Appreciating the Fundamentals of Trade Secrets Law – I

I discussed a trade secret case law recently. I wrote that I would discuss some of the fundamental aspects from a comparative law perspective. As a prelude, I can only discuss the broad contours of trade secret protection in a blog post. I am limiting the discussion of this post to fundamentals of trade secret protection and US position. I shall discuss the EU position in a later post. If specific questions are asked, I shall try to answer them.

What is a Trade Secret?

A trade secret can be any kind of information (and not limited to technology). Therefore, in a broad sense, all commercial enterprises own trade secrets. In the IP world, licenses are generally a combination of patent and know-how licenses. For instance, a pharmaceutical patent may protect a particular chemical ingredient. But the medicine’s galenic formulation (the principles of preparing and compounding medicines in order to optimize their absorption) may be protected by a trade secret.

There are significant differences between patents and trade secrets. I shall discuss some of them. While a patent demands disclosure to the patent office, a trade secret does not. While a patent extends a 20 year exclusivity period, the term of trade secret protection is unlimited. Given the legal protection attached to a patent, a patent is easy to license when compared to a trade secret. Unlike patents, trade secret protection always carries the risks of parallel inventions and reverse engineering. That means, the protection offered by trade secret is conditional in nature as it entails inherent risks. Considering all these aspects of trade secrets, it is harder to prove infringements when compared to patents. For instance, infringement of patent calls for examination of patent claims. A trade secret may not have something akin to claims. In the light of this understanding, let us examine trade secrets.

Statutory trade secret protection generally protects trade secrets against misappropriation (i.e acquisition by improper means or from someone who had improperly acquired).  But a pressing issue is: how can a trade secret be protected when it is the subject matter in a court proceeding? Is there a possibility for in-camera proceeding? If adjudication can jeopardise trade secret protection, the so-called protection may turn out to be redundant in practice. Can trade secret, therefore, be treated as a ‘property’ so as to extend some solid degree of protection? Indian law is silent on these aspects. Right to property is no longer a fundamental right in India. On the other hand, it is a legal right. [Note that, even if there is lawful disclosure of trade secret, the protection lapses (unlike patents). Trade secret Law doesn’t protect the information per se. On the other hand, it protects information from unauthorized access only.]

In US, both federal (The Defend Trade Secrets Act) and state laws deal with trade secrets. The state laws are harmonized to a great extent by Uniform Trade Secrets Act (a piece of legislation proposed by Uniform Law Commission). [For the Act, please click here.]

Having set the background, this post briefly discusses the following from US perspective:

  1. When is a particular piece of information treated as a trade secret?
  2. When can it be said to be misappropriated?
  3. What are the remedies?

Whether a Particular Piece of Information is a Trade Secret?

US courts follow a six-factor test (Sections 757 and 758 of the Restatement of Torts (1939) followed by US Courts):

  • The extent to which the information is known outside the claimant’s business
  • The extent to which it is known by employees and others involved in the business
  • The extent of measures taken by the claimant to guard the secrecy of the information
  • The value of the information to the business and its competitors
  • The amount of effort or money expended by the business in developing the information
  • The ease or difficulty with which the information could be properly acquired or duplicated by others

Misappropriation (Section 1(2) of UTSA)

[Note that it is a broad definition which includes even indirect acquisition of trade secret.]

“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

Legal Remedies

US  → injunctive relief + damages including exemplary damages damages (factors-in actual loss and unjust enrichment)

Exemplary damages are awarded in case of willful and malicious misappropriation.

H/T: I would like to thank Michael Lin for pointing out the federal law on trade secrets.


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