Trade Secrets

Overview

Trade secrets are confidential information not generally available to the public that have commercial value to a business. They make take the form of a formula, practice, process, design, instrument, pattern, or compilation of information, such as customer lists or manufacturing details. Coca Cola's formula, for example, is a trade secret that the company has protected for many years. Software is also commonly protected as a trade secret.

Because of their confidential nature, trade secrets are not protected in the same way that other forms of intellectual property such as patents, copyrights, or trademarks are, because those legal protections of confidential information require disclosure to obtain legal protection. But misuse of trade secrets is considered a form of unfair competition and state and federal laws protect them from disclosure. There is no limit to how long a trade secret can remain protected, as long as a business takes adequate measures to ensure its secrecy.

A company can keep its confidential information from competitors by requiring its employees to sign non-compete or non-disclosure agreements prohibiting them from disclosing trade secrets. Similar contracts preventing disclosure may also be used when a company is engaged in licensing or other business negotiations. If an employee or other party bound by such an agreement discloses or misuses trade secrets in violation of that contract, he or she may be subject to financial penalties, usually provided for in the agreement, as well as penalties imposed by state and federal law.

State Laws Protect Trade Secrets

Trade secrets are primarily protected under state law, including common law interpretations, which vary from state to state. Generally, states only protect a trade secret from unauthorized disclosure, use of the trade secret by others, and from another person obtaining the trade secret by some improper means. If the information could be properly acquired or duplicated by others, such as by reverse engineering, it may not be protected by law. The language state laws use to define what is a trade secret varies by jurisdiction, and so does the specific types of information that each state recognizes as protectable confidential information. But there are three factors that all definitions share: A trade secret is some sort of information that (1) is not generally known to the relevant portion of the public; (2) confers some sort of economic benefit on its holder; and (3) is the subject of reasonable efforts to maintain its secrecy.

Approximately 40 states have adopted the model Uniform Trade Secrets Act (USTA). . The USTA defines a trade secret as "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."

The USTA specifies remedies for violation of trade secrets including injunctions, damages, and attorney's fees. It also gives courts the authority to grant protective orders to ensure the secrecy of a trade secret during the discovery phase of litigation, and prevents disclosure of confidential information by witnesses.

Federal Protection for Trade Secrets

The Economic Espionage Act of 1996 (18 U.S.C. §§ 1831-1839) federally criminalizes the theft or misappropriation of trade secrets under two key provisions. The first, 18 U.S.C. § 1831, makes it illegal to steal trade secrets for the benefit foreign powers; the second, 18 U.S.C. § 1832, makes it illegal to steal trade secrets for commercial or economic purposes regardless of who benefits. The law provides different penalties for the two offenses, limiting penalties for violation of 18 U.S.C. § 1832 to $5,000,000.

The Economic Espionage Act of 1996 applies outside of the United States where the offender is a U.S. citizen or any act in that led to the misuse of the trade secret occurred in the United States. The first jury trial charging violation of § 1832, in 1999, resulted in the conviction of a Taiwanese businessman and his daughter on charges of stealing company secrets from one of the largest adhesive manufacturing companies in the United States. Since then, many other individuals and corporations have been found guilty of violating the Act for stealing or misusing confidential information, including source code, engineering drawings, confidential medical research and other trade secrets worth millions of dollars to the trade secret holders.