EE veryone has heard of tradesecrets. Employees areoften asked to sign anagreement regarding theirprotection, whereas

employers often worry thatemployees will move to acompetitor and take the company’strade secrets with them. TheInternet appears to containinformation on every companynow in business (and many nolonger in business). Much of thepublic corporate information nowavailable on the Internet wouldhave been viewed as trade secretinformation just a few years ago.

What is a trade secret today? Aretrade secrets still important? Arethere any left to protect? If yes,how can those secrets be protectedin today’s information age? Partone of this article discusses legaldefinitions of trade secrets in theUnited States and theirimplications for protection. Parttwo will discuss federalenforcement provisions and specificmethods companies can use toprotect their trade secrets.

WHAT IS A TRADE SECRET?A trade secret is information thatcan be used in the operation of abusiness or other enterprise that isboth sufficiently valuable andsufficiently secret to give the owneran actual or potential competitiveadvantage. Two or more businessescould each possess the same tradesecret (or variations of the samesecret) because each of them

developed it independently andkept it secret.

An exact definition of a tradesecret is not possible because eachsecret is specific to a particularbusiness operation. Some of thefactors typically considered indetermining whether businessinformation qualifies as a tradesecret are

• the extent to which theinformation is known outside ofthe business

• the extent to which it isknown by employees and othersinvolved in the business

• the extent of measures takenby the business to guard its secrecy

• the value of the informationto the business and its competitors

• the amount of effort ormoney expended in developing it

• the ease or difficulty withwhich it could be properly acquiredor duplicated by others.

See the Restatement of Tortsbox for one famous legal definitionof trade secrets.

Unlike the federal patent laws(1) and trademark laws (2), tradesecret protection was traditionallyprovided by various laws of theindividual states, and litigationinvolving trade secrets was usuallyhandled in the state court systems.Some states protected trade secretsunder the common law; someenacted statutes specifically directedto their protection. Thus trade-secret law developed unevenlyaround the United States, whichwas a problem because of its

commercial importance tointerstate business. Trade secretlitigation often occurred in stateswith large commercial centers, butit rarely occurred in less populousand more agricultural jurisdictions.Even in states where there hadbeen significant litigation, theparameters of trade secretprotection and the appropriateremedies for misappropriation wereuncertain. Adding to the confusionwas the 1978 release of the SecondRestatement of Torts, whicheliminated the Section 757

A Brief History of Trade Secret Law, Part 1by Ernie Linek

The secret formula for Coca-Cola is one ofthe oldest and most famous trade secrets inthe world. THE COCA-COLA COMPANY

(WWW2.COCA-COLA.COM)

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definition of trade secrets quotedabove that had served as a legalguide for trade secret protectionsince 1939.

A STANDARD DEFINITION?Thus starting in the 1980s, manystates adopted a new trade-secretlaw called the Uniform TradeSecrets Act (UTSA) (3). Some statesthat adopted the UTSA modifiedcertain provisions of the originalmodel, so a local attorney shouldalways be consulted to determinewhich sections and/or definitionshave been adopted by your state (4).

The UTSA defines a protectabletrade secret as follows:

“Trade secret” meansinformation, including a formula,pattern, compilation, program,device, method, technique, orprocess, that

(i) derives independent economicvalue, actual or potential, fromnot being generally known to, andnot being readily ascertainable byproper means by, other personswho can obtain economic valuefrom its disclosure or use, and

(ii) is the subject of efforts that arereasonable under the circumstancesto maintain its secrecy.

The UTSA definition goesbeyond the 1939 Restatement ofTorts definition, which required thata trade secret be continuously usedin one’s business. The broaderdefinition in the UTSA extendsprotection to a trade-secret ownerwho has not yet had an opportunityor acquired the means to put asecret to use. The definition alsoincludes information that hascommercial value from a negativeviewpoint, such as the results of

lengthy and expensive researchproving that a certain process willnot work, which could be of greatvalue to a competitor.

The UTSA codified the basicprinciples of common law trade-secret protection, preserving itsessential distinction from the patentlaws. Under both the UTSA andcommon law principles, for example,more than one person can beentitled to trade-secret protection ofthe same information, and analysis,in the hope of “reverse engineering”a lawfully obtained product todiscover a trade secret, is permissible.

Misappropriation or ProperDiscovery? For liability to exist underthe UTSA, a trade secret must exist,and either a person’s acquisition ofthat secret, disclosure of it to others,or use of it must be improper. Forexample, the mere copying of anunpatented item is not a violation ofthe UTSA.

Misappropriation, as defined bythe UTSA means

(I) acquisition of a trade secret ofanother by a person who knowsor has reason to know that thetrade secret was acquired byimproper means; or

(II) disclosure or use of a tradesecret of another without expressor implied consent by a personwho

(A) used improper means toacquire knowledge of the tradesecret; or

(B) at the time of disclosure oruse, knew or had reason to knowthat his knowledge of the tradesecret was

(i) derived from or through aperson who had utilized impropermeans to acquire it;

(ii) acquired undercircumstances giving rise to a dutyto maintain its secrecy or limit itsuse; or

(iii) derived from or througha person who owed a duty to theperson seeking relief to maintainits secrecy or limit its use; or

RESTATEMENT OF TORTS

The following definition of tradesecrets was made in Section 757 of the1939 Restatement of Torts.

A trade secret may consist of anyformula, pattern, device, orcompilation of information which isused in one’s business, and whichgives him an opportunity to obtain anadvantage over competitors who donot know or use it. It may be a formulafor a chemical compound, a process ofmanufacturing, treating, or preservingmaterials, a pattern for a machine orother device, or a list of customers.

It differs from other secret informationin a business in that it is not simplyinformation as to single or ephemeralevents in the conduct of the business,as, for example, the amount or otherterms of a secret bid for a contract orthe salary of certain employees, or thesecurity investments made orcontemplated, or the date fixed for theannouncement of a new policy or forbringing out a new model or the like.

A trade secret is a process or device forcontinuous use in the operation of thebusiness. Generally it relates to theproduction of goods, as, for example, amachine or formula for the productionof an article. It may, however, relate tothe sale of goods or to other operationsin the business, such as a code fordetermining discounts, rebates, or other

concessions in a price list or catalogue,or a list of specialized customers, or amethod of bookkeeping or other officemanagement.

The subject matter of a trade secret mustbe secret. Matters of public knowledgeor of general knowledge in an industrycannot be appropriated by one as hissecret. Matters which are completelydisclosed by the goods which onemarkets cannot be his secret.

Substantially, a trade secret is knownonly in the particular business in whichit is used. It is not requisite that onlythe proprietor of the business knows it.He may, without losing his protection,communicate it to employees involvedin its use. He may likewisecommunicate it to others pledged tosecrecy.

Others may also know of itindependently, as, for example, whenthey have discovered the process orformula by independent invention andare keeping it secret. Nevertheless, asubstantial element of secrecy mustexist, so that, except by the use ofimproper means, there would bedifficulty in acquiring the information.

REFERENCE

Restatement of Torts, Section 757,Comment b, 1939.

(C) before a material change ofhis/her position, knew or hadreason to know that it was a tradesecret and that knowledge of ithad been acquired by accident ormistake. (4)

One of the broadly stated policiesbehind the UTSA is maintenance ofstandards for commercial ethics. Inconnection with that policy, theUTSA identified several propermeans for determining the tradesecrets of another, including

• Discovery by independentinvention

• Discovery by reverseengineering: that is, by starting withthe known product and workingbackward to find the method bywhich it was developed. (Theacquisition of the known productmust, of course, also be by a fairand honest means, such as purchaseof the item on the open market, forreverse engineering to be lawful.)

• Discovery under a license fromthe owner of the trade secret

• Observation of the item inpublic use or on public display

• Obtaining it from publishedliterature.

Improper means of discoverycould include otherwise lawfulconduct that is improper under thecircumstances: e.g., an airplaneoverflight used as aerialreconnaissance to determine acompetitor’s plant layout duringconstruction. Because a trade secretcan be destroyed through publicknowledge, the unauthorizeddisclosure of a trade secret is also amisappropriation.

Under the UTSA, “not beinggenerally known to and not beingreadily ascertainable by propermeans by other persons” does notrequire that information begenerally known to the public fortrade secret rights to be lost. Forexample, a method of casting metalmay be unknown to the generalpublic but readily known within thefoundry industry, in which case itcould not be considered a tradesecret.

Information is readilyascertainable if it is available in tradejournals, reference books, or

published materials. Often, aproduct lends itself to being readilycopied as soon as it is available onthe market. On the other hand, ifreverse engineering is lengthy andexpensive, a person who fairlydiscovers the trade secret throughreverse engineering can theinformation obtained as a tradesecret.

Reasonable efforts to maintainsecrecy have been held to includeadvising employees of the existenceof a trade secret, limiting access to atrade secret, and controlling plantaccess. On the other hand, publicdisclosure of information throughdisplay, trade journal publications,advertising, or other carelessness canpreclude protection. The effortsrequired to maintain secrecy arethose “reasonable under thecircumstances.” The courts do notrequire that extreme or undulyexpensive measures be taken toprotect trade secrets from flagrantindustrial espionage. It follows thatreasonable use of a trade secret,including controlled disclosure toemployees and licensees, isconsistent with the requirement ofrelative secrecy.

ENFORCEMENT OPTIONS

The UTSA not only provideddefinitions of trade secret and tradesecret misappropriation. It also setforth a single statute of limitationsfor the various property,quasicontract, and violation offiduciary relationship theories ofnoncontract liability used incommon law. The statute oflimitations is generally three yearsfrom either discovery of amisappropriation or a time when, bythe exercise of reasonable diligence,the misappropriation should havebeen discovered. The UTSA permitscourts to grant injunctions againstactual or threatenedmisappropriation of trade secrets.Injunctions are frequently soughtrestraining future use and disclosureof misappropriated trade secrets,typically by employers againstformer employees.

The general rule of the UTSAregarding such relief is that an

injunction should last as long as isnecessary, but no longer, toeliminate the commercial advantageor “lead time” a misappropriator hasover good faith competitors. Aninjunction should thus terminatewhen a former trade secret becomeseither generally known to good faithcompetitors or generally knowableto them because of the lawfulavailability of products that can bereverse engineered to reveal a tradesecret.

In addition to injunctive relief,the UTSA permits the recovery ofdamages based on the actual losscaused by trade secretmisappropriation. Like injunctiverelief, a monetary recovery for tradesecret misappropriation isappropriate only for the time theinformation is entitled to protectionas a trade secret plus the additionalperiod, if any, in which amisappropriator retains an advantageover good-faith competitors becauseof misappropriation. Although aclaim for actual damages and netprofits can be combined with aclaim for injunctive relief, if bothclaims are granted, the injunctiverelief will ordinarily preclude amonetary award for the time theinjunction is effective.

The UTSA also allows the courtto award reasonable attorney fees toa prevailing party in specifiedcircumstances as a deterrent tospecious claims of misappropriation,specious efforts by amisappropriator to terminateinjunctive relief, and willful andmalicious misappropriation.

The UTSA is not acomprehensive body of law becauseit does not deal with criminalremedies for trade secretmisappropriation. It applies toduties imposed by law to protectcompetitively significant secretinformation. The UTSA does notapply to duties voluntarily assumedthrough an express or implied-in-fact contract. The enforceability ofcovenants not to disclose tradesecrets and covenants not tocompete, which are also generallyintended to protect trade secrets,

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are governed by other law, oftencontract law, as enforced by stateand/or federal courts.

Although the UTSA was avaluable update of the laws designedto protect trade secrets, clearly morewas needed, particularly on a federallevel, because states did notuniformly adopt it. So in 1996,Congress passed the EconomicEspionage Act (EEA) in recognitionof the increasing importance of thevalue of intellectual property ingeneral, and trade secrets inparticular, to the economic well-being and security of the UnitedStates and to close the federalenforcement gap. Part two of thisarticle will discuss the changescreated by the EEA and stepscompanies can take to protect theirtrade secrets.

REFERENCES1 United States Patent and Trademark

Office. US Code, Section 1 et seq., Title 35,1999, www4.law.cornell.edu/uscode/35.

2 Application for Registration;Verification. US Code, Section 1051 et seq.,Title 15, 2002, www4.law.cornell.edu/uscode/15/1051.html.

3 Economic Espionage. US Code,Section 1831 et seq., Title 18, 1996,www4.law.cornell.edu/uscode/18/1831.html.

4 States that have enacted statutes basedin whole or in part on the UTSA are: AK,AL, AR, AZ, CA, CO, CT, DE, FL, GA, HI,ID, IL, IN, IO, KS, KT, LO, MD, ME, MI,MN, MS, MT, ND, NE, NH, NM, NV, NC,OH, OK, OR, RI, SC, SD, TN, UT, VT,VA, WA, WV, WI. The District of Columbiahas also enacted a UTSA statute. MA has itsown statute. Six other states (MO, NJ, NY,PA, TX, and WY) protect trade secrets undertheir common law. ��

Ernie Linek is senior partner at Banner& Witcoff, Ltd., 28 State Street, 28thFloor, Boston, MA 02109-1775,ELinek@bannerwitcoff.com.