Trade Secret Protection

Trade Secret Protection

A company’s proprietary trade secret information, includes a wide variety of things including formulas, customer lists, vendor lists, customer contacts, methods, sales or manufacturing techniques and/or processes which are not generally known outside the company.

Proprietary information often provides a leg-up for one company over another and provides an economic benefit to a business.  Trade Secret protection is provided to protect a company’s intellectual property from being unlawfully stolen and used by a competitor.

When an employee leaves a company to start or join a competitor, there is a threat that proprietary information of one company will be used by the other. Corporate espionage, economic espionage and corporate spying are also possible ways a company can have its trade secrets stolen.  Most states and the federal government have created a variety of laws which are designed for trade secret protection and to prevent trade secrets from being stolen by a departing employee or another company.

Trade secret protection claims are on the rise in the court system and in the news.  Based on some industry reports, trade secret litigation is rising in the IT and healthcare areas.  A significant number of trade secret cases are related to computer software, computer technology, consumer data, pricing, supplier and designs.

Uniform Trade Secrets Act

The Uniform Trade Secrets Act (“UTSA”) was proposed back in 1979 to encourage each state to create a uniform law related to the protection of trade secrets.  Under the UTSA a trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process that:

• 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
• Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Most trade secret claims are based on two scenarios, when someone obtains information through improper means and the second is where a party breached an obligation to maintain the information in a secret manner.

There are typically three essential elements to a trade secret claim:

1. The information involved must qualify for trade secret protection
2. The holder of the information must establish that reasonable precautions were taken to prevent disclosure of the information.
3. The trade secret holder must prove that the information was stolen

Trade secret protection does not protect against independent discovery, reverse engineering or inadvertent disclosure.

Defend Trade Secrets Act

The Defend Trade Secrets Act (“DTSA”) was passed in 2016 and makes it a violation of federal law to steal a trade secret which is related to a product or service used in or intended for use in interstate or foreign commerce.  By making it a federal issue, a party wronged can now file a federal lawsuit related to the unlawful misappropriate of the trade secret.

The DTSA provides a broader definition of trade secret protection which protects:

“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….”

Under the DTSA, to qualify for trade secret protection”

1. The owner must take reasonable measures to keep the information secret; and
2. The information must provide independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

Under the DTSA, a party can file a federal lawsuit for unlawful misappropriation of a trade secret protection which has been:

1. Acquired by a person who knows or has reason to know that the trade secret was acquired by improper means; or
2. Disclosed or used without express or implied consent by a person who—
   1. Used improper means to acquire the trade secret; or
   2. Knew or had reason to know that the trade secret was—
      • obtained through the use of improper means; or
      • acquired by a party who had a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
      • derived by a party who had an obligation to maintain the secrecy or limit the use of the trade secret.

U.S. Industrial Espionage Act

In 1996, the U.S. passed a criminal law which makes it illegal to steal, sell or pass along trade secrets.  In addition, if the trade secret is sold to a foreign government, it is called economic espionage and the thief can be sentenced up to 20 years in federal prison.