Protecting Trade Secrets – Starting with the Basics

What is a Trade Secret?

Although the definition may vary somewhat from state to state, a trade secret has three basic characteristics:

  1. It is a secret– not generally known by or readily ascertainable to competitors;
  2. It confers a competitive advantage on its owner; and
  3. It is subject to reasonable efforts to maintain its secrecy.

Although the three definitional elements of a trade secret are relatively simple concepts, each has been the subject of extensive case law interpretation.  If a dispute erupts over an alleged wrongful taking of a trade secret -- "misappropriation" -- the analysis over whether each of these elements has been met can become exceedingly complex.  Any party seeking to protect a trade secret must keep in mind, from the outset, how it will prove these three elements, if it is forced to do so.

Trade secrets can generally be divided into technical information and business information.  Technical information that may qualify for trade secret status includes product formulas, software code, business methods, manufacturing methods, and research and testing data.  Business information that may so qualify includes business plans, marketing strategies, customer lists, sales reports, financial data and cost information.

How are Trade Secrets Legally Protected?

Remedies for trade secret misappropriation are generally provided under State, as opposed to Federal law. 

Most States have adopted the Uniform Trade Secrets Act ("UTSA"), or at least a statutory scheme based upon UTSA.  Some States, including New York, still rely upon common law protection, i.e., Judge-made law based upon prior case law decisions.

In those States that have adopted UTSA, the statutory remedies may preempt all or most of those previously afforded by the common law.  It is very important to understand and be governed by the particular legal rules and requirements of a State, whose law will govern trade secret protection issues.  Most often, this will be the State in which the company is located.

A contract or writing is not necessary to protect a trade secret and unlike patents, no filings are necessary.  If something meets the definitional requirements for a trade secret, it is entitled to protection.

What is a Violation of Trade Secret Law (Misappropriation)?  

Under UTSA, “misappropriation” means: 

(i) the 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)  the 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 has 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 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.

Under New York law, "misappropriation" consists of use or disclosure of a trade secret that was acquired through a relationship of trust (such as employment), or through fraud or other improper means, such as theft, bribery, or hacking.

"Improper means" include theft, fraud, bribery, industrial espionage, breaching a contractual duty to keep something confidential, or inducing others to breach that duty.

Reverse engineering a product is not misappropriation; it is not an "improper means" of obtain information and cannot be the basis for a misappropriation claim.

What are Remedies in a Trade Secret Dispute?  

Injunctive Relief: A court is empowered to order a defendant to stop violating the plaintiff's rights and to take steps to preserve the secrecy of the plaintiff's information. 

Damages:  A court can order a defendant to pay money damages to the plaintiff for the economic harm suffered as a result of a trade secret violation.  This may also include the plaintiff's losses resulting from the misappropriation and the defendant's profits derived from it. 

Royalties:  In lieu of actual damages and/or "profits derived" from a misappropriation, a court can also order a defendant who misappropriates to pay a royalty to the trade secret owner. 

Punitive Damages:  When a court determines that the defendant acted willfully or maliciously, it may also award punitive damages against the defendant in an amount up to twice the plaintiff’s actual damages.

Attorneys' Fees:  A court may order the defendant to pay plaintiff's attorney's fees when it find that the defendant acted willfully or maliciously in violating the plaintiff's trade secret rights.  Conversely, where the defendant prevails in the lawsuit, the court may order the plaintiff to pay the defendant's attorneys' fees if it finds that the plaintiff acted in bad faith in filing the lawsuit.