As previously discussed, the main pillars of Intellectual Property are Patents, Trademarks, Copyrights, and Trade Secrets. We are now going to discuss Trade Secrets in greater depth.
Definition of Trade Secrets
Trade Secrets are confidential information used in a business that gives the business a competitive advantage. Trade secrets can include a wide range of information, such as formulas, recipes, manufacturing processes, customer lists, and business strategies, as long as they are kept secret and provide the business with a competitive advantage.
Trade Secrets are not generally known or readily ascertainable by others. The basics requirements of Trade Secrets are:
- (1) the existence of confidential information,
- (2) the holder makes reasonable efforts to maintain the secrecy of the confidential information, and
- (3) the confidential information creates independent economic value from not being publicly known.
These requirements are set forth in the Economic Espionage Act of 1996 and the Defend Trade Secrets Act of 2016, discussed below.
The History of Trade Secret Law in the U.S.
Trade secret law in the United States has a long history dating back to the country’s early days. The first trade secret law in the United States was the Massachusetts Trade Secret Act of 1851, based on the English law of trade secrets.
Trade secrets law evolved on a case-by-case basis by the state courts determining outcomes of disputes, creating a set of precedents that became state common law. The trade secret common law evolved differently in different states. Trade Secret Common Law differed between the states creating a ‘patchwork’ of laws and uncertainty, especially for trade secrets developed or implemented in more than one state.
To correct this situation, the Uniform Law Commission published the first version of the Uniform Trade Secrets Act (UTSA) in 1979, later amended in 1985. The majority of the states adopted the UTSA (with some variations) and created somewhat uniform regulations that would apply to most states.
On May 11, 2016, the Defend Trade Secrets Act (DTSA), 18 U.S.C. §§ 1839 et seq., was passed. The DTSA created uniform Trade Secret law that applies to the entire country and supersedes state common law and the Uniform Trade Secrets Act.
The Purpose of Trade Secrets
The purpose of trade secrets is to protect confidential information that is used in a business and that gives the business a competitive advantage. If a business can prevent competitors from gaining access to valuable information, the business could produce more advanced products or provide more advanced services. If the business is the only one or one of very few that has access to the Trade Secret information, it will have a competitive edge over those who do not have the Trade Secret information.
Trade secrets can include a wide range of information, such as formulas, recipes, manufacturing processes, customer lists, and business strategies, as long as they are kept secret and provide the business with a competitive advantage.
The Inventor has a choice of protection for inventions that cannot be determined by viewing the invention or by operation of the invention. The Inventor can choose patent protection or trade secret protection. Patent protection will be described in the following article.
For Trade Secrets protection, the Inventor is the Trade Secrets owner unless there is a contract to the contrary. The Trade Secret owner must keep the Trade Secrets information confidential and restrict access. The Trad Secret owner can act to maintain confidentiality by requiring Non-disclosure Agreements to be executed before disclosing the Trade Secret.
The Trade Secrets owner can bring a federal lawsuit against anyone who misappropriates the Trade Secrets information under the Defend Trade Secrets Act. Misappropriation includes overcoming reasonable security measures, hacking, breaking and entering, burglary, etc.
If another entity reverse engineers the Trade Secret information without any misappropriation, that entity is free to use the Trade Secrets information.
What Qualifies as a Trade Secret?
A Trade Secret is any information that is not generally known or readily ascertainable by others and used in a business or other enterprise to obtain an economic advantage over competitors. The information must be the subject of reasonable efforts to maintain its secrecy to qualify as a Trade Secret.
A Trade Secret is Information that is ‘secret and ‘valuable’. Trade Secrets information is valuable because it describes how to construct or use a novel device, system, or process, or how to improve the device, system, or process, or otherwise provides a competitive advantage to the holder of the Trade Secrets.
Requirements for protection under trade secret laws
The Defend Trade Secrets Act (DTSA) covers Trade Secrets misappropriation matters. For information to qualify under the DTSA:
(A) the owner thereof has taken reasonable measures to keep such information secret; (such as by restricting access to the information),
(B) the information derives independent economic value, actual or potential, from not being generally known, and
(C) the subject matter cannot be readily ascertainable through proper means.
Once it is determined that the information cannot be ascertained properly, and the Trade Secrets owner meets the requirements of “A” and “B” above, it falls under the DTSA.
Examples of trade secrets
Information that meets the requirements of the DTSA above will qualify as Trade Secret information. Some common examples found in businesses are:
- manufacturing specifications,
- mechanical Tolerances,
- customer lists,
- manufacturing costs, and
- future development plans, etc.
How are trade secrets protected?
Trade Secrets are generally protected through non-disclosure agreements and other confidentiality agreements, which prohibit Trade Secret disclosure to third parties. In addition, physical and digital security measures are essential to protect Trade Secrets.
People who have a need to view Trade Secrets information must be under a legal obligation to keep the Trade Secrets info confidential. The person requesting the Trade Secret information must sign a Non-disclosure Agreement (NDA) before receiving the Trade Secret information.
An NDA restricts disclosure only to those who need the information and have executed an NDA themselves. The NDAs function to prevent the spread of confidential information.
Restrict Access (Physical and digital security measures)
Physical files should be in locked drawers or cabinets.
Electronic folders and files should be encrypted and password protected.
Access should be allowed only to those with a need to know.
A (physical and/or electronic) log should be kept indicating who accesses the Trade Secrets information and when they are accessing it.
Misusing or Disclosing Trade Secrets
The consequences of misusing or disclosing trade secrets can include “… injunctive relief, compensatory damages, and attorney’s fees”, as indicated in the DTSA.
Legal action and damages
The DTSA provides companies with protection for their trade secrets. The act provides a federal civil cause of action for trade secret misappropriation. The DTSA allows companies to bring a lawsuit in federal court if they believe their Trade Secrets have been stolen or misused.
The DTSA is an essential tool for companies to protect their confidential information. It allows companies to seek injunctive relief, damages, and attorney’s fees. It also allows companies to seek an ex parte seizure order to prevent the dissemination of their trade secrets.
The DTSA also provides immunity to whistleblowers who report Trade Secret misappropriation. This provision prevents an employee who reports the misappropriation of a Trade Secret to the government or a court of law from being held liable for disclosing the Trade Secret.
The DTSA also provides criminal penalties for Trade Secret theft. The law makes it a crime to knowingly and willfully misappropriate a Trade Secret for economic advantage or to benefit a competitor. The penalties for this crime can include up to 10 years in prison, fines of up to $5 million, or both.
The DTSA is an important step in protecting the intellectual property of companies. It provides companies with additional tools to protect their trade secrets from theft or misappropriation and incentives for employees to report misappropriation.
Trade secrets are an essential form of intellectual property that businesses and individuals can use to protect their confidential information. It is important to take steps to protect trade secrets and be aware of the consequences of misusing or disclosing them.
If you need additional descriptions regarding your Trade Secrets, feel free to contact us at Zale Tech Law.