Intro to Trade Secrets

Intro to IP – Prof Merges

4.3.2012

How does trade secret (TS) law relate to federal statutory IP?

• Preemption cases

• General principles: federalism, interrelationship

Sources of TS Law

• Common law (“business tort”)

• State statutory law

– Uniform Trade Secret Act – Similar to the UCC

– Uniform (model) Act, codified in 44+ states

Trade Secret Claim – Major Elements

• TS eligible subject matter: not “generally known”; UTSA § 1(4) (definition of TS)

• TS Holder has taken “reasonable precautions” to keep info secret

• Defendant has “misappropriated” the TS; UTSA § 1(2) (def. of “misappropriate”)

Features of TS Law

• Protection of potentially unlimited duration (as long as info is (a) valuable and (b) secret)

• TS cases often, but not always, arise from pre-existing relationships– Employment contracts– Expectations of confidentiality

Kewanee Oil

• “Employee mobility” case

• Basic question: is TS law compatible with federal statutory IP scheme?

• Answer: Yes; mutually supportive “incentive systems”, TS law and patent law

Kewanee Oil v. Bicron

The trade secret at the center of this case was a process that would create 17-inch crystals useful in detecting radiation. A division of the plaintiff firm, Harshaw Chemicals, was involved in the refining of uranium during World War II for the Manhattan Project. Both companies involved in the case were later bought out. Harshaw became a part of Engelhard Corporation, while Bicron joined with Saint-Gobain Crystals and Detectors.

http://www.saint-gobain.com/en

Kewanee holding:

• State trade secret law is not preempted by federal IP scheme

– TS law is a “sieve”, as opposed to a “barrier” like patent law• Why? Reverse engineering/independent invention;

“commercial ethics” as well as innovation policy

– A weaker, and quite different, form of IP law

Survey evidence:• Yale survey (Levin, Klevorick, Nelson, and Winter

1983)• Carnegie-Mellon survey (Cohen, Nelson, and Walsh

1994)• Berkeley-Kauffman Survey 2009

• Firms value trade secret protection more highly than patent, copyright, TM in protecting investment in innovation

“(T)rade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industry…The future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property.” --Rockwell Graphics (Posner, J.)

Defining Trade Secrets

• Metallurgical Industries v. Fourtek

• Interesting facts

– Plaintiff was a customer of defendant’s predecessor; contributed substantially to design of technology

Very Common Scenario

• Supplier – customer relationship

• Joint work on implementing supplier’s technology

• Modifications and adaptations to fit customer’s production process

Trade Secret Protection

• Can apply either way: on part of supplier (more common) or customer

• Here, the customer is the plaintiff; arguing that the supplier learned from it and misappropriated its technology

Facts

• Metallurgical sued when Fourtek signed K with a Metallurgical competitor

• Common situation: the (informal) joint venture, leading to technology exchange, leading to an IP conflict

What improvements did Metallurgical make?

• They added chill plates, changed crucible design, and redesigned heating elements

• Series of minor changes – led to significant performance enhancements

A Transactional View of Property Rights, 20 Berkeley Tech. L.J.

1477 (2005)

Robert P. Merges

Property Rights Create a Legal “Field” Around an Information Asset (i), Protecting Seller (S)

During Buyer’s (B) Precontractual Evaluation

BS i

Metallurgical Industries

• Were the “incremental” and “public domain” contributions by plaintiff “trade secrets” as defined by Texas law?

• Unitary heating elements, vacuum filters, chill plates: all combined to form a useful – and secret – set of improvements in furnace design

Metallurgical holding

• “[Trial court] abused discretion in excluding evidence”

• New trial, with evidence of existence of TS

Trade Secret in General

• In general, a trade secret can be defined as any commercially valuable information or compilation of information that is not generally known to others who can profit from its disclosure or use

• Information, including a formula, pattern, compilation, program, device, method, technique, or process, that:–derives independent economic value from not

being generally known or readily ascertainable by proper means by other persons and;– is the subject of efforts that are reasonable

under the circumstances to maintain its secrecy

Definition of TS

UTSA

• Provides cause of action for “misappropriation” of trade secrets

• 3 year statute of limitations - action must be brought within 3 years after misappropriation is discovered or should have been discovered

IPNTA 5th ed. at 41

Metallurgical’s particular modification efforts can be as yet unknown to the industry. A general description of the zinc recovery process reveals nothing about the benefits unitary heating elements and vacuum pump filters can provide to that procedure. That the scientific principles involved are generally known does not necessarily refute Metallurgical’s claim of trade secrets.

Blum testimony

• First, notice the complex organization of this new piece of technology

• Supplier – customer – consultant

• Importance of IP assignment contracts!!

Disclosures: Degree and impact

• Consarc

• La Floridienne – Euro licensee

• Not enough to eliminate TS protection

Definitional issue

[It is a TS if it]

. . . 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

State Law ProtectionUniform Trade Secrets Act

• Trade secrets are protected under state law• Uniform Trade Secrets Act - Model Act Amended

in 1985• 44 states have enacted statutes modeled after

UTSA• 2 states (AL and MA) have separate state statutes

protecting trade secrets• 7 states protect trade secrets under the common

law

UTSA – Basic Issues

• What is a Trade Secret?

• When is there liability for misappropriation of TS?

• What are “improper means”?

Trade Secret - definition

(4) ‘‘Trade secret’’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

(2) ‘‘Misappropriation’’ means:(i) 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) 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 [or her] 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. . . .