A trade secret is maintained when an inventor or business takes reasonable
precautions to keep important information confidential. Trade secret
protection generally arises under state statutes. Trade secrets comprise
chemical formulas, mechanical structures, manufacturing processes and
chemical compositions such as the formula for COCA-COLA. Once an individual
has publicly disclosed a trade secret, any protection enjoyed by state
statute is lost.
The most widely quoted definition of a "trade secret" prior to the Uniform Trade Secret Act (UTSA), was that of the Restatement of Torts.1 The vast majority of states, including North Dakota, have now adopted a version of the UTSA that defines a trade secret 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.2
It is frequently stated that customer lists are generally not protectable as trade secrets. This statement is incorrect where: (i) the customer list contains information not generally known in the trade, (ii) not generally in use by good faith competitors, and (iii) the proprietor has taken reasonable steps to preserve the secrecy of the list. Also, lists containing specialized information have been protected.
Although some courts have suggested that the identification of which customers might need a product or service can not qualify for trade secret protection, the 8th Circuit has stated that the identity of high volume users was appropriate for trade secret protection because such information was not readily available.3
CRITERIA FOR TRADE SECRET PROTECTION
The criteria adopted by the Restatement of Torts for determining whether a trade secret exists are:
- Novelty: The extent to which the information is known outside of the business;
- Business Knowledge: The extent to which it is known by employees and others involved in the business;
- Secrecy: The extent of measures taken to guard the secrecy of the information;
- Value: The value of the information to the business and to competitors;
- Development: The amount of effort and money expended in developing the information; and
- Reverse Engineering: The ease or difficulty with which the information could be properly acquired or duplicated by others.4
The Food and Drug Administration has also adopted the same criteria in determining whether an ingredient in a cosmetic is a "trade secret" and therefore may be omitted from an ingredient listing or a label.5
Comment b to §757 of the Restatement of Torts makes clear that "novelty" in the patent law sense is not a requirement for trade secret protection:6
Novelty and prior art. A trade secret may be a device or process which is patentable; but it need not be that. It may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement that a good mechanic can make. Novelty and invention are not requisite for a trade secret as they are for patentability.
Although some minimal amount of novelty is required, absolute novelty is not required because trade secret protection does not protect against independent creation, as does patent protection. Maintaining secrecy of the information, in the context of trade secrets, implies at least minimal novelty.7 Information cannot qualify for trade secret protection if it is generally known to others in the same field.
The fourth and fifth criteria deal specifically with the question of value. The sixth criteria deals both with the issue of value and the issue of secrecy. It should be noted that "value" here does not mean intrinsic or absolute value. Rather, the issue is whether the asserted trade secret would have at least some value to a competitor. The trade secret must be of sufficient value in the operation of a business or other enterprise to provide a potential commercial advantage over those who do not have access to the information. It is usually sufficient if the trade secret is of more than a trivial value. Relatively minor advances can qualify as trade secrets.8
Direct evidence of a trade secret's value is the strongest evidence. Indirect or circumstantial evidence is permitted, however. Evidence can consist of the (i) time, money and effort spent in producing the trade secret, (ii) licensing to others in the industry, and (iii) measures the trade secret owner has taken to preserve the confidentiality of the information.
The subject matter of a trade secret must be secret.9 Trade secret protection is not, however, lost if the secret is discovered through "improper means."10 The Restatement of Torts adopted the "relative" rather than "absolute" standards of secrecy.11
"Others may also know of it independently, as, for example, when they have discovered the process or formula by independent invention and are keeping it secret."12
The "relative" standard of secrecy is the prevailing view,13 and is also the standard adopted by the UTSA ("not being generally known").14
The trade secret owner is under a duty to take reasonable steps to preserve the secrecy of the trade secret. If the owner of the trade secret is subsequently found to have inadequately protected the "secret," protection will be denied.15 In effect, the property right is deemed to have been forfeited.16
One of the principal precautions taken to protect trade secrets are employee nondisclosure or confidentiality agreements.17 However, nondisclosure agreements alone in certain circumstances may not be enough. Although the circumstances of each case will vary, eight basic requirements can be extracted from the cases to prove a trade secret:
- take reasonable precautions against industrial espionage;
- mark plans and documents confidential";18
- use confidentiality agreements and warnings;19
- restrict visitors and implement similar types of plant security;
- lock up or secure sensitive information;
- take technical precautions, such as dividing the system into steps handled by different individuals or departments;
- include copy protection and embedded code within software to track copies; and
- conduct employee exit interviews.
A company which utilizes the above stated eight requirements will increase its odds for receiving and maintaining trade secret protection.
LIABILITY FOR MISAPPROPRIATION
The UTSA is expressly premised on deterring "breach of faith and reprehensible means of learning another's secret."20 Accordingly, the UTSA bases misappropriation on the use of "improper means." However, the analysis only begins after it has been decided that a protectable trade secret exists. Misappropriation is defined under two broad categories: (i) acquisition, and (ii) disclosure and use.
With respect to acquisition, misappropriation is defined as "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."21 "‘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."22
DISCLOSURE AND USE
With respect to disclosure or use, misappropriation is defined as "disclosure or use of a trade secret of another without express or implied consent by a person who:
- Used improper means to acquire knowledge of the trade secret;
- At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was:
- Derived from or through a person who had utilized improper means to acquire it;
- Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
- Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
- Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake."23
Injunctive relief is the principal remedy in trade secret cases.24 A trade secret owner may obtain both a preliminary and a permanent injunction; however, a substantial bond is typically required in these cases.25
Actual and punitive damages are specifically provided for under the UTSA and North Dakota law.26 Monetary relief, like injunctive relief, is only appropriate for the period of time in which the subject matter qualifies as a trade secret plus any additional time necessary to preclude the misappropriator from benefiting from a "head start."27
Damages may be measured by either (i) unjust enrichment, (ii) actual loss, or (iii) a reasonable royalty.28 Punitive damages may be awarded up to twice the amount of any damages if a (i) willful and (ii) malicious misappropriation exists.29 It should be noted that the court awards the punitive damages, not the jury.
It has been held that misappropriation of trade secrets through acts of mail or wire fraud may be a claim properly asserted under the mail fraud statute.30 It has also been held that a misappropriation of trade secrets, as part of a fraudulent scheme, is actionable under RICO provided the facts are sufficient to show the necessary predicate acts.31
LOSING TRADE SECRET STATUS
A trade secret may be lost by selling or displaying a product, outside of an obligation of confidentiality, where the "secret" of the product can be discovered upon inspection or by reverse engineering. It is not a misappropriation to discover a trade secret "properly" by reverse engineering.32 Accordingly, trade secret protection for publicly distributed software may be lost when there are no safeguards against copying.33
Obviously, when an individual publicly discloses their "trade secret" information the information is no longer a trade secret. Many leaks of trade secret information are the result of deliberate (but negligently prepared) publications. Many leaks also come about through casual conversation, loose talk at trade shows and in restaurants, and leaving sensitive documents where they might be seen by others. The lesson to be learned is this: the most important way to protect trade secrets against misappropriation is to educate those to whom the secrets have been entrusted, namely employees.
Since patent applications are initially maintained in secrecy, the information stated in the application is protected as a trade secret until the patent application is publicly disclosed after 18 months from the filing date.34 After the "trade secret" information is published in an issued patent or a published patent application, the information is no longer entitled to trade secret protection. Any "trade secret" information which is not disclosed in the resulting patent is still protected by its trade secret status. However, the applicant may abandon the patent application prior to the 18 months of pendency thereby retaining trade secret protection.
From the date an inventor conceives his invention to the date a patent issues, the only protection that he has is trade secret protection. Hence, it is extremely important for an individual to have confidentiality agreements signed by third parties who receive information relating to his invention to avoid losing trade secret rights. This is applicable during the licensing stage also.
TRADE SECRETS v. PATENTS
Though usually not utilized, trade secret protection should usually be considered prior to filing for patent protection. An individual should consider the following factors:
- the degree of effort required to maintain confidentiality;
- the expense to maintain confidentiality;
- patentability of invention;
- likelihood of reverse engineering; and
- the useful life of the invention.
If maintaining confidentiality of the information is going to be expensive and complex, or if the invention is susceptible to reverse engineering, then patenting the invention should be considered. If the invention's useful life is less than 20 years, then patent protection should be considered since trade secret protection will not increase the time of protection compared to a patent. If the invention is not patentable, then the only protection available is obviously trade secrets.
BENEFITS OF TRADE SECRETS
One interesting aspect of a trade secret is that the information does not need to be patentable to receive trade secret protection. The information only needs to be slightly novel in order to receive trade secret protection, regardless of how obvious it would be to create the material.
Another benefit of a trade secret over a patent is that the term of protection is perpetual as long as it is not discovered or reverse-engineered by another. An additional benefit of a trade secret is that the inventor does not have to go through an expensive patent application process. The inventor only needs to retain the material in a confidential manner so as to prevent public disclosure. Lastly, a trade secret is not publicly disclosed like a patent, therefore the inventor may make improvements to their invention without competition from other businesses.
DETRIMENTS OF TRADE SECRETS
A trade secret can be difficult to maintain when considering accidental public disclosures and reverse engineering. Also, a trade secret does not prevent another individual who independently develops the subject matter of the trade secret, whereas a patent protects the subject matter regardless if the infringer copied or independently developed the infringing product.
PROTECTION DURING LITIGATION
It would be a hollow victory in trade secret litigation if one were required to disclose the asserted trade secrets during litigation to protect those secrets. On the other hand, a defendant is entitled to know what he is alleged to have misappropriated. In order to balance the interests of the litigants, confidentiality orders are frequently used to permit mutual disclosure of confidential information in trade secret litigation.35
- RESTATEMENT OF TORTS, §757 (1939). The Restatement states:
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, testing or preserving materials, a pattern for a machine or other device, or a list of customers * * * Generally, it relates to the production of goods, as for example, a machine or formula for the production of an article. It may, however relate to the sale of goods or to other operations within the business such as a code for determining discounts, rebates or other concessions in a price list or catalog, or a list of a specialized customers or a method of bookkeeping or other office management. Id., at cmt. b.
- UNIFORM TRADE SECRETS ACT §1(4); N.D.C.C. §47-25.1-01 (emphasis added).
- Surgidev Corp. v. Eye Technology, Inc., 828 F.2d 452 (8th Cir. 1987).
- RESTATEMENT OF TORTS, §757, cmt b.
- 21 C.F.R. §20.61, 701.3(a), 720.8 (1987). See also, Zotos International Inc. v. Young, 830 F.2d 350 (D.C. Cir. 1987).
- Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974).
- USM Corp. v. Marson Fastener Corp., 467 N.E.2d 1271 (Mass. 1984).
- Kewanee Oil, at 470 ("However, some novelty will be required if merely because that which does not possess novelty is usually known; secrecy, in the context of trade secrets, thus implies at least minimum novelty").
- Such as theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. N.D.C.C. §47-25.1-01.
- RESTATEMENT OF TORTS, §757 comment b (1939).
- Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983).
- N.D.C.C. §47-25.1-01.
- Nationwide Chemical Corp. v. Wright, 458 F.Supp. 828 (M.D. Fla. 1976), aff'd, 484 F.2d 714 (5th Cir. 1978).
- Evidence of the security measures the trade secret owner undertook is also relevant in determining whether the acquisition was improper, whether the alleged misappropriator knew or should have known the information was a trade secret, and whether the disclosure was accidental.
- Surgidev Corp. v. Eye Technology, Inc., 828 F.2d 454, 455 (8th Cir. 1987) (requiring employees to sign nondisclosure agreements, restricting visitor access to sales and administrative areas, keeping customer information in locked files, and distributing customer information on a "need-to-know" basis was sufficient to meet the "reasonable precaution" test)
- Electro-Craft, 332 N.W.2d at 903.
- Commissioner's prefatory note, UTSA.
- N.D.C.C. §47-25.1-01 (emphasis added).
- Id. A pure heart, empty head defense is not available.
- Ruckelshous v. Monsanto Co., 104 S.Ct. 2862 (1984) ("The right to exclude, indeed, is fundamental to the concept of a property right").
- N.D.C.C. §47-25.1-02.
- N.D.C.C. §47-25.1-03.
- Conmar Products Corp. v. Universal Slide Fastener Co., 172 F.2d 150 (2d Cir. 1949).
- N.D.C.C. §47-25.1-03.
- Religious Technology Center v. Wollersheim, 796 F.2d 1076 (9th Cir. 1986).
- 18 U.S.C. §1962(c); Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985).
- Cataphote Corp. v. Hudson, 422 F.2d 1290, 1293 (5th Cir. 1970).
- Videotronics, Inc. v. Bend Electronics, 564 F.Supp. 1471 (D. Nev. 1983). The propriety of reverse engineering mask works has been codified at 17 U.S.C. §906.
- 35 U.S.C. §122.
- N.D.C.C. §47-25.1-05; See also Rule 507 of the North Dakota Rules of Evidence.