A Closer Look at Trade Secret Regulation

Article 39 of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement details provisions for the protection of trade secrets as intellectual property. These provisions include inaccessible information about a product or process that is not widely known, commercial value linked with this property of secrecy, and protection of this commercially valuable, secret information.[1] In the United States, trade secrets are a type of proprietary intellectual property consisting of secret, commercially independent, economically valuable information that is protected by the entity that owns the right to the trade secret.[2] [3] [4] Information is defined as “a formula, pattern, compilation, program, device, method, technique, or process.”[5]

Advantages of trade secrets include the fact that one can obtain immediate, indefinite and complete ownership of a trade secret (unless the trade secret is discovered). In other words, trade secrets are not time-limited. On the other hand, patents are time-limited. Trade secrets may be obtained in a shorter amount of time than patents, which often require a lengthy approval process. Trade secrets – unlike patents – may cover all matter of subjects (including abstract ideas). Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014). Unlike a patent, there is no need to register or disclose a trade secret. Like patents, trade secrets may also be licensed. Trade secrets are often less costly to protect than patents. “Trade secrets encompass both technical information, such as information concerning manufacturing processes, experimental research data, software algorithms and commercial information such as distribution methods, list of suppliers and clients, and advertising strategies.”[6]

In the United States, trade secrets are regulated as a form of intellectual property. Specifically, Article I, Section 8, Clause 8 of the United States Constitution states that “The Congress shall have Power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries[.]” Trade secrets are also regulated as a form of commerce within the United States as per Article I, Section 8, Clause of the United States Constitution. 

Trade secrets are defined by Section 1 of the Uniform Trade Secrets Act (USTA):

“Trade Secret” means information, including a formula, pattern, compilation, program, device, method, technique or process, 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.”

USTA §1; Amoco Production Co. v. Laird, 622 N.E.2d 912 (Ind. 1993).

In addition to the Uniform Trade Secrets Act, trade secrets are regulated via individual state law and United States federal law. The Defend Trade Secrets Act, 18 USC §1839(3), also discusses activity surrounding trade secrets. Trade secrets include:

“[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, another person who can obtain economic value from the disclosure or use of the information.”

Defend Trade Secrets Act of 2016, (amending Economic Espionage Act) 18 USC § 1839(3)

Trade secrets are also covered by the Restatement of Torts.

“A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process for manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers…”

1st Restatement of Torts, § 757, comment b (Definition of a trade secret)

The 1st Restatement of Torts, § 757 further discusses characteristics of whether or not a secret is truly a trade secret, including:

1. “the extent to which the information is known outside of his business;
2. the extent to which it is known by employees and others involved in his business;
3. the extent of v measures taken by him to guard the secrecy of the information;
4. the value of the information to him and to his competitors;
5. the amount of effort or money expended by him in developing the information;
6. the ease or difficulty with which the information could be properly acquired or duplicated by others.”

1st Restatement of Torts, § 757

In other words, trade secrets are confidential to those who have vested economic interest in keeping the trade secret information secret.[7] Amoco Production Co. v. Laird, 622 N.E.2d 912 (Ind. 1993). Typically, invested parties employ reasonable means to keep the information secret. A potential trade secret violator would need to exert extraordinary effort “through the expenditure of considerable time and money” to steal a trade secret. Webcraft Technologies, Inc. v. McCaw, 674 F. Supp. 1039, 1045 (S.D.N.Y. 1987). Typically, “[i]f the information can be readily duplicated without involving considerable time, effort or expense, then it is not secret.” Hamer Holding Group, Inc. v. Elmore, 202 Ill. App. 3d 994, 1011-12 (1990). The value of a trade secret is often proportional to the extraordinary means the owner of the trade secret undertakes to protect the confidentiality of the trade secret.

Trade secrets protect against unfair competition, and violation of a trade secret protection may constitute a breach of contract.[8] [9] [10] The 1st Restatement of Torts, § 757, also discusses what constitutes misappropriation, breach of confidence, and/or infringement with regard to trade secrets.

“One who discloses or uses another’s trade secret, without a privilege to do so, is liable to the other if (a) he discovered the secret by improper means, or (b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or (c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his duty to the other, or (d) he learned the secret with notice of the facts that it was a secret and that its disclosure was made to him by mistake.”

The 1st Restatement of Torts, § 757

Typically, invested parties employ reasonable means to keep trade secret information secret. A potential trade secret violator would need to exert extraordinary effort “through the expenditure of considerable time and money” to steal a trade secret. Webcraft Technologies, Inc. v. McCaw, 674 F. Supp. 1039, 1045 (S.D.N.Y. 1987). If the information can be readily duplicated without involving considerable time, effort or expense, then it is not secret.” Hamer Holding Group, Inc. v. Elmore, 202 Ill. App. 3d 994, 1011-12 (1990). Lawful reverse engineering, independent, or simultaneous discovery of something that is supposedly a trade secret may void or invalidate an entity previously thought to be a trade secret.[11] [12]  Thus, the value of a trade secret is often proportional to the extraordinary means the owner of the trade secret undertakes to protect the confidentiality of the trade secret.

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References:

[1] Module 4. 4.1: Kind of Protection. World Intellectual Property Organization. Online: https://welc.wipo.int/lms/pluginfile.php/1969981/mod_resource/content/5/modules_r13/DL301E_M04_V2.0.pdf

[2] World Intellectual Property Organization. Online: https://www.wipo.int/tradesecrets/en/.

[3] TRIPS Agreement, Article 39.

[4] Article 10bis of the Paris Convention

[5] Definition of “Trade Secret.” § 1 (4). Uniform Trade Secrets Act of 1979. Amended in 1985.

[6] Frequently Asked Questions – Trade Secrets. World Intellectual Property Organization. Online https://www.wipo.int/tradesecrets/en/tradesecrets_faqs.html.

[7] Id.

[8] World Intellectual Property Organization. Online: https://www.wipo.int/tradesecrets/en/.

[9] TRIPS Agreement, Article 39.

[10] Article 10bis of the Paris Convention

[11] Frequently Asked Questions – Trade Secrets. World Intellectual Property Organization. Online https://www.wipo.int/tradesecrets/en/tradesecrets_faqs.html.

[12] Module 4. 4.1: Kind of Protection. World Intellectual Property Organization. Online: https://welc.wipo.int/lms/pluginfile.php/1969981/mod_resource/content/5/modules_r13/DL301E_M04_V2.0.pdf