Trade secret

Overview

The Uniform Trade Secrets Act ("UTSA") is a piece of legislation created by the Uniform Law Commission (ULC), a non-profit organization. The USTA defines trade secrets and describes claims related to trade secrets. To date, 47 states and the District of Columbia have adopted the UTSA. Click HERE for an example of the USTA, as adopted by Florida's legislature. 

What is a Trade Secret 

USTA's Definition

The USTA 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.

Non-USTA Defnition

Prior the the development of the UTSA, improper use or disclosure of a trade secret was traditionally a common law tort. Sections 757 and 758 of the Restatement of Torts (1939) set forth the basic principles of trade secret law that were widely adopted by U.S. courts.  In particular, § 757, comment b, listed six factors to be considered in determining whether information constitutes a trade secret:

  • The extent to which the information is known outside the claimant's business
  • The extent to which it is known by employees and others involved in the business
  • The extent of measures taken by the claimant to guard the secrecy of the information
  • The value of the information to the business and its competitors
  • The amount of effort or money expended by the business in developing the information
  • The ease or difficulty with which the information could be properly acquired or duplicated by others 

Elements of a Trade Secret Claim 

There are typically three essential elements to a trade secret claim:

  1. The subject matter involved must qualify for trade secret protection (see "Scope" below for more on this)
  2. The holder of the subject matter must establish that reasonable precautions were taken to prevent disclosure of the subject matter.
  3. The trade secret holder must prove that the information was misappropriated or wrongfully taken

Use of a trade secret belonging to another does not always constitute misappropriation.  There are two basic situations in which obtaining the use of a trade secret is illegal; where it is acquired through improper means, or where it involves a breach of confidence.  Trade secrets may be obtained by lawful means such as independent discovery, reverse engineering, and inadvertent disclosure resulting from the trade secret holder's failure to take reasonable protective measures.  The misappropriation of trade secrets is considered a form of unfair competition, and is discussed in the Restatement (Third) of Unfair Competition.  

Misappropriation of Trade Secrets as a Crime

In some circumstances, misappropriation of trade secrets is not only a tort; it is a federal crime

Economic Espionage Act

In 1996, Congress enacted the Economic Espionage Act ("EEA"), codified as 18 U.S.C. §§1831-1839.  In United States v. Sazonov, a case currently pending in the United States District Court for the Southern District of New York, the defendant Sazonoz has been charged with violating the EEA for "attempt[ing] to steal valuable proprietary computer code that took his employer years to develop . . . .  Sazonoz was employed for thirteen years by Susquehanna International Group ("Susquehanna"), a financial services firm headquartered in Pennsylvania with offices in Manhattan."

Scope of Subject Matter

Customer Lists

Customer lists and other lists related to customer business qualify for trade secret protection if the lists' information cannot be ascertained from other generally available sources. In Morlife Inc. v. Perry, 56 Cal. App. 4th 1514 (1997), the California court held that customer identities from an organization's list are protected as trade secrets if the identities are not generally known to the industry. The court also found three factors to be helpful when determining whether something is a trade secret:

  1. how the entity stores the information
  2. who has access to the information 
  3. whether the information was subject to confidentiality provisions

In Morlife, the court ruled that information about customers that was "stored on computer with restricted access" which had been subject to "a confidentiality provision expressly referring to [] customer names and telephone numbers" fell under trade secret protection. According Morlife, information that is difficult and time-consuming to obtain will likely be more protectable than information than was neither difficult nor time-consuming to obtain. Further, the court in Brocade Communication Systems Inc. v. A10 Networks Inc., 873 F.Supp.2d 1192 (N.D. Cal. 2012) found that information including "customer lists and contact information, pricing guidelines, historical purchasing information, and customers' business needs/preferences" typically receives trade secret protection.

Particular manufacturing details that are not publicly available often qualify as protectable subject matter. For more on this, see Gates Rubber Co. v. Bando Chemical Industries Ltd., 9 F.3d 823 (10th Cir. 1993)

Remedies

Remedies will vary depending upon the state, and whether the Economic Espionage Act is involved.

Under §1832(a) of the Economic Espionage Act, misappropriating a trade secret used in interstate commerce or foreign commerce may result in fines or imprisonment.

As an example of enforcement under the Uniform Trade Secrets Act, under Texas's adoption of the Act, a plaintiff who files for a preliminary injunction only needs to show that the defendant possesses the subject matter in question and has the opportunity to use it. This was confirmed in heard in Hughes v. AGE Industries Ltd., which was decided by the Texas Court of Appeals.

Further Reading 

For more on trade secrets, see this Florida State University Law Review article, this Florida State University Law Review article, and this University of Miami Business Law Review article