United States Trade Secrets Law

by Ladas & Parry LLP


The America Invents Act (AIA) changes the traditional calculus in determining whether to seek patenting an invention or to maintain it as a trade secret. This shift in intellectual property protection is the result of two major changes in the law.

First, the Act has expanded 35 U.S.C. § 273(a) to provide a general commercial prior user right defense to claims for patent infringement. Under this provision, a qualified prior user of an invention is one who was using the patented invention commercially at least 12 months prior to the earlier of the effective filing date or public disclosure of the invention. As a result, the qualified prior user is permitted to continue using the invention without fear of infringement.[1]  Prior to this amendment of the law, a prior user of the invention who had been using it secretly prior to the grant of a patent to another could have been required to cease such use when someone else obtained a patent for the invention.

Secondly, the AIA repealed 35 U.S.C. § 102(c), commonly referred to as the “abandonment clause.”[2]

As a result of this repeal, the law now provides that for applications or patents where claims have a date on or after March 16, 2013, an applicant who decides to patent an invention that was previously kept a trade secret is no longer at risk of the application being rejected or the patent being held invalid on the ground that they have abandoned, suppressed, or concealed the invention. Furthermore, depending on how the courts will interpret the changes to 35 U.S.C. § 102 relaying to the terms “public use” and “on sale” in the statute there is a possibility that even one’s own secret prior commercial use of the invention will not preclude the grant of a valid patent.

As a result of these changes, we believe that a brief summary of United States trade secrets law may be useful and, since in most of its aspects this is a matter of state law rather than federal law, we will comment, where relevant, on any particular features of state laws of states where our offices are located: California, Illinois, New York, and Virginia.

 State and Federal Law Relating to Trade Secrets

History of Federal Law Relating to Trade Secrets

Article 1 Section 8 of the United States Constitution vests Congress with the power to regulate commerce between states and with foreign nations.[3] Congress, therefore, has the power to enact legislation relating to trade secrets but so far, with the exceptions noted below, has not done so.  Individual states are free to enact legislation unless it is preempted by federal law, in which case the federal law prevails.[4]

In KewaneeOil Co. v. Bicron Corp.,[5] the Supreme Court considered the question of whether state laws relating to trade secrets might be preempted by the federal patent law on the ground that the trade secret laws provided an alternative means for protecting inventions that were in conflict with the policy underlying the patent law.[6]  After noting that it was permissible for states to hold different views on the general question of protection of intellectual property as long as “they do not conflict with the operation of laws in this area passed by Congress,” and noting that in cases where the subject matter of the trade secret was un-patentable or of dubious patentability, there could be no conflict. The Court went on to consider whether possible protection of a clearly patentable invention by means of trade secret protection was in conflict with the disclosure requirement of the patent statute.  The Court started from the premise that “[i]f a State, through a system of protection, were to cause a substantial risk that the holders of patentable inventions would not seek patents but rather would rely on state protection, we would be compelled to hold that such a system could not constitutionally continue to exist.”[7]

However, the Court went on to find that trade secret law provides  weaker protection for inventions than the patent law and that the risk was insufficient to deny the states the right to provide for protection of trade secrets.[8]

Federal Law Relating to Trade Secrets

Federal trade secret protection is provided by The Economic Espionage Act of 1996 that is codified as 18 U.S.C. §§ 1831-1839.

A trade secret is defined as:

[A]ll 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—

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.[9]

The Act makes it an offense inter alia for one with:

[I]ntent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly to—

(1) steal, or without authorization appropriate, take, carry away, or conceal, or by fraud, artifice, or deception obtain such information;

(2) without authorization copy, duplicate, sketch, draw, photograph, download, upload, alter, destroy, photocopy, replicate, transmit, deliver, send, mail, communicate, or convey such information;

(3) receive, buy, or possess such information, knowing the same to have been stolen or appropriated, obtained or converted without authorization;

(4) attempt to commit any offense described in paragraphs (1) through (3); or

(5) conspire with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy.[10]

Penalties for committing such an offense include a fine or imprisonment for up to ten years, or both. 18 U.S.C. § 1831 creates a similar set of offenses where a perpetrator intends or knows that the offense will benefit any foreign government, foreign instrumentality, or foreign agent.  In this case the maximum term of imprisonment is 15 years. 18 U.S.C. § 1838 specifically states that the Economic Espionage Act does not preempt state or other laws dealing with misappropriation of trade secrets.

In its decision in U.S. v. Aleynikov,[11]the Second Circuit placed emphasis on the fact that the Act only applied to a “trade secret that is related to or included in a product that is produced for or placed in interstate or foreign commerce” to overturn a conviction of a trader who had copied software from Goldman Sachs before departing to a new job.  The court found that the software in question relating to a reading system had been for internal business use only and not for use in commerce. Thereafter, Congress immediately stepped in and passed the Theft of Trade Secrets Clarification Act of 2012[12] to amend the language in the Economic Espionage Act to now cover trade secrets “that [are] related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof.”[13] The new law, essentially, closes a loophole by broadening the language of the Economic Espionage Act to provide protection for a trade secret that may be used internally to provide services to third parties.

During the past few years, there have been attempts to pass federal laws relating to various aspects of trade secret law including the Protecting American Trade Secrets and Innovation Act of 2012[14] and the Foreign and Economic Espionage Penalty Enhancement Act of 2012,[15] and it is possible that Congress will be more active in this area in the future than in the past in view of the perception that industrial espionage is on the rise. Most recently, on April 29, 2014, Senators Coons (Dem. Delaware) and Hatch (Rep. Utah) have introduced the Defend Trade Secrets Act 2014 ( S2267) which if enacted provide for a civil remedy under federal law for breaches of 18 USC 1831 and also for misappropriation of a trade secret used in or intended for use in interstate of foreign commerce.  Proposed remedies include the right to an injunction and damages and in cases of willful or malicious misappropriation awards of exemplary damages and/or attorney fees.

 The Freedom of Information Act

The Freedom of Information Act (FOIA) makes almost every document in the possession of any federal agency, disclosable to the public;[16] however, this mandatory presumption of disclosure does not include any record which is specifically exempted by one of the nine exemptions in the Act. Exemption 4 of the FOIA protects from the disclosure trade secrets and commercial or financial information obtained by the government on a confidential basis that, if released, would (1) result in competitive harm to the company from which the information was obtained or (2) impair the government’s ability to obtain necessary information in the future.[17]  In adopting this exemption, Congress intended to encourage submitters to provide such information without fear of commercial harm and to assure the government that such information would be reliable.

Data Exclusivity Rights

Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides protection for undisclosed information, such as trade secrets. Specifically, under Article 39(3) of TRIPS

[m]embers, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use.[18]

This section provides protection for companies who submit data to regulatory agencies (e.g., Food and Drug Administration) from the unfair commercial use of such data.

In the United States, new drugs and agrochemicals are provided exclusivity periods, during which time no other company may seek approval of an equivalent/generic product and no regulator can approve a generic product based on the originator’s data without the originator’s approval.[19] The basis behind the adoption of these data exclusivity regimes is to protect companies who spend significant money, time, and effort on research and testing of products and to encourage them to continue producing new products. Some countries, for example the United States, have claimed that Article 39(3) of TRIPS creates a data exclusivity regime; however, TRIPS deals with disclosure of trade secrets and undisclosed information to the public while data exclusivity laws do not deal with disclosure to the public, but rather, provide businesses with protection from competition by implementing time limits for submission and approval of a competing product whose production was based on the originator’s data.

State Law Relating to Trade Secrets

History of State Law Relating to Trade Secrets

State laws approach issues of confidentiality, and hence protection of trade secrets, in two ways: through contract law and through tort law by sanctioning unlawful use of another’s property.

In the United States, trade secrets law utilizing the unlawful use of property approach developed from a body of case law that was later synthesized and incorporated into the Restatement (First) of Torts.[20] The First Restatement adopted a core concept of “commercial morality and reasonable conduct” as the standard to determine whether a trade secret was appropriated by improper means.[21] The commercial morality standard was later adopted by most courts. Currently, trade secrets are embodied in the Restatement (Third) of Unfair Competition.[22]

In 1979, the Uniform Law Commissioners drafted the Uniform Trade Secrets Act (UTSA). The UTSA is a model law published together with a commentary on the text by the National Conference of Commissioners of Uniform State Laws.  This was revised in 1985.[23]

Most states, with the exception of New York and North Carolina, have enacted trade secrets laws based on the UTSA.[24] However, there may be variations in the precise language and interpretation in different states.[25]

 Modern State Law Protection for Trade Secrets

As noted above, most states have adopted the UTSA. Section 7(b) of the UTSA expressly provides that it does not affect or displace the availability of contractual or criminal remedies whether or not based upon misappropriation of a trade secret or any other civil remedies that are not based upon misappropriation of trade secrets.[26] Therefore, it is possible to have trade secret protection through contract law with regard to a breach of a restrictive covenant, tort law (e.g., interference with contract, breach of confidence, fiduciary duty and covenant of good faith), and the UTSA for the misappropriation and misuse of secret information in the states that have adopted the Act.

General Contract Approach

It is normal procedure to require that anyone to whom one gives confidential information of any type, or indeed even non-confidential information if its disclosure at a particular time to a particular recipient has value, to sign a non-disclosure agreement in which the recipient agrees not to disclose the information in question without the consent of the provider of the information and often not to use such information in any way other than for some purpose set out in the agreement.

Such contracts must, of course, comply with the general laws relating to contracts, the most important of which relate to questions of consideration and clauses that are in restraint of trade.  However, the general rule is that if a party has voluntarily accepted a commitment and has received consideration for it then that party should be required to fulfill its obligations and so it may be possible to protect matters by contract that might not be protectable by simply relying on the laws relating to misappropriation of trade secrets. It is, however, probably desirable that any such contract specifically states that valuable and legally sufficient consideration has been given.

In Aronson v. Quick Point Pencil Co.,[27] a patent application had been pending at the time the license agreement was entered into. There were two agreements. One agreement provided for a five percent royalty if a patent issued.  No duration was given.  The second agreement provided that if no patent issued within five years (so that in effect the license was of know-how rights only) a royalty of two and a half percent would be paid for as long as the licensee sold the invention.  No patent was issued within the five year period. The Supreme Court upheld the second agreement on the basis that case law barring payment of patent royalties after a patent has expired did “not bear on a contract that does not rely on a patent, particularly where, as here, the contracting parties agreed expressly to alternative obligations if no patent should issue.”[28]

Different states have varying requirements with respect to the need for each party to a contract to have given adequate consideration in order for a contract to be valid, but in general, as long as there is some value in what is disclosed a court will find adequate consideration; therefore, this is not usually an issue in non-disclosure agreements.[29]

However, restraint of trade issues are more significant and to avoid problems, it is common for non-disclosure agreements to include provisions that restrict their application in situations where the disclosed information (a) is or becomes generally available to the public other than as a result of a disclosure by the recipient, (b) was within recipient’s possession prior to the disclosure, (c) becomes available to the recipient on a non-confidential basis from a source other than the discloser, or (d) is independently developed by the recipient without the aid, application or use of the information being disclosed.  It is, however, common to accompany such exceptions with provisions placing the burden of proof that such exceptions apply on the recipient of the information.[30]

Nevertheless, one should keep in mind how different states treat contracts that restrain trade when drafting a restrictive covenant. For example, on one side of the spectrum, California has a statutory prohibition on contact clauses that restrain a person “from engaging in a lawful profession, trade, or businesses of any kind.”[31] In Virginia, restrictive covenants are not favored and generally not enforced unless they are narrowly tailored to protect the employer’s legitimate business interest, not unduly harsh and oppressive on the future employment of the employee, and not offensive to public policy.[32]  On the other side of the spectrum, New York and Illinois enforce restrictive covenants if the covenants are reasonable. Use of broad language in the covenant is not dispositive so long as the covenant is drawn to protect the employer’s legitimate business interests.[33]

Furthermore, New York and Illinois recognize the “inevitable disclosure doctrine.”[34] The reasoning behind the inevitable disclosure doctrine is that a former employee will inevitably disclose protected information learnt in their former job because “the employee cannot help but draw upon this information” to perform the new job effectively.[35] In practice, the inevitable disclosure doctrine enables an employer to enjoin a former employee from working for a competitor—regardless of the existence of a restrictive covenant.[36]

The differing approaches to the enforceability of restrictive covenants illuminate the tension between the competing interests of the doctrine to protect employers’ confidential information while supporting an employees’ freedom of mobility.[37] For states whose laws promote the right of employees to move between jobs, the inevitable disclosure doctrine is not looked at favorably.[38] There is still much inconsistency with how states apply the doctrine; while some view it favorably, others choose not to apply it at all.

Another point to be kept in mind when drafting any agreement which one may wish to enforce in the United States is that the agreement should specify the forum in which it is to be enforced and the law which is to be applied. The latter requirement may be a trap for the unwary in that under the conflict of laws rules applied by some states, where the parties are not domiciled in the state, the general rule applied by the courts of the chosen state may be that the law of some other state should apply.[39]

Conflict of laws rules can differ between states and the outcome of an action may depend on where the action is brought. For example, New York will apply the law a contract specifies, but in the case of a conflict the courts will perform the Currie governmental interest analysis. New York courts generally do not entertain public policy arguments while performing the Currie analysis if the contested issue regards a contract.[40] In contrast, California will apply the law that a contract specifies unless application of the law “would result in the contravention of California’s public policy, [in that case,] the provision will be ignored to the extent necessary to preserve public policy.”[41] Thus, it is possible that an action brought in California to enforce a restrictive covenant that chooses NY law may be held unenforceable because California finds restrictive covenants offensive to public policy; whereas, if the same action were brought in New York the covenant may be enforced.This problem may be avoided if the choice of law clause of the agreement specifies the chosen law “absent its conflict of laws rules.”[42] Such language should be used, for example, if New York law is the chosen law.

Tort Approach

Prior to the development of the UTSA, misappropriation of a trade secret was a common law tort governed by The Restatement (First) of Torts sections 757 and 758.  As mentioned above, most states now follow their adopted versions of the UTSA; however, New York still follows the common law tort and also looks to the Restatement (First) or Torts.[43]

Generally, the courts that use the First Restatement,[44] look to six factors in determining whether information constitutes a trade secret: (1) the extent to which the information is known outside the claimant’s business, (2) the extent to which it is known by employees and others involved in the business, (3) the extent of measures taken by the claimant to guard the secrecy of the information, (4) the value of the information to the business and its competitors, (5) the amount of effort or money expended by the business in developing the information, and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[45]

Use of a trade secret does not always rise to the level of misappropriation. Where such use is acquired through improper means or by a breach of confidence, a claim for misappropriation may be successful.

Property Approach

After UTSA was drafted and adopted by many states but prior to its revision in 1985, there existed a long-running debate as to whether trade secrets should be regarded as a form of property. The debate was finally settled by the Supreme Court in 1983 in Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984). In Ruckelshaus the court found that trade secrets were property and thus could be subject to a taking under the Fifth Amendment.

The Court rationalized their holding by first recognizing a “general perception of trade secrets as property is consonant with a notion of ‘property’ that extends beyond land and tangible goods and includes the products of an individual’s ‘labour and invention.’”[46]  This notion of intangible property exists because expending “labour and invention” manifests a property interest and therefore should be treated akin to copyright, trademark, and patent rights. Thus, “the right to exclude others is central to the very definition of the property interest. Once the data that constitute a trade secret are disclosed to others, or others are allowed to use those data, the holder of the trade secret has lost his property interest in the data.”[47] These underlying principles are the reasons why a cause of action can only accrue under the UTSA if the information is secret and also misappropriated.

The property approach to trade secret law has been adopted by the UTSA. Under this approach information must be secret in order for a plaintiff to prevail on a claim for trade secret misappropriation.[48]The property approach differs from the contract approach discussed above in much the same way as does the tort approach.  The property approach is similar to the tort approach because neither approach requires a confidential relationship exist between the parties to find trade secret misappropriation, while under the contract approach a plaintiff may succeed on a claim of trade secret theft based on a finding that the defendant’s access to the information was through a confidential relationship regardless of whether the information was actually secret.[49]

Under the UTSA, a Trade Secret is defined as:

information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (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.[50]

 Section 2 of the UTSA provides for injunctions to prevent misappropriation of a trade secret and Section 3 provides for recovery of damages in most situations where there has been a misappropriation.

Misappropriation is defined in Section 1(2) as

(i) 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; or

(ii) disclosure or use of a trade secret of another without express or implied consent by a person who

(A) used improper means to acquire knowledge of the trade secret; or

(B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was

(I) derived from or through a person who had utilized improper means to acquire it;

(II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(C) before a material change of his [or her] 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.

“Improper means” are defined as including theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.[51]

The official commentary on the UTSA discusses what is meant by “improper means” to indicate that it is not improper to obtain information by independent invention, reverse engineering, under license from the owner of a trade secret, observation of an item in public use or on public display or obtaining the secret from published literature.  The commentary does, however, point out that acts that are otherwise legal may under some circumstances be “improper,” referring to E. I. du Pont de Nemours & Co Inc. v. Christopher, 431 F.2d 1012 (5th Cir. 1970), where aerial reconnaissance was used to obtain pictures of a chemical plant while it was under construction.

Under Section 2 of the UTSA, both actual and threatened misappropriation may be enjoined, but normally a court will terminate the injunction when the trade secret in question ceases to be secret.  Courts can, however, extend the injunction so as to eliminate any commercial advantage or head start that the misappropriator may have gained from his or her misappropriation.  In exceptional circumstances as an alternative to an injunction, the courts may order payment of a continuing royalty.

General damages awards under Section 3 of the UTSA are to include both the actual loss caused by misappropriation and the unjust enrichment caused by the misappropriation, but not taken into account when calculating the actual damages.  Alternatively, the Court may order payment of a reasonable royalty.  Exemplary damages up to twice the amount of the actual damages award may be awarded in the case of willful and malicious appropriation.  Attorneys’ fees may also be awarded under these circumstances or where a motion to terminate an injunction is made or resisted in bad faith.

Finally, the UTSA provides for hearings in camera and other provisions to preserve the secrets in question during a law suit relating to them and for a statute of limitations period of three years from the date on which the misappropriation was discovered or should by exercise of reasonable diligence have been discovered.

Although the tort and property approaches have similarities, they have crucial differences;  therefore, it is important to realize the ramifications of trade secret misappropriation in a state that has adopted the UTSA (e.g., Illinois) as opposed to a state that has not adopted the UTSA and still uses the Restatement (First) or Torts (e.g., New York). One major difference between the tort and property approaches is that under the tort approach, which is based on the Restatement (First) or Torts, information must be in “continuous use” to qualify as a trade secret,[52] while the property approach does not have this requirement, thus providing protection for a wider range of trade secrets. Another difference is that the tort approach does not hold a good faith acquirer of misappropriated information by others liable, whereas the property approach under the UTSA does and provides equitable relief to the harmed.

The aforementioned differences between the tort and property approaches are the consequence of divergent views on the proper legal essence of secret information. The UTSA views misappropriation of trade secrets as a mishandling of intangible property, whereas the Restatement of Torts views misappropriation as a breach of good faith and, in fact, discourages the view that trade secrets are property.[53]

End Notes

[1] Leahy-Smith America Invents Act, sec. 5, § 273.

[2] Leahy-Smith America Invents Act, sec. 3, § 102(c); 35 U.S.C 102(c).

[3] U.S. Const. art. I, § 8, cl. 3.

[4] U.S. Const. art. VI, § 2.

[5] 416 U.S. 470, 181 U.S.P.Q. 673 (1974).

[6] Id. at 472.

[7] Id., at 489.

[8] Id. at 490.

[9] 18 U.S.C. § 1839.

[10] 18 U.S.C. § 1832.

[11] 676 F.3d 71, 102 U.S.P.Q.2d 1458 (2d Cir. 2012).

[12] Theft of Trade Secrets Clarification Act of 2012, S. 3642, 112th Cong. (2012).

[13] Aleynikov, 676 F.3d at 79.

[14] Protecting American Trade Secrets and Innovation Act of 2012, S. 3389, 112th Cong. (2012).

[15]Foreign and Economic Espionage Penalty Enhancement Act of 2012, S. 678, 112th Cong. (2012) (This Act was signed into law in January 2013).

[16] 5 U.S.C. § 552; NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 136 (1975).

[17] 5 U.S.C. § 552(b)(4); See National Parks and Conservation Ass’n v. Morton, 498 F.2d 765, 770 (D.C.Cir. 1974); see also Frasee v. U.S. Forest Service, 97 F.3d 367, 371 (9th Cir. 1996).

[18] Agreement on Trade-Related Aspects of Intellectual Property Rights Part II, § 7, Art. 39 (1996), available at: http://www.wto.org/english/tratop_e/trips_e/t_agm3d_e.htm (last visited Apr. 17, 2013).

[19] 21 USC 351(k)(7)(A)-(B); 21 C.F.R. 314.108

[20] Restatement (Third) of Unfair Competition § 39 (1995).

[21] Restatement (First) of Torts, sec. 757, cmt. a (1939).

[22] See Donald Chisum, Tyler Ochoa, Shubha Ghosh & Mary LaFrance, Understanding Intellectual Property, pp. 206-207 (2d ed. 1992).

[23] Uniform Law Commission, Legislative Fact Sheet, available at: http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Trade%20Secrets%20Act (last visited Feb. 28, 2013); The difference between the Restatement (Third) of Unfair Competition and the UTSA is that “the principles of trade secret law described in this Restatement are applicable to actions under the Uniform Trade Secrets Act as well as to actions at common law.” Restatement (Third) of Unfair Competition § 39 (1995).

[24] Adopted in California as Cal. Civ. Code §§ 3426-3426.11, Illinois as 765 ILCS 1065/1, and Virginia as Va. Code Ann. §§ 59.1-337, -338. Additionally, Massachusetts has introduced a version of the UTSA into the House on January 2, 2013. See Uniform Trade Secrets Act, 2013 HB. 27, available at: http://www.malegislature.gov/Bills/188/House/H27 (last visited Mar. 7, 2013).

[25] The UTSA defines a Trade Secret as: “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (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.” New York, which has not adapted the UTSA, defines a trade secret through case law. New York courts “generally look to Section 757 of the Restatement (First) of Torts for its definition of a trade secret. ‘[A] trade secret is any formula, pattern, device or compilation of information which is used in one’s business, and which gives [the owner] an opportunity to obtain an advantage over competitors who do not know or use it.’” Softel, Inc. v. Dragon Med. & Scientific Communications, Inc., 118 F.3d 955, 968 (2d Cir.1997) (quoting Restatement of Torts § 757, cmt. b (1939)). Under New York law, “a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage.” Norbrook Laboratories Ltd. v. G.C. Hanford Mfg. Co., 297 F.Supp.2d 463, 483 (N.D.N.Y. 2003) (quoting Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir.1990)).

[26] UTSA § 7(b).

[27]440 U.S. 257, 201 USPQ 1 (1979).

[28] Aronson, 440 U.S. at 262.

[29] For example, in Apfel v. Prudential-Bache Securities Inc., the defendant entered a contract to purchase the plaintiffs’ idea for issuing and selling municipal bonds. The defendant claimed that the plaintiffs had no property right in the idea because it was not novel and, therefore, the contact was void due to a lack of consideration. The Court of Appeals of New York held that adequate consideration for a contract is satisfied if “something of ‘real value in the eye of the law’ was exchanged.” Apfel v. Prudential-Bache Securities Inc., 81 N.Y.2d 470, 476, 600 N.Y.S.2d 433 (1993) (quoting Mencher v. Weiss, 306 N.Y. 1, 8, 114 N.E.2d 177).

[30] See generally, 3 Terrence F. MacLaren, Trade Secrets Throughout the World § 40:49 (2012); see also, Raymond T. Nimmer, Law of Computer Technology § 3:37 (2012).

[31] West’s Ann. Cal. Bus. & Prof. Code § 16600. (2012). However, California courts have created an exception to section 16600 that permits the enforcement of a covenant of non-disclosure if the proprietary information is used by the former employee to compete with the former employer. See Scott v. Snelling and Snelling, Inc., 732 F.Supp. 1034, 1043 (N.D.Cal. 1990).

[32] See Brainware, Inc. v. Mahan, 808 F.Supp.2d 820, 825 (E.D.Va. Aug. 24, 2011).

[33] 104 N.Y. Jur. 2d Trade Regulation § 77 (2013); 8 Ill. Prac., Business Organizations § 14:23 (2d ed. 2012).

[34] Although the applicability of the doctrine in New York may be limited to situations where actual trade secrets are involved, there is breach of a non-competition agreement or other wrong doing. Janus et Cie v. Andrew Kahnke, 2013 U.S. Dist. LEXIS 129686 ( (S.D.N.Y. 2013). The doctrine was, however applied in another case where the former employee had signed a non-competition agreement.  International Bus. Machines Corp. v. Papermaster,  2008 WL 4974508 (S.D.N.Y.2008).

[35] See Farrell, supra.

[36] See Farrell, supra at § 2.

[37] Restatement (Third) of Unfair Competition § 44 (1995).

[38] Doubleclick, Inc. v. Henderson, No. 116914/97, 1997 N.Y. Misc. LEXIS 577, at 16 (N.Y. Sup. Ct. 1997); Marietta v. Fabhurst, 2002, WL 31898398 (N.Y.A.D. Dept. 3 2002); Strata Marketing, Inc. v. Murphy, 740 N.E.2d 1166, 1178 (Ill. App. Ct. 2000); Whyte v. Schlage Lock Co., 101 Cal. App.4th 1443 (Cal. App. 2002).

[39] See Restatement (Second) of Conflict of Laws § 187 (1971)(“The law of the state chosen by the parties to govern their contractual rights and duties will be applied, . . . unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state.”).

[40] See Matter of Allstate Ins. Co., 81 N.Y.2d 219 (N.Y. 1993).

[41] Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881,896 (Cal. App. 1998).

[42] See Gregory J. Battersby & Charles W. Grimes, 2009 Licensing Update (2009).

[43] New York courts “generally look to Section 757 of the Restatement (First) of Torts for its definition of a trade secret. ‘[A] trade secret is any formula, pattern, device or compilation of information which is used in one’s business, and which gives [the owner] an opportunity to obtain an advantage over competitors who do not know or use it.’” Softel, Inc. v. Dragon Med. & Scientific Communications, Inc., 118 F.3d 955, 968 (2d Cir.1997) (quoting Restatement of Torts § 757, cmt. b (1939)). Under New York law, “a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage.” Norbrook Laboratories Ltd. v. G.C. Hanford Mfg. Co., 297 F.Supp.2d 463, 483 (N.D.N.Y. 2003) (quoting Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir.1990)).

[43] UTSA § 7(b).

[44] Be aware that some states, Illiniois for example, apply the First Restatement’s six factor test although they have adopted the UTSA.

[45] See Restatement (First) of Torts, § 757, cmt. a (1939).

[46] Ruckelshus, 467 U.S. at 1002 (quoting 2 W. Blackstone, Commentaries; see generally J. Locke, The Second Treatise of Civil Government, ch. 5 (J. Gough ed. 1947)).

[47] Ruckelshus, 467 U.S. at 1011.

[48] The UTSA does not displace state claims brought under theft of confidential information. So, one may still have state claims if the information does not rise to the level of a trade secret.

[49] The UTSA § 1(4) defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: (i) derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might 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.”

[50] UTSA Section 1(4).

[51] UTSA Section 1(1).

[52] See Restatement (First) of Torts, §757, cmt. b (1939).

[53] Id. at cmt. a (“The suggestion that one has a right to exclude others from the use of his trade secret because he has a right of property in the idea has been frequently advanced and rejected. The theory that has prevailed is that the protection is afforded only by a general duty of good faith and that the liability rests upon breach of this duty; that is, breach of contract, abuse of confidence or impropriety in the method of ascertaining the secret.”).

[View source.]


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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