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The Secret to Success: How to Keep Trade Secrets Safe

Posted by Tulip Mahaseth on Tuesday, Mar 19, 2019

trade-secrets

Red Points examines what qualifies as trade secrets subject matter in the United States, the elements of trade secrets theft under 18 U.S. Code § 1832 and trade secrets misappropriation claim, and affirmative defenses available against said legal actions.

SUMMARY

  • Trade secrets subject matter constitutes information of actual or potential economic value that is not generally known in the industry, is not readily ascertainable by proper means, and for which reasonable precautions are taken to maintain its secrecy both internally and externally.
  • Trade secrets misappropriation is the improper acquisition, disclosure, or use of a trade secret.
  • A trade secret owner may sue the concerned party for trade secrets misappropriation by showing that the trade secret information was obtained through improper means, or that the other party’s use of trade secret information involved a breach of express or implied trust.
  • Agreements such as NDAs and, in the case of Chinese manufacturers, NNNs are important for providing trade secret owners legal causes of action to sue for trade secrets misappropriation.
  • If trade secrets misappropriation benefits a foreign instrumentality, the party concerned can be sued under the federal statute 18 U.S. Code § 1832 for the federal crime of theft of trade secrets.
  • To assert an affirmative defense against trade secrets theft or misappropriation, the defendant has to show that the information was acquired through independent invention or reverse engineering rather than improper means.

Keeping valuable commercial information as trade secrets is standard practice in industry, which can in certain circumstances be more advantageous than seeking patent protection.  Information that qualifies as trade secrets subject matter is diverse. Examples of trade secrets include the KFC trade secret recipe and the Coca Cola formula trade secret, as well as search algorithms utilized by Google and Amazon.

Trade secret vs patent

Trade secrets can be kept indefinitely, unlike patents, which expire 20 years from filing, after which anyone can use the patented invention for their profit.  Moreover, not all valuable commercial information is patentable. However, the disadvantage of keeping information as a trade secret is that unlike patent owners, owners of trade secrets get no ascertained period of exclusive use.  If a competitor independently invents or reverse engineers the same compositions or methods of producing them, then the trade secret owner cannot prevent them from using or marketing said compositions, while a patent owner could sue them for patent infringement and file injunctions to prevent them from making use of their patented inventions during the 20-year period of exclusivity.  

[Free guide] Intellectual property protection for small business owners

Maintaining information as a trade secret also risks that the trade secret information can become public information if adequate measures are not taken to maintain its secrecy. But at the same time, patents can take a long time to issue and can be expensive to obtain and enforce in court.  In addition, another advantage of keeping valuable information a trade secret is that, in the United States, theft of trade secrets, unlike patent infringement, is not just a civil cause of action, but also a federal crime with severe criminal penalties if the theft benefits a foreign instrumentality.  This article discusses what subject matter can qualify as a trade secret, what constitutes theft of trade secrets under 18 U.S. Code § 1832 or trade secrets misappropriation, and what are the defenses against theft of trade secrets or trade secrets misappropriation.  

What qualifies as trade secrets subject matter?

In the United States, trades secrets are protected both under state and federal law.  The Uniform Trade Secrets Act (UTSA), which has now been adopted by all states in the United States with the exception of New York,  and 18 USC § 1839(3) describe trade secrets as any information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent actual or potential economic value from:

  1. not being generally known in the industry,
  2. not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and
  3. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

To qualify as a trade secret, the owners of such information must treat it as a trade secret by taking reasonable internal and external safeguards to maintain its secrecy.  For example, in Rockwell Graphic Systems v. DEV Industries, the disputed information was found not to be a trade secret because the plaintiff failed to take reasonable external safeguards to maintain secrecy by sending out the information to third parties without Non-Disclosure Agreements (NDAs) in place, despite the many internal safeguards the plaintiff took to keep the information a secret among its own employees.  

Even though maintaining secrecy is a prerequisite, the secrecy does not have to be absolute.  Some reasonable disclosure of trade secrets is allowed even without having NDAs in place when the disclosure is made in the furtherance of important business economic interests, such as during negotiations for sale of the business.  It is also important to note that in other countries, such as China, agreements such as Non-Compete, Non-Circumvention, Non-Disclosure (NNN) Agreements may be required instead of standard NDAs to prevent Chinese manufacturers or licensees from using trade secrets without the owners’ authorization.  

In the United States, trade secrets misappropriation includes improper use of trade secrets without the owner’s authorization. However, in other countries such as China, trade secrets may not be granted such vast protection.  Given that NDAs only prevent Chinese manufacturers or potential licensees from revealing trade secrets but not from using it themselves, broader agreements such as NNNs may be required to protect against trade secrets misappropriation.

Negative know-how

In some states, trade secrets include “negative know-how,” such as what drug composition has no therapeutic effect etc.  Gaining corporate knowledge of what doesn’t work has economic value as time and resources are valuable to any business. By utilizing this negative know how, that is, by not pursuing unsuccessful strategies, competitors may gain an advantage over corporations that devoted their resources to test and find out what strategies failed.  However, in other states, negative know-how does not fall under trade secrets subject matter because they take the narrower view that only information that can be “used” in business has economic value, and because negative know-how is not literally used in business, it is excluded from being trade secrets subject matter.

In New York state, which has not adopted the UTSA, Section 757 of the Restatement of Torts still governs what qualifies as trade secrets subject matter under New York law.  In particular, Section 757, comment b lists six factors that a court can weigh and balance in determining whether the disputed information qualifies as a trade secret:

  1. Extent to which the information is known outside of the trade secret owners’ business
  2. Extent to which the information is known by employees and others in the trade secret owners’ business
  3. Extent of measures taken to guard the secrecy of the information
  4. Value of the information to the trade secret owners’ business and its competitors
  5. Amount of effort and/or money expended by the trade secret owners in developing the information
  6. Ease with which the information could be properly acquired or duplicated by others

Elements of theft of trade secrets under 18 U.S. Code § 1832 and trade secrets misappropriation claim

18 U.S. Code § 1832 provides that theft of trade secrets involves “intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent,” therefore, whoever:

  1. “knowingly steals or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;
  2. without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret; or
  3. receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;”

or attempts to commit any offense described in (1) through (3) or conspires with one or more other persons to commit said offenses would be convicted for theft of trade secrets.  A conviction under 18 U.S. Code § 1832 for the federal crime of theft of trade secrets can result in a fine of up to $5,000,000 or three times the value of the stolen trade secrets to the trade secret owner, or imprisonment up to ten years, or both.

The UTSA Section 1(2) defines "misappropriation" as the improper acquisition, disclosure, or use of a trade secret.  For the use of a trade secret belonging to another to constitute trade secrets misappropriation, 1) the trade secret information must be acquired through improper means, or 2) the use of trade secret information must involve a breach of trust

Improper means includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage.  For example, obtaining trade secrets information about a plant construction by taking aerial photographs of the trade secret owner’s premises were found be “devious” and “commercially wrong” improper means by the court in the Dupont case because they were outside the normal ethical bounds of business.  

Breach of trust can be express or implied.  An express breach of trust involves breaking an express promise of secrecy or to not disclose.  This kind of breach usually involves violating an NDA. Additionally, the trade secret owner can also sue the party violating the NDA for breach of contract.  An implied breach of trust involves breach of the duty of loyalty, that is, when the other party had reason to know that the disclosure was intended in confidence, and the trade secrets owner was reasonable in inferring that the other party consented to the obligation of secrecy even in the absence of any such express agreements like NDAs.  

For example, in Smith v. Dravo Corp, the court held that the implied trust was breached when the potential buyer started using the blueprints disclosed by the trade secret owner for the limited purpose of securing business from the buyer ,even though the blueprints were disclosed without an express NDA.  If parties would like to avoid being sued for implied breach of trust from trade secret owners, they should enter into "disclosure agreements" with the owners that expressly indicate that any information disclosed to them is not a trade secret.

Affirmative defenses to theft of trade secrets or misappropriation of trade secrets claim

When sued for theft of trade secrets or trade secrets misappropriation, defendants can assert the following affirmative defenses:

  1. Discovery by independent invention: To assert this defense the defendants would need to show that they did not acquire the trade secret information by improper means, and instead, independently invented or discovered the trade secret information on their own.
  2. Discovery by reverse engineering:  For this defense, the defendants would need to show that they acquired the trade secret information by reverse engineering the trade secret owners’ product.  For example, if by carrying out certain tests somebody can deduce the exact composition or recipe of Coca Cola or KFC chicken, then that person cannot be successfully sued for trade secrets theft or misappropriation.

Conclusion

In conclusion, there are several advantages to keeping valuable commercial information as trade secrets so long as such information is not generally known in the industry, is not readily ascertainable by proper means, and reasonable precautions are taken to maintain its secrecy both internally and externally.  

NDAs and, in the case of Chinese manufacturers, NNNs are important for maintaining secrecy and providing trade secret owners legal causes of action to sue for trade secrets misappropriation.

Trade secrets misappropriation is the improper acquisition, disclosure, or use of a trade secret. The trade secret owner may sue the other party for misappropriation by showing that trade secret information was obtained through improper means or that the other party’s use of trade secret information involved a breach of trust.  Additionally, if the trade secrets misappropriation benefits a foreign instrumentality, the other party can be sued under the federal statute 18 U.S. Code § 1832 for the federal crime of theft of trade secrets.

To assert an affirmative defense against trade secrets theft or misappropriation, the defendant has to show that the trade secret information was not acquired through improper means but by either independent invention or reverse engineering.

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About the author

Tulip Mahaseth

Post Written by Tulip Mahaseth

Tulip Mahaseth, Ph.D., is a legal content contributor for Red Points. She is a Patent Attorney at Foley & Lardner LLP, Palo Alto, where she practices patent prosecution and counseling. Tulip is admitted to practice before the State Bar of California and the United States Patent and Trademark Office. Tulip received her JD, cum laude, from Northwestern University School of Law, where she was a George L. Quilici Scholar and Foley & Lardner Diversity Fellow. Tulip holds an M.S. and a Ph.D. in Microbiology from University of Illinois at Urbana-Champaign. She received her integrated M.S. in Biological Sciences with First Division honors from Birla Institute of Technology and Sciences, Pilani