INTRODUCTION TO TRADE SECRETS
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Copyright © 1986-2004 Zegarelli Law Group. All rights reserved.
Written by Gregg R. Zegarelli, Esq.

THE FOUNDATION OF TRADE SECRET LAW

Trade secret protection originated in the first century when the definition of "kidnapping" was expanded to encompass the pirating of literary works. Throughout ancient history, the law strictly curtailed the dissemination of trade secrets. During the Middle Ages, the guild systems evolved, under which only guild members were entrusted with trade secrets. By the seventeenth century, statutory protection for some types of intellectual property had begun to develop. In the United States, trade secret protection arose from the common law, rather than constitutional or statutory regulation. While there is disagreement as to whether trade secret protection actually evolved from the law of confidential relationships or from more basic property law principles, most courts will not allow parties to "reap where they have not sown."

WHAT IS A TRADE SECRET

Generally, a trade secret is "any formula, pattern, process or device which is used in one's business and which gives one the opportunity to obtain advantage over competitors who do not know or use it." For example, a specific computer program using generally known ideas can contain trade secrets because of the unique logic and coherence by which it is designed. In other words, while generally known concepts cannot be protected, a specific implementation involving a unique combination of general concepts may be a trade secret. Trade secret law requires only that the particular architecture of a program is valuable and that it is not a matter of common knowledge or readily duplicated.

The law of trade secrets differs substantially from both patent and copyright law. While the law of copyrights and patents is determined by federal law, the law of trade secrets is determined by state law.

Trade secret protection, unlike copyright and patents, can extend to ideas, algorithms and procedures. Therefore, trade secret protection is a very important method of protecting aspects of computer software not otherwise protectible by copyright or patent. Copyright protects the author from illegal copying of a creative work. A trade secret protects only unauthorized use when done in violation of a confidential relationship whether implied or expressed in contract.

Trade secrets do not require compliance with general statutory formalities. Furthermore, a trade secret is not subject to the same requirements as a patent. There is no registration of trade secrets, and the only time that a judgment would be made whether or not a particular idea, invention, or other item of intellectual property is a trade secret is if the question should come to litigation.

Many states define a trade secret as: "The whole or any portion or phase of any scientific or technical information, design, process, procedure, formula or improvement which is: 1) of value; 2) has been specifically identified by the owner as of a confidential character; and 3) which has not been published or otherwise become a matter of general public knowledge."

By the same statute, there is a rebuttable presumption that scientific or technical information has not been published or otherwise become a matter of general public knowledge when the owner takes measures to prevent the information from becoming available to persons other than those selected to have access for limited purposes.

ACQUIRING A TRADE SECRET

Trade secret laws will not protect any item of information. To qualify as a trade secret, the information must have two basic characteristics: 1) it must be secret; and 2) it must provide its owner with an advantage over competitors who do not have it. Also, many states add a third requirement that the information be "specifically identified" as confidential.

Generally, courts have developed a number of factors to determine whether a trade secret exists. Among these factors are the following: 1) the extent to which the information is known outside of the business; 2) the extent to which it is known by employees involved in the business; 3) the extent of measures taken to guard the secrecy of the information; 4) the value of the information to the business owner and to the competitors; 5) the expense of developing the information; and 6) the difficulty with which the information could be legally duplicated by others.

A trade secret need not be unique and may be clearly anticipated by "prior art." Nevertheless, it must be "valuable." Generally, value is a function of whether the trade secret affords the owner a competitive advantage. Courts frequently analyze the competitive advantage of a trade secret by looking at the time and effort that has gone into its development. It is the development time and money that goes into a finished product that frequently gives the owner a "head start" over competitors. The essence of trade secret law is to protect the value of this head start by requiring competitors to spend their own resources to create a competing product.

One of the first cases involving trade secrets in computer software was Com-Share, Inc. v. Computer Complex, Inc. In that case, the trade secret was alleged to be the "unique engineering, logic and coherence" of the software. This phrase has become one of the cornerstones of trade secret law in the software industry. It is the uniqueness which is the essence of the trade secret. Thus, although one program may do precisely the same tasks as another program, the task itself probably would not constitute a trade secret if it is the type that is generally carried out in that business. Alternatively, if one program is substantially faster and has more features and flexibility than the other program, then the first program's unique design and advantages relative to the second program make it possible for trade secrecy. In short, the unique secret qualities of the software provide the "value" of the trade secret.

MAINTAINING A TRADE SECRET

Because a trade secret must be, in fact, a secret, businesses should take every precaution to ensure that their employees are on notice of the secret nature of the information. For example, the owner should put its employees on notice that the owner considers the information to be a valuable trade secret. A trade secret notice might read as follows:

WARNING: THIS MATERIAL IS A PROPRIETARY TRADE SECRET OF BEST SOFTWARE, INC. AND IS TO BE KEPT CONFIDENTIAL AT ALL TIMES. ANYONE WHO WRONGFULLY USES OR DISCLOSES THIS INFORMATION MAY BE SUBJECT TO CIVIL AND CRIMINAL PENALTIES.

The trade secret notice should be in an obvious location. In cases of software development, the owner should program the software so that the notice is displayed to the user: 1) at sign-on/startup; 2) continually at every menu screen; 3) in hardcopy printouts; and 4) as a data element during memory dumps or decompiling. The notice also should be on the diskette label and throughout the humanly readable source code. Providing such notices should comply with the state criminal statute requirements for notification of trade secrets.

Also, anyone who does not directly work with the trade secrets should not have access to the secrets. Employers should use passwords, restrict access levels and generally secure storage. Although a shredder often has negative implications, it is a valuable method to ensure that company secrets are not being removed from the trash.

Restrictive Covenants.

One of the best methods to ensure that employees understand the secret nature of certain materials is to have a written agreement. It should be noted, however, that employees will often be considered to have obtained the information as a secret even without a written agreement, if it is reasonable that the employee should have known of the confidentiality. As a result, even without specific contractual provision, employees must generally respect the confidentiality of his or her employer's trade secrets.

Restrictive covenants may also prevent employees from pursuing their vocation after termination of employment. A covenant not-to-compete can be more restrictive than a covenant not to reveal a trade secret because the prevented competition may involve the use of information which is not necessarily a trade secret. Such covenants are not favored by the law. As stated by one court "powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood."

Pursuant to this strong public policy, a covenant that restricts an employee will be enforced only to if it is: 1) reasonably necessary to protect the employer's legitimate business interests, e.g. unique employee service, trade secrets or confidential customer information; 2) not unreasonably burdensome to the employee in either time or area; and 3) not harmful to the general public. If a court determines that the conditions are satisfied, then the covenant will be enforced. However, tailoring an agreement to the particular circumstances is difficult. Care must be taken to ensure that the agreement is not overbroad in scope. Also, proper language should be inserted in the agreement to allow the court to limit, rather than strike, an overbroad clause.

If the agreement is signed after the employee has actually been hired, then there may be no consideration to make the agreement enforceable. Also, a too restrictive covenant could be a restraint of trade.

LOSING A TRADE SECRET

There are several means by which a competitor might legitimately obtain an owner's trade secret. First, the owner of the trade secret might inadvertently publicize the information—at a cocktail party, for example. If the owner or one of the owner's employees reveals the secret without any wrong-doing on the part of the one that learns it, and if there is no prior notice that the information is a trade secret which has been revealed by mistake, then the one who gains the trade secret has no liability.

A competitor is also free to "reverse engineer" the trade secret. Thus, if the competitor buys a micro chip on the open market, analyzes its design, and then builds an identical chip, there is no misappropriation of the trade secret. However, to prevent this situation, many micro chips are embedded in a protective casing before they are marketed. Destroying the case will also destroy the microchip.

There are also illegal ways to obtain a trade secret, and some of them may subject the actor to criminal prosecution as well as civil liability. One of the most complex situations involves the information that employees take from a prior job. The matter is particularly sensitive when such employees have been made to sign a nondisclosure, non-competition agreement with their former employer, and yet are being hired because of skills and knowledge demonstrated in their previous work. When hiring new employees, it is always good practice to have them represent that they are not misappropriating any proprietary information from a former employer.

MISAPPROPRIATION AND REMEDIES

Trade secret cases often involve multiple pleading that include contract law, quasi-contract law, unjust enrichment, tort and conversion law, unfair competition and confidential relationships. In many states, it is a crime if a person:

1. by force or violence, or by putting the owner in fear, takes from the owner any article representing a trade secret; or willfully and maliciously enters any building or other structure with the intent to obtain unlawful possession of, or access to, an article representing a trade secret; or

2. intends to wrongfully deprive of, or withhold from the owner, the control of a trade secret, or intends to wrongfully appropriate a trade secret for his or her own use, or for the use of another, or unlawfully obtains possession of, or access to, an article representing a trade secret; or

3. having lawfully obtained possession of an article representing a trade secret, or access thereto, converts such article to his or her own use or that of another person, while having possession thereof or access thereto makes, or causes to be made, a copy of such article, or exhibits such article to another.

In order to prove the above, the owner might show that the competitor did not have the information prior to his or her firing the former employee and that a substantial bonus or salary increase was offered because of the former employee's special knowledge.

The owner of a trade secret may seek relief from a court if he or she believes that the trade secret has been, or is about to be, misappropriated. For example, an injunction may be sought to prevent a former employee from using the trade secret in the employee of another company.

CONCLUSION

Trade secrets provide an owner with one of the least formal and effective methods of retaining an advantage in the marketplace. Furthermore, trade secret law co-exists with copyright law disclosure policies. As a result, trade secret policies should be incorporated into almost every employer's business practices. Our firm can assist you with obtaining trade secret protection.

Articles and information are for general information only, and often address issues, without expressly indicating, in generalizations. Laws vary between and among jurisdictions.  You should not rely upon any information provided by or on the website, including articles, as applicable to your particular situation. The law, filing fees, etc., change often, so the information in this document may not be current. The laws of various jurisdictions may be different than provided here.  Please contact us at info@zegarelli.com if you are interested in becoming our client--only then would this office be in the position to provide advise with regard to your particular situation.  It is important for you to review Terms of Use.

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