Sociology Index

Trade Secrets Law

Intellectual Property Rights, Trade Secrets Law Books, Trade Secrets Case Law, Inevitable Disclosure

Under Trade Secrets Law any establishment can protect its confidential information through non-compete non-disclosure contracts with its employees. In the absence of formal protection under Trade Secrets Law, a third party is not prevented from independently duplicating and using the secret information once it is discovered.

The Trade Secrets Law of protection of confidential information allows a perpetual monopoly in secret information.

Generally the following factors are to be considered in determining whether a trade secret owner possessed a trade secret:

the extent to which the information considered a trade secret is known outside the business;

the extent to which information considered a trade secret is known by employees and others involved in the business;

the extent of measures taken to guard the secrecy of the information considered a trade secret;

the value of the information to the trade secret owner and to his competitors;

the amount of effort or money expended in developing the information considered a trade secret;

the ease or difficulty with which the information could be properly acquired or duplicated by others.

In order to succeed in a trade secret infringement suit, a trade secret owner must show:

that the information alleged to be confidential provides a competitive advantage,

that the information really is maintained as a trade secret,

that the information was improperly acquired by the defendant, or

that the information was improperly disclosed or leaked by the defendant.

To prove that measures have been taken to guard the secrecy one has to diligently:

Maintain adequate information security and access security.

Encode trade secret information.

Restrict trade secret information under a written obligation to maintain secrecy.

Restrict trade secret information only to staff who are directly concerned with it

Post signs on all information related to the trade secret.

Trade secret law has gained importance in India only recently with the intensification of competition. Coca Cola’s formula has been protected for over a century under tradesecret law. The first reported trade secret case in England is Newbery v. James, 35 Eng. Rep. 1011 (Ch. 1817)..

Trade secrets are not registered with the government as is done in the case of intellectual properties such as patents, copyrights and trademarks.

The only way to protect trade secrets is to keep the information confidential. Tradesecret protection lasts for as long as the trade secret is kept confidential. Trade secret protection ends the moment a tradesecret is made available to the public.

What are trade secrets?
Trade secrets may consist of any formula, idea, physical device, pattern, process, customer lists or other compilations.
Trade secret provides the owner of the information with a competitive advantage in a competitive market.
Trade secret is protected in such a way that competitors gain knowledge of it only through acquisition or theft.
Potential trade secrets are a secret recipe or a formula for a drink, survey methods used by professional pollsters, a new invention for which a patent application has not yet been filed, marketing strategies, manufacturing techniques and computer algorithms.

How to keep and protect trade secrets?
Trade secrets are valuable intellectual property that cannot be protected by intellectual property laws such as patents, copyrights and trademarks laws. So, the best way to keep and protect trade secrets is:

By keeping a new idea or business concept secret in order to enjoy a competitive advantage as a early mover.

By keeping competitors from learning that a product or service is under development and from discovering its functional or technical attributes.

By protecting valuable business information such as marketing plans, cost and price information and customer lists.

By protecting both negative and positive information learned during the course of research and development.

By protecting any other information that has some value and is not generally known by your competitors.

What are trade secret ownership rights?
A company owning tradesecrets can prevent any employee who routinely comes into contact with the employer's trade secrets as part of the employee's job, who is automatically bound by a duty of confidentiality, not to disclose or use trade secret information, from copying, using and benefiting from its trade secrets or disclosing them to others without permission.
A company owning tradesecrets can prevent those who acquire a trade secret through improper means such as theft, industrial espionage or bribery, from copying, using and benefiting from its trade secrets or disclosing them to others without permission.
A company owning tradesecrets can prevent those who knowingly obtain trade secrets from people who have no right to disclose them, from copying, using and benefiting from its trade secrets or disclosing them to others without permission.
A company owning tradesecrets can prevent those who learn about a trade secret by accident or mistake, but had reason to know that the information was a protected trade secret, from copying, using and benefiting from its trade secrets or disclosing them to others without permission.
A company owning tradesecrets can prevent those who sign nondisclosure agreements ("confidentiality agreements") from copying, using and benefiting from its trade secrets or disclosing them to others without permission.

Employees are normally bound by an implied duty not to disclose sensitive information. Even then, nondisclosure agreements should preferably be signed by all employees who come into contact with a company's trade secrets, including high-level employees and company presidents. Nondisclosure agreements make it clear to the employee that the company's trade secrets must be kept confidential. A company's lenders, investors and potential investors may also insist that employees sign nondisclosure agreements.

People who discover the tradesecret independently, without using illegal means or violating agreements or state laws cannot be stopped from using information protected under trade secret law.. It is not a violation of trade secret law to "reverse engineer" any lawfully obtained product and determine its trade secret.
Product X is comprised of a trade secret protected formula. Y reverse engineers the Product X and recreates the formula. Y can legally use this information to make and sell his own Product X.

How can trade secrets be protected?
There must be a clear demonstrated intention to keep any valuable business information a trade secret by marking documents containing trade secrets "Confidential," maintaining computer security and limiting access to secrets.
Trade secrets are best protected through the use of nondisclosure agreements. Courts have repeatedly reiterated that the use of nondisclosure agreements is the best demonstrated way to maintain the secrecy of confidential information.
Lack of nondisclosure agreements gives rise to doubts about genuine intention to keep trade secrets protected.
Enforcing trade secret rights if someone steals or improperly discloses confidential information.
Every state has enacted a law prohibiting theft or disclosure of trade secrets. Most of these laws are derived from the Uniform Trade Secrets Act (UTSA).
A trade secret owner can enforce rights against someone who steals confidential information by asking a court to issue an injunction preventing further disclosure. If Company X learns that an employee has emailed trade secrets to Company Y, Company X can obtain a court order preventing use of the secrets by Company Y. A trade secret owner can also collect damages for any economic injury suffered as a result of the trade secret's improper acquisition and use.

Examples of trade secret infringement that can lead to trade secret lawsuits:

X, a former employee of Y, discloses Y's trade secrets to a new employer.

X hacks into the network for a company and downloads information. X sells the information to a third party which a rival company.

X works as an independent contractor for Y. X signed a nondisclosure agreement with Y, but later discloses Y's secrets to a rival.

The "Inevitable Disclosure" Doctrine
A company may prevent a former employee from working for a competitor if the company can demonstrate that employment with the competitor will inevitably lead to disclosure of trade secrets.

In PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), there is discussion of when disclosure of trade secrets is “inevitable.”
The court identified several factors to be weighed in determining whether disclosure of trade secrets in “inevitable” including;
(1) Is the new employer a competitor? (2) What is the scope of the defendant’s new job? (3) Has the employee been less than candid about his new position? (4) Has the plaintiff clearly identified the trade secrets that are at risk? (5) Has actual trade secret misappropriation already occurred? (6) Did the employee sign a nondisclosure and/or non-competition agreement? (7) Does the new employer have a policy against use of others’ trade secrets? (8) Is it possible to “sanitize” the employee’s new position?”

PepsiCo (1995 case) successfully argued that a former executive could not work as Chief Executive Officer of a competitor Gatorade and Snapple because the executive will inevitably rely on PepsiCo's trade secrets and in the process give the competitor an unfair advantage over PepsiCo.

The inevitable disclosure doctrine has been rejected by many States because it challenges an employee's basic freedom to switch employers. A court may refuse to apply the inevitable disclosure doctrine unless

additional bad faith is shown

underhanded dealing is proved, or

a competitor who does not have comparable technology has employed the worker.

Does the stealing of trade secrets constitute a crime under trade secrets law?
Intentional theft of trade secrets can constitute a crime under both federal and state laws. “Theft” includes not only literal theft but also such practices as flying a plane over a factory to take pictures to deduce the production process. The most significant federal law dealing with trade secret theft is the Economic Espionage Act of 1996 (EEA) (18 U.S.C., Sections 1831 to 1839). The EEA gives the U.S. Attorney General sweeping powers to prosecute any person or company involved in trade secret misappropriation and punishes intentional stealing, copying or receiving of trade secrets. Individuals may be fined up to $500,000 and corporations up to $5 million. A violator may also be sent to prison for up to ten years. All property used and proceeds derived from the theft can be seized and sold by the government.
The EEA applies not only to thefts that occur within the United States, but also to thefts outside the U.S. if the thief is a U.S. citizen or corporation, or if any act in furtherance of the offense occurred in the U.S. If the theft is performed on behalf of a foreign government or agent, the corporate fines can double and jail time may increase to 15 years.
Trade secret infringement a crime in California. It is a crime to acquire, disclose or use trade secrets without authorization. Violators may be fined up to $5,000, sentenced to up to one year in jail, or both. (Cal. Penal Code Section 499c.)

Unless otherwise stated, the trade secrets law statute in the United States of America reads as follows:
“Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, process, drawing, cost data or customer list that:
(1) 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
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
"Misappropriation" of trade secrets is defined as the:
(1) 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
(2) 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 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.