The law of trade secrets had its origin in the common law and was imported into the United States from England in the landmark case of Peabody v. Norfolk, where the court held that the owner of a secret of trade or manufacture is "entitled to protection against those who in, or with knowledge of, violation of contract and breach of confidence, undertake to disclose it or to reap the benefit of it."
Economic Espionage Act of 1996
A trade secret is:
|“||all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if —||”|
Restatement (First) of Torts §757, comment b
A trade secret is:
|“||[A]ny formula, pattern, device or compilation of information which is used in one's business, and which give him an opportunity to obtain an advantage over competitors who do not know or use it. . . . A substantial element of secrecy must exist, so that, except by use of improper means, there would be difficulties in acquiring the information. . . . Protection is not based on a policy of rewarding or otherwise encouraging the development of secret processes or devices. The protection is merely against breach of faith and reprehensible means of learning another's secret.||”|
Uniform Trade Secrets Act
Trade secrets are:
|“||Information, including a formula, pattern, compilation, program, device, method, technique, or process, that is both of the following: (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.||”|
The sine qua non of a trade secret, then, is the plaintiff’s possession of information of a type that can, at the possessor’s option, be made known to others, or withheld from them, i.e., kept secret. Trade secret law does not protect ideas as such. Indeed a trade secret may consist of something we would not ordinarily consider an idea (a conceptual datum) at all, but more a fact (an empirical datum), such as a customer’s preferences, or the location of a mineral deposit. In either case, the trade secret is not the idea or fact itself, but information tending to communicate (disclose) the idea or fact to another. Trade secret law, in short, protects only the right to control the dissemination of information.
There are several factors used to determine if subject matter qualifies as a trade secret. Among the factors considered are the extent of measures taken by the trade secret owner to guard the secrecy of the information and the ease or difficulty with which the information could be properly acquired or duplicated by others. Based on these considerations, the general rule is that subject matter cannot be successfully protected as a trade secret if it is widely distributed. However, if adequate security precautions are taken to ensure that access to the subject matter being distributed is treated as secret, the subject matter may still be considered a trade secret.
Among the factors in assessing whether certain subject matter is a trade secret are:
- the extent to which the information is known outside of the company;
- the extent to which it is known by employees and others involved in the company;
- the extent of measures taken by the company to guard the secrecy of the information;
- the value of the information to the company and to its competitors;
- the amount of effort or money expended by the company in developing the information; and
- the ease or difficulty with which the information could be properly acquired or duplicated by others.
"[T]he rise of computer technology, the ubiquity of cell phones and the Internet, and our transition to the Information Age have increased the difficulty that firms encounter in maintaining the confidentiality of their proprietary information. Years ago, the theft of trade secrets may have involved the taking of laboratory notebooks, memoranda, or other papers from a competitor's office despite the presence of security personnel or surveillance cameras. Today, a trade secret misappropriator can download proprietary information from company computers, or take photographs of confidential documents using a cell phone camera, within moments."
One of the most famous trade secrets is the formula for manufacturing Coca-Cola. Coca-Cola was accorded trade secret protection in 1920 because the recipe had been continuously maintained as a trade secret since the company's founding in 1892, and it apparently exists to this day.
Unlike a copyright or patent, a trade secret is not limited in duration to a fixed number of years. Instead, a trade secret endures so long as the protected information remains commercially valuable and is maintained as a secret. If the trade secret holder ceases to take measures to maintain the confidentiality of the protected information, or if the information becomes widely available to the public, then the trade secret is extinguished.
Rights of trade secret owner
Trade secret protection is limited. A trade secret holder is only protected from unauthorized disclosure and use of the trade secret by others and from another person obtaining the trade secret by some improper means. Typical cases of trade secret misappropriation involve trespass, bribery and theft, as well as breaches of a duty of confidence committed by former employees or commercial partners.
The information can be freely used if it is obtained or learned through legitimate means, such as reverse engineering. Moreover, if the trade secret is publicly disclosed, it loses its legal protection.
Importance of trade secrets
Many businesses have developed proprietary information that provides a competitive advantage because it is not known to others. As the United States continues its shift to a knowledge- and service-based economy, the strength and competitiveness of domestic firms increasingly depends upon their know-how and intangible assets. Trade secrets are the form of intellectual property that protects this sort of confidential information.
A number of competing innovation policy concerns help shape the particular doctrines that comprise trade secret law. The availability of legal protection for trade secrets potentially promotes innovation, encourages firms to invest in employee development, and confirms standards of commercial ethics and morality. On the other hand, trade secret protection involves the suppression of information, which may hinder competition and the proper functioning of the marketplace. An overly robust trade secret law also could restrain employee mobility and promote investment in costly, but socially inefficient security measures.
Unlike many of the other forms of intellectual property, trade secrets are generally protected by state law, not federal law. Trade secrets are broader in scope than patents, and include scientific and business information (e.g., market strategies).
See Economic Espionage Act of 1996 above for the definition of trade secret contained in the Act.
The Act criminalizes both "economic espionage" and the "theft of trade secrets." The theft of trade secrets is punishable by up to fifteen years' imprisonment and a $500,000 fine if done to benefit a foreign government or agent, and up to ten years' imprisonment and a $250,000 fine in other cases. The Act also provides for the criminal forfeiture of property and court orders preserving the confidentiality of trade secrets.
Negative information as a trade secret
There are many cases that have found trial and error information used in software development (often referred to as "negative information" or negative know-how)) to be protected as a trade secret.
There is no absolute privilege for trade secrets and other confidential information. Additionally, trade secrets are not accorded automatic and immediate immunity against disclosure; rather, in each case the claim to privilege is weighted against the need for disclosure. The party claiming a trade secret privilege has the burden of establishing its existence. Thereafter the party seeking discovery must make a prima facie particularized showing that the information sought is relevant and necessary to the proof of, or defense against, a material element of one or more causes of action.
- 98 Mass. 452 (1868).
- Id. at 461.
- See 18 U.S.C. §1839(3).
- Restatement (Third) of Unfair Competition §39 (1995). The trade secret owner may communicate the trade secret to others provided that those to whom the trade secret is communicated pledge not to reveal the trade secret to others. Id.
- The Role of Trade Secrets in Innovation Policy, at 2-3.
- See Coca-Cola Bottling Co. v. Coca-Cola Co., 269 F. 796 (D. Del. 1920) (holding that Coca-Cola retained legal title to its formula upon entering a bottling contract because it kept the formula secret).
- See United States v. Dubilier Condenser Corp., 289 U.S. 178, 186 (1933)(full-text).
- Restatement (Third) of Unfair Competition §43 (1995).
- Id. §39 cmt. c.
- Federal law does prohibit the disclosure of confidential information obtained by federal officials in the course of their official duties. Id.
- Id. §1831
- See, e.g., Integrated Cash Management Services, Inc. v. Digital Transactions, Inc., 732 F. Supp. 370 (S.D.N.Y. 1989) (full-text) ("the Court credits his testimony that a significant amount of time and money was spent in investigating alternatives that, in the end, were not fruitful. Such a trial and error process is also protectable as a trade secret of ICM"), aff'd, 920 F.2d 171 (2d Cir. 1990)(full-text); Cybertek Computer Products, Inc. v. Whitfield, 1977 Cal. App. LEXIS 2140, 203 U.S.P.Q. (BNA) 1020 (Cal. Super. 1977) (full-text) ("the specifications of these basic mechanical elements and their relationship to each other . . . were not publicly known, were arrived at only through painstaking research and extensive trial and error, and, therefore, constituted a trade secret entitled to protection." (emphasis added.))
- See Paulsen v. Case Corp., 168 F.R.D. 185 (C.D. Cal. 1996); In re Continental Gen. Tire, Inc., 979 S.W.2d 609 (Tex. 1998) (full-text).
- See Federal Open Market Comm. of Federal Res. Sys. v. Merrill, 443 U.S. 340 (1979) (full-text).
- See Hartley Pen Co. v. United States Dist. Ct., 287 F.2d 324 (9th Cir. 1961) (full-text).
- See In re Continental Gen. Tire, Inc., 979 S.W.2d 609 (Tex. 1998) (full-text).