Trade secret

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Contents 1 Historical Background 2 Definition of a "Trade Secret" 3 Secrecy 4 Duration 5 Rights of trade secret owner 6 State law 7 Federal law 8 Software as a Trade Secret 9 Negative Information as a Trade Secret 10 References

[edit] Historical Background

The law of trade secrets had its origin in the common law and was imported into the United States from England in the landmark case of Peabody v. Norfolk,^[1] where the court held that the owner of a secret of trade or manufacture is “entitled to protection against those who in, or with knowledge of, violation of contract and breach of confidence, undertake to disclose it or to reap the benefit of it.”^[2]

[edit] Definition of a "Trade Secret"

A trade secret is any secret formula, pattern, device or compilation of information used in a business that has some independent economic value and which is used to obtain an advantage over competitors who do not know or use it.^[3] Restatement (First) of Torts § 757, comment b defines a trade secret as:

[A]ny formula, pattern, device or compilation of information which is used in one's business, and which give him an opportunity to obtain an advantage over competitors who do not know or use it. . . . A substantial element of secrecy must exist, so that, except by use of improper means, there would be difficulties in acquiring the information. . . . Protection is not based on a policy of rewarding or otherwise encouraging the development of secret processes or devices. The protection is merely against breach of faith and reprehensible means of learning another's secret.

Trade secrets are defined broadly under the Uniform Trade Secrets Act to include:

Information, including a formula, pattern, compilation, program, device, method, technique, or process, that is both of the following: (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.

[edit] Secrecy

There are several factors used to determine if subject matter qualifies as a trade secret. Among the factors considered are the extent of measures taken by the trade secret owner to guard the secrecy of the information and the ease or difficulty with which the information could be properly acquired or duplicated by others.^[4] Based on these considerations, the general rule is that subject matter cannot be successfully protected as a trade secret if it is widely distributed. However, if adequate security precautions are taken to ensure that access to the subject matter being distributed is treated as secret, the subject matter may still be considered a trade secret.

One of the most famous trade secrets is the formula for manufacturing Coca-Cola. Coca-Cola was accorded trade secret protection in 1920 because the recipe had been continuously maintained as a trade secret since the company's founding in 1892, and it apparently exists to this day.^[5]

[edit] Duration

Unlike a copyright or patent, a trade secret is not limited in duration to a fixed number of years. Instead, a trade secret endures so long as the protected information remains commercially valuable and is maintained as a secret.^[6] If the trade secret holder ceases to take measures to maintain the confidentiality of the protected information, or if the information becomes widely available to the public, then the trade secret is extinguished.

[edit] Rights of trade secret owner

Trade secret protection is limited. A trade secret holder is only protected from unauthorized disclosure and use of the trade secret by others and from another person obtaining the trade secret by some improper means.^[7] Typical cases of trade secret misappropriation involve trespass, bribery and theft, as well as breaches of a duty of confidence committed by former employees or commercial partners.

The information can be freely used if it is obtained or learned through legitimate means, such as reverse engineering.^[8] Moreover, if the trade secret is publicly disclosed, it loses its legal protection.

[edit] State law

Unlike many of the other forms of intellectual property, trade secrets are generally protected by state law, not federal law.^[9] Trade secrets are broader in scope than patents, and include scientific and business information (e.g., market strategies).

[edit] Federal law

Under the federal Economic Espionage Act of 1996, a trade secret means "all 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, the public."^[10]

The theft of trade secrets is punishable by up to fifteen years' imprisonment and a $500,000 fine if done to benefit a foreign government or agent,^[11] and up to ten years' imprisonment and a $250,000 fine in other cases.^[12]

[edit] Software as a Trade Secret

Upholding plaintiff’s trade secret claim to its software, the federal court in Com-Share, Inc. v. Computer Complex, Inc.^[13] held:

[T]he existing software systems which are unique in the computer time sharing industry all contain certain elements which perform similar functions and many utilize certain similar fundamental concepts, of a general nature. This is no more than saying that all have a common concept, and, in the most general sense, a common base. Such is common in all engineering. . . . The specific engineering of these software systems, and their particular underlying technologies and design, together with what has been referred to as their ‘logic and coherence’, as well as their speed, accuracy, cost, and commercial feasibility may differ greatly from system to system. They will and do inevitably reflect the peculiar and unique accomplishments and technical skills of the developers thereof.

Case law further supports the proposition that the overall design of a software program may be protectable as a trade secret, even if the individual components of that program are common knowledge in the programming industry.^[14]

Numerous court decisions have made clear that software specifications are also subject to trade secret protection.^[15]

[edit] Negative Information as a Trade Secret

There are many cases that have found trial and error information used in software development (often referred to as “negative information”) to be protected as a trade secret.^[16]

[edit] References

1. ↑ 98 Mass. 452 (1868)
2. ↑ Id. at 461.
3. ↑ See 18 U.S.C. §1839(3).
4. ↑ Restatement (Third) of Unfair Competition §39 (1995). The trade secret owner may communicate the trade secret to others provided that those to whom the trade secret is communicated pledge not to reveal the trade secret to others. Id.
5. ↑ See Coca-Cola Bottling Co. v. Coca-Cola Co., 269 F. 796 (D. Del. 1920) (holding that Coca-Cola retained legal title to its formula upon entering a bottling contract because it kept the formula secret).
6. ↑ See United States v. Dubilier Condenser Corp., 289 U.S. 178, 186 (1933).
7. ↑ Restatement (Third) of Unfair Competition §43 (1995).
8. ↑ Id. §39 cmt. c.
9. ↑ Federal law does prohibit the disclosure of confidential information obtained by federal officials in the course of their official duties. Id.
10. ↑ 18 U.S.C. §1839(3).
11. ↑ Id. §1831
12. ↑ Id.
13. ↑ 338 F. Supp. 1229, 1234 (E.D. Mich.), aff’d, 458 F.2d 1341 (6th Cir. 1972) (emphasis added).
14. ↑ See, e.g., Computer Care v. Service Sys. Enters., Inc., 982 F.2d 1063, 1074 (7th Cir.1992) (“A trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process design and operation of which in unique combination affords a competitive advantage and is a protectable trade secret” (citation omitted)).
15. ↑ See, e.g., Computer Care v. Service Sys. Enters., Inc., 982 F.2d 1063, 1074 (7th Cir.1992); Harbor Software, Inc. v. Applied Sys., Inc., 887 F. Supp. 86, 90 (S.D.N.Y. 1995); i-Systems, Inc. v. Softwares, Inc., 2004 WL 742082, at *14 (D. Minn. Mar. 29, 2004) (trade secret found in the “detailed explanations of the logical workings of the feature sets of TQ Tracker”); TouchPoint Solutions, Inc. v. Eastman Kodak Co., 345 F.Supp.2d 23, 28 (D. Mass. 2004) (trade secret protection for software design).
16. ↑ See, e.g., Integrated Cash Management Services, Inc. v. Digital Transactions, Inc., 732 F. Supp. 370 (S.D.N.Y. 1989) (“the Court credits his testimony that a significant amount of time and money was spent in investigating alternatives that, in the end, were not fruitful. Such a trial and error process is also protectable as a trade secret of ICM”), aff’d, 920 F.2d 171 (2d Cir. 1990); Cybertek Computer Products, Inc. v. Whitfield, 203 U.S.P.Q. (BNA) 1020 (Cal. Super. 1977) (“the specifications of these basic mechanical elements and their relationship to each other . . . were not publicly known, were arrived at only through painstaking research and extensive trial and error, and, therefore, constituted a trade secret entitled to protection.” (emphasis added.)