shall not during, or at any time after the termination of my employment with the Company, disclose or divulge to others including future employers, any trade secrets, confidential information, or any other proprietary data of the Company in violation of this agreement.”

Non-compete agreements

An agreement that prevents an employee from competing (by taking a job with a competitor or opening up competing business)

Limited by time, geography, and profession

Does not affect whether a company can prohibit an employee by competing by using trade secrets improperly obtained from previous employer

Non-Compete Agreements

In Louisiana, these are enforceable

“The agreement may limit competition only in a business similar to that of the employer (1) in a specified geographic area and (2) for a term not to exceed two years.”

Customer lists

Is it just list of names and addresses or information compiled over time by company?

How much effort went into list?

Is information easily ascertainable?

Did departing employee create list?

Evaluation, or submission, Agreement

“The Developer has created certain Materials as described in Paragraph 1 and is submitting the Materials, together with this Agreement, to Company.”

Idea must be solicited

Expectation of compensation

For next time

Read Chapter 8 and as much as 9 as possible.

What do courts consider in determining if a trade secret exists?

Answer: Courts usually consider the following three factors in determining whether you have a trade secret:

(2) What steps have been taken to keep the information secret?Trade secret laws require that you have taken some action to keep your information a secret. The security procedure taken to protect the information is often the most important evidence that the information constitutes a trade secret. For example, courts have often found that restricting access (on a "need to know" basis) to any sensitive information is a factor that helps to meet this requirement. Courts have also found that physical security, such as keeping written trade secret information in a locked drawer and granting very limited access to it, can meet this requirement. Generally, holders of trade secrets develop a formal system for safeguarding their trade secret information. Such a system can include, for example, reviewing information to be sure that the secret information is not included in documents sent to customers and competitors. In addition, proprietary notices can be placed on all documents containing information related to trade secrets and strict confidentiality provisions can be written into all consulting, manufacturing, employment, and/or non-disclosure agreements.

(3) To what extent do employees and others involved in the business know about the information? What about people outside the business?The extent that those in your business and those outside the business have access to the information can affect a court's decision as to whether you have a legal trade secret. Generally, courts have found the information to be public knowledge and not a trade secret if people who do not have a need to know the information have access to it. This is especially true if many people outside the company are familiar with the information.