Chapter 2: Definitions Trade Secret Law


Below are concise definitions of the major concepts and terminology associated with explaining, protecting and enforcing trade secrets.

accidental disclosure of trade secrets

Valuable business information that is inadvertently disclosed to the public usually doesn’t qualify as a trade secret, so the courts won’t protect it as such. This means that the disclosed information can be used by competitors without fear of a lawsuit by the information’s original owner.

EXAMPLE: Independent Robotics conducts a guided tour of its plant. One of the company’s engineers accidentally leaves a top secret diagram of a new robot in full view, where it is seen by a competitor on the tour. This diagram (and the information contained in it) has lost its trade secret status due to the fact that it was discovered accidentally, without any intentional wrongdoing by the employee or the competitor.

Related terms: loss of trade secrets; reasonably precautionary measures to protect trade secrets.

advantage over competitors

See competitive advantage.

anti-competition agreements

See covenant not to compete by employee; covenant not to compete by owners of a sold business.

antitrust law and trade secrets

The primary purpose of antitrust law is to preserve a free, competitive marketplace by preventing companies from engaging in behavior that unduly dominates the marketplace or restricts free trade. Antitrust law consists of treaties, federal and state statutes and court opinions that:

  • restrict businesses from engaging in practices with the intent to create a dominant or monopolistic market position, and

  • prohibit businesses from making agreements with other businesses or individuals that impose significant restrictions or restraints on trade, such as price fixing, territorial restriction agreements, bid rigging and tying arrangements.

In some circumstances, trade secret owners may violate the antitrust laws by using their trade secrets to unfairly discriminate against other companies. For example, if a clothing manufacturing company that has discovered a new method for protecting cotton from shrinkage shares this secret with one competitor for the purpose of driving a third competitor out of business, the antitrust laws may have been violated (conspiracy in restraint of trade and monopolistic practices). In general, deciding whether a particular activity violates the antitrust laws involves such variables as the intent of the actors, the degree of harm done to other companies and the level of commerce that is affected (local, state, national or international).

Related terms: illegal restraint of trade; licensing of trade secrets; territorial restriction agreements—trade secrets; tying arrangements.

beta-testing and trade secrets

After new products and services are developed, but before being released to the public, they are often tested exhaustively under real-life conditions to make sure that they work properly. Called beta-testing, this reality check is especially important in the case of computer software, which is usually so complex that its performance in disparate real-life situations cannot accurately be predicted on the basis of the written code. To identify any potential problems and mistakes (bugs) in the software, the software developer will commonly allow a number of people free use of the software in exchange for keeping track of any problems they encounter. To preserve the software as a trade secret during the beta-test phase, the developer customarily requires beta-testers to sign nondisclosure agreements containing a promise to not talk about the software with anyone, unless authorized by the developer.

Related terms: nondisclosure agreement; software and trade secrets.

business information as trade secret

A business’s internal information can qualify as a trade secret if its disclosure would negatively affect that business’s competitiveness. For example, the following types of information commonly are considered to be trade secrets because they provide a business with a competitive edge:

  • information concerning the characteristics of customers

  • information relevant to the cost and pricing of goods

  • sources of supply, especially if disclosure would divulge the nature of a secret ingredient

  • books and records of the business

  • mailing lists and other sales information

  • customer lists

  • information regarding new business opportunities (such as the price and physical characteristics of real estate)

  • information regarding the effectiveness and performance of personnel, distributors and suppliers, and

  • methods of doing business.

On the other hand, business information is not protectable as a trade secret if it can be independently developed with little difficulty. Information that might not generally qualify as a trade secret includes general employee handbooks and personnel policies that discuss the rights and responsibilities of workers based on applicable federal and state law.

Related terms: competitive advantage; compilation of information as a trade secret; customer lists; databases as trade secrets; know-how; industrial secret.

clean room

In order to demonstrate that proprietary materials were developed independently, teams are isolated and monitored in “clean rooms.” These facilities provide evidence that similarities to others’ works or products are due to legitimate constraints and not copying.

commercial piracy

See piracy.

competition by former employees

See confidential employment relationship; covenant not to compete by employee.

competitive advantage

A competitive advantage may be gained from any confidential information, idea, item or state of events that can potentially be exploited to enhance the income or assets of a business. If the owner of information cannot derive economic benefit from the information, there is no trade secret. Conversely, if keeping the information secret will give its owner a competitive advantage, the item may qualify as a trade secret, assuming that secrecy is, in fact, maintained.

EXAMPLE: Universal Programming, Inc., develops and distributes business software. One of its employees creates an outline permitting user interface screens to be quickly and efficiently edited while programming is in process. If other software companies have developed equally quick and efficient screen editors, Universal’s program does not provide a competitive advantage and, although the program uses an innovative approach, it probably will not qualify as a protectable trade secret. On the other hand, if Universal’s innovative new screen editor works faster than others in general use throughout the industry or offers unique features, this would give Universal a competitive advantage because it may produce software faster or better than its competitors. In this situation, the screen editor program would qualify for trade secret status as long as Universal treats the program as confidential and other companies do not independently create the same innovations.

Related terms: trade secret, defined.

compilation of information as a trade secret

Trade secrets are often thought to involve a new approach, formula, device or method for accomplishing a given end. However, a genuinely innovative structuring or reorganization of otherwise public information that creates a competitive advantage can also qualify as a trade secret if it is maintained as one.

Much existing information is now being reorganized so that it can be more easily stored in and retrieved from computer databases. Often referred to as “knowledge engineering,” these new machine-searchable formats themselves may qualify as innovative compilations. They deserve treatment as trade secrets if maintained as such, because they enable a business to analyze old information in new ways that can lead to a competitive edge.

EXAMPLE: A hearing aid manufacturer designs an innovative way to create a specialized mailing list of deaf Americans from available census data. Although the census data is certainly not a trade secret, the mailing list would qualify as a trade secret in that it is not available to anyone else, and would provide the manufacturer with a competitive advantage.

Related terms: business information as trade secret; customer lists; databases as trade secrets.

computer programs and trade secrets

See software and trade secrets.

confidential employment relationship

Much of trade secret law is concerned with how employees may act with respect to an employer’s trade secrets during and after the period of their employment, even if these matters are not set out in a written agreement.

Each state has laws that prohibit trade secret theft. Regardless of whether an employer uses a nondisclosure agreement, an employee can be prevented, under these laws, from making unauthorized disclosures. In some cases, an employer may obtain financial damages from the employee for such disclosures. Although it is always advisable to use a nondisclosure agreement, these state laws provide a second line of defense in the event trade secrets are stolen.

In addition to state laws prohibiting disclosure, certain management and high-level employees—for example, an engineer, scientist or corporate executive—who come in contact with trade secrets during the course of their work have a special obligation (referred to as a “fiduciary duty” or “duty of trust”) to treat secrets as confidential. The higher the level of expertise or responsibility possessed by the employee, the more likely this special fiduciary relationship exists. This offers an employer another method of preserving trade secrecy.

Regardless of these state laws and fiduciary duties, firms possessing trade secrets usually require all employees with access to trade secrets to sign nondisclosure agreements, as such agreements provide additional rights and obligations in the event of a trade secret theft.

Related terms: nondisclosure agreements; duty of trust; exit interview.

confidentiality agreements

See nondisclosure agreement.

copyright and trade secret law compatibility

A copyright consists of the exclusive right to reproduce, display, perform, distribute and make alterations to an original work of expression. Simply put, copyright law protects the original expressions of ideas, but not the ideas themselves.

Copyright and trade secret laws sometimes protect the same kinds of information and sometimes are mutually exclusive of each other. Here are the salient points of how trade secret and copyright legal protections can work together under the Copyright Act of 1976:

  • Trade secret and copyright protection are both available for unpublished works as long as the idea (or ideas) in the work are sufficiently innovative to qualify as a trade secret (any confidential information that provides a business with a competitive advantage), and the information is kept confidential.

  • Trade secret and copyright protection may both be available for works that are distributed on a limited and restricted basis under a copyright licensing arrangement requiring the licensee (user) to recognize and maintain the trade secret aspects of the work. This dual protection is especially pertinent for the computer software business.

  • Trade secret protection is generally not available for software if the source code is made available to the public on an unrestricted basis through such means as listing it in a computer magazine or on a medium of distribution (for instance, a floppy disk).

  • Works that are widely distributed without specific licensing agreements will generally lose their trade secret status but may be entitled to copyright protection.

  • The deposit of a physical copy of the work that is being registered with the U.S. Copyright Office operates to disclose any trade secrets in the work unless the deposit in some way masks the material that comprises the trade secret. For instance, it is possible to deposit samples of source code with major portions blacked out so that the parts of the code being maintained as a trade secret are not disclosed. There are several other methods for simultaneously registering a computer program and maintaining trade secrets. One common way is to withhold the source code altogether and deposit object code—which is impossible to understand when read in the U.S. Copyright Office.

    Related terms: ideas as trade secrets; reasonably precautionary measures to protect trade secrets; software and trade secrets.
    See also Part 2 (Copyright Law): Copyright Act of 1976.

covenant not to compete by employee

(also referred to as a “noncompetition agreement” or “noncompete”). This is legalese for a written promise by an employee not to compete with his or her employer, or take employment with a competing business, for a specified length of time after the employer-employee relationship ends.

Noncompetition and nondisclosure agreements both have the same goal: to prevent a competitor from using valuable business information. The difference is that a nondisclosure prohibits disclosure to a competitor; a noncompete prohibits even working for a competitor or starting a competing business. In other words, the noncompete is broader and more heavy-handed in its approach. (So heavy-handed, in fact that some states restrict or prohibit them.

In some cases, noncompetes and nondisclosure agreements complement each other. For example, an Internet business might use a noncompete agreement to prohibit employees from working for competitors for a period of six months. After that the employees may work for a competitor but will still be prohibited, under the terms of a nondisclosure agreement, from disclosing trade secrets. The six-month noncompete period guarantees that short-term business strategies won’t be compromised, while the nondisclosure agreement guarantees that fundamental long-term business information and methods won’t be lost in subsequent years.

By delaying former employees from going to work for competitors or starting their own competing businesses, covenants not to compete minimize the risk that trade secrets will be disclosed or used to compete with the former employer.

Agreements restricting the right of employees to compete have often proved difficult to enforce in court, as courts tend to dislike contracts that restrict a worker’s right to earn a living. Employees with high levels of responsibility are more likely to be held to their promise, while those with less important responsibilities may be able to escape from the restriction on the premise that they would not be in a position to harm the employer’s interest, and it would more severely affect their ability to support themselves.

Covenants not to compete are banned in some countries, and banned or greatly restricted in a few states, including California. However, if an employee enters into a legal noncompete in one state and then takes a job with a competitor in California, California courts will enforce the agreement.

EXAMPLE: Medtronic, a manufacturer of implantable medical devices, hired Mark Stultz to work in its Minnesota branch office. Stultz signed a noncom-pete agreement—legal in Minnesota—and then, after a few years, resigned and went to work for Advanced Bionics, a California medical device manufacturer. Stultz and Advanced Bionics asked a California court to invalidate the Medtronic noncompete agreement, since California does not permit noncompetes. The California Supreme Court refused; Stultz was bound by the Minnesota agreement, even in California. Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th 697 (2002). Most state courts will, however, enforce covenants not to compete if they are seen as necessary to protect trade secrets and they are drafted to minimize the restriction of the employee’s right to work and/or engage in commerce.

EXAMPLE: Laser Fair Corp., a company engaged in making holographs for amusement parks, hires Peter Erickson as a high-level laser specialist. As a condition of employment, Peter is required to sign a covenant not to compete in work specifically involving amusement park holographs for a one-year period. This narrower covenant would likely be enforceable in most states. If, however, Peter signed a covenant not to engage in any holography or related laser work for a five-year period after leaving the company, most courts would refuse to uphold it. Given the fast-changing nature of the field, such an agreement is both broader in scope and longer in duration than is needed to protect Laser Fair’s competitive interest in trade secrets acquired by Peter.

A court is more likely to shorten the time periods for restrictive covenants when the employee works in an area of developing technology such as software or the Internet. For example, one court ruled that an Internet employee’s one-year restriction on working for a competitor was too long “given the dynamic nature of this [Internet] industry, its lack of geographical borders, and the employee’s former cutting-edge position.” (EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 313 (S.D. N.Y. 1999).) Another court limited an Internet employee’s non-compete restriction to six months. (DoubleClick, Inc. v. Henderson, 1997 LEXIS 577, (Sup. Ct. N.Y. Co. 1997).)

Related terms: confidentiality agreements; reasonably precautionary measures to protect trade secrets.

covenant not to compete by owners of a sold business

As a condition of the sale of an existing business, its owners, officers or directors are commonly required to promise in writing not to compete with the purchased business for a specific time period. These promises (or covenants) constitute recognition that part of the value of the purchased business consists of trade secrets. If former owners, officers or directors were permitted to utilize this information in competing businesses, the purchasers of the existing business would not be getting their money’s worth. For this reason, courts are usually willing to enforce these covenants.

criminal prosecution for trade secret theft

Because trade secrets are a type of property, criminal prosecution is available in most states for their theft. A prosecution may also be brought by the federal government under the federal Industrial Espionage Act.

Although state criminal laws affecting trade secrets differ from state to state, the typical law applies to anybody who intentionally:

  • physically takes records or articles reflecting the trade secret

  • copies or photographs such records or articles

  • assists in either of these acts, or

  • discloses the trade secret to another after having received knowledge of the secret in the course of a confidential employment relationship.

    EXAMPLE: Alice Engineer is hired by LaserDisk, Inc., to design a home laser disk unit. Alice is informed of certain LaserDisk trade secrets relevant to her design work. About a year later, Alice becomes unhappy with her employment and takes a better job at a competing company. She discloses LaserDisk’s trade secrets to the new company. Because Alice learned of the trade secrets in the course of a trust relationship at LaserDisk (a relationship usually considered to exist between highly skilled employees and their employer), she is subject to criminal prosecution if the state in question has a trade secret theft law. In every state, Alice could be sued in civil court in a trade secret infringement action.

    Related terms: improper acquisition of trade secrets; improper disclosure of trade secrets; trade secret infringement action.

customer lists

Companies are often very eager to protect their customer lists with nondisclosure agreements, particularly when a former employee might use a customer list to contact clients. If a dispute over a customer list ends up in court, a judge generally considers the following elements to decide whether or not a customer list qualifies as a trade secret:

  • Is the information in the list ascertainable by other means? A list that is readily ascertainable cannot be protected.

  • Does the list include more than names and addresses? For example, a customer list that includes pricing and special needs is more likely to be protected because this information adds value.

  • Did it take a lot of effort to assemble the list? A customer list that requires more effort is more likely to be protected under a nondisclosure agreement.

  • Did the departing employee contribute to the list? If the departing employee helped create it or had personal contact with the customers, it is less likely to be protected under a nondisclosure agreement.

  • Is the customer list personal, long-standing or exclusive? If a business can prove that a customer list is special to its business and has been used for a long time, the list is more likely to be protected.

    EXAMPLE 1: A salesman worked for an insurance company selling credit life insurance to automobile dealers. When he switched jobs to work for a competing insurance company he took his customer list and contacted the customers at his new job. A court ruled that the customer list was not a trade secret because the names of the automobile dealers were easily ascertainable by other means and because the salesman had contributed to the creation of the list. (Lincoln Towers Ins. Agency v. Farrell, 99 Ill. App. 3d 353, 425 N.E.2d 1034 (1981).)

    EXAMPLE 2: Former employees took the client list of a temporary employee service. The former employees argued that the list could not be a trade secret since the information could be obtained through other means. A court disagreed and prevented the ex-employees from using the list because it could not be shown, using public information, which companies were likely to use temporary employees and because the list also included such information as the volume of the customer’s business, specific customer requirements, key managerial customer contacts and billing rates. (Courtesy Temporary Serv., Inc. v. Camacho, 222 Cal. App. 3d 1278 (1990).)

Wholesalers’ lists of retail concerns are often hard to protect as trade secrets. Retailers are usually easy to identify through trade directories and other sources, and a list of them ordinarily does not confer a competitive advantage. But there are exceptions—for instance, a list of bookstores that order certain types of technical books and pay their bills promptly may be very valuable to a wholesale book distributor. But if the information is readily ascertainable through trade publications or other industry sources, it is not classified as a trade secret.

In a California case, a court determined that employees who left a business could use their former employer’s mailing list to send out an announcement of their change of employment to former clients. The former employer’s mailing list was not a trade secret because: (1) the clients became known to the ex-employees through personal contacts; and (2) the use of the customer list simply saved the ex-employees the minor inconvenience of looking up the client addresses and phone numbers. In other words, the information was easy to ascertain. (Moss, Adams & Co. v. Shilling, 179 Cal. App. 3d 124 (1984).)

Related terms: business information as trade secret; databases as trade secrets.

damages in trade secret misappropriation actions

If a trade secret owner suffered monetary loss as a result of a trade secret theft, the owner may be able to get a court to award either:

  • money damages measured by the profits earned by the competitor as a result of the use of the trade secret, or

  • money damages measured by the loss of profits by the trade secret owner, due to the improper trade secret leak.

Further, if the theft was intentional, courts in many states may impose punitive damages (damages awarded to the plaintiff for the purpose of punishing the wrongdoer and providing an example to other would-be trade secret thieves). By contrast, in other states, treble damages (three times the amount of proven actual damages) is the most that can be awarded in a trade secret case. For example, in a state that allows punitive damages, a court might award the plaintiff $1,000,000, even if the trade secret owner only proves $10,000 worth of actual damages. But in states where punitive damages are defined as treble damages, the court could only award $30,000 in the same case.

Related terms: injunctions in trade secret cases; trade secret misappropriation action.

databases as trade secrets

A database is information of any type organized in a manner to facilitate its retrieval. An encyclopedia, for example, is a database that is organized alphabetically and contains information that can be retrieved by subject.

The term “database” currently is understood as referring to computer databases. Computer databases usually consist of information linked in a way to allow its quick retrieval, either by specific item or in combination with other items.

Databases may be protected as trade secrets. For instance, a database that allows a book publisher to identify people who purchased certain categories of books in the previous year would qualify as a trade secret if it were kept confidential.

A database often contains component materials that are protected by copyright. Sometimes this copyrighted material is owned by someone other than the database owner, as in the case of a database of archived newspaper articles where the copyright in the articles is owned by their original authors or publishers. Even so, this type of database can still be a trade secret because the way the materials are organized is at least as valuable as the materials themselves.

EXAMPLE: Windtronics Inc. creates a database consisting of all articles published on wind power. The database structure allows retrieval by key word and/or by any of 200 key wind-power concepts. Windtronics then establishes a thriving consulting business, based on its ability to retrieve information quickly from its database. Windtronics must obtain permission to copy the articles from their authors (or other current owners), since the creation of the database necessarily involves copying the articles into electronic form. Nevertheless, the database itself can be a trade secret if it is maintained as one and gives Windtronics a competitive advantage.

Related terms: competitive advantage; compilation of information as trade secret; copyright and trade secret law compatibility; customer lists.

disclosure of confidential information

See Internet and trade secrets; nondisclosure agreement.

disclosure of confidential information during lawsuit

See litigation and disclosure of trade secrets.

duty of trust

Over the years, the courts have recognized that certain business relationships require a higher than normal degree of trust between the parties. These relationships are often referred to as “fiduciary relationships,” and people or businesses in these relationships are said to owe a duty of trust to each other. Those with a duty of trust have an obligation to take the interests of another person or a business into account when engaging in commercial activity potentially affecting that person or business. For instance, an employer and a high-level employee or provider of a service (expert consultant, lawyer, accountant) have a duty of trust to deal fairly with each other under all circumstances.

If a person violates (breaches) a duty of trust, the courts are usually willing to grant whatever remedy is necessary to undo the harm caused by the breach. For example, if a high-level executive breaches a duty owed to his or her employer by disclosing trade secrets to a competitor, the employer may go to court to prevent further breaches, to receive an award of damages from the employee and to prevent the competitor from using the disclosed trade secrets.

Criminal prosecutions seldom are brought in breach of trust cases, which are almost always viewed as civil matters.

Related terms: confidential employment relationship; trade secret misappropriation action.

Economic Espionage Act of 1996

See Federal Trade Secret Act.

email and confidentiality

How risky is it to send trade secrets by email? There’s much less risk in the transmission of email than in its storage. The transmission of email usually doesn’t jeopardize confidentiality because each email message is broken into packets of information and reassembled at the delivery point making it difficult to intercept. Also, the nature of email requires that the address is typed exactly and if it is not, it almost always bounces back to the sender.

The danger from loss of confidentiality occurs when email is stored either on the sender’s computer, a host computer (for example, an Internet service provider like America Online) or at the recipient’s computer. These stored files can be acquired legally by employers, lawyers or the police, or they can be acquired illegally by hackers. Email transmissions also pose a threat to confidentiality when the information is subsequently posted on a bulletin board or in a chat group. For this reason, businesses generally institute trade secret procedures on company computers, including password protection and encryption of messages—a process that uses sophisticated software to garble the sender’s words and then allows the recipient to unscramble and read them. In addition, companies prevent outsiders from penetrating the office network by the use of firewalls, protective computer hardware or software systems.

Related terms: Internet and trade secrets.

employees, covenant not to compete

See covenant not to compete by employee.

employees, notice of trade secrets

See notice to employees of trade secrets.

employees’ rights and duties towards trade secrets

See confidential employment relationship.

employment contracts and trade secrets

See nondisclosure agreements; covenant not to compete by employee.

evaluation agreement

This is a contract by which one party promises to submit an idea and the other party promises to evaluate the idea. After the evaluation, the evaluator will either enter into an agreement to exploit the idea or promise not to use or disclose the idea.

Related terms: idea submission

exit interview

An employer may conduct an interview with a departing employee, in which the employee is reminded of the trade secrets he or she has knowledge of and warned that his or her unauthorized disclosure of these trade secrets may result in being held personally liable for damages.

Related terms: duty of trust; notice to employees of trade secrets.

Federal Trade Secret Statute

The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy or possess trade secret information knowing it to have been stolen. The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act. The penalties for a violation of this new statute include a potential prison term of 15 years and fines up to five million dollars, depending on whether the defendant is an individual or a corporation. The Act is set out in full in the statutes following this part of the book.

A private party can still sue for trade secret theft even if the federal government files a criminal case under the Electronic Espionage Act. In one case a Taiwanese company was found guilty of criminal espionage and ordered to pay $5 million in fines to the government. In a civil suit arising from the same trade-secret theft, the company had to pay $60 million to the Avery-Dennison company.

Since its adoption, the Economic Espionage Act has been enforced in several instances including:

  • an attempt to steal the process for culturing Taxol from plant cells (Taxol is used in the treatment of ovarian cancer)

  • the theft of a new shaving system developed by the Gillette Company, and

  • the sale of trade secrets about a Kodak-owned device (known as the 401 machine) that inexpensively produced the clear plastic base used in consumer film.

fiduciary duty and trade secrets

See duty of trust.

formulas as trade secrets

Product formulas that both are kept confidential and add to a business’s competitive advantage may qualify as trade secrets. A formula can consist of any combination of ingredients that results in a particular product. Examples of the many formulas that have been granted trade secret status are those for soft drinks, butter flavoring, industrial solvents, floor wax and rat poison.

Freedom of Information Act, exemption of trade secrets

In its regulatory capacity, the federal government often requires businesses to submit information that the businesses consider to be trade secrets, such as the precise formula used in a drug for which FDA approval is being sought. The Freedom of Information Act (FOIA), located in 5 United States Code, Section 552, ordinarily provides the public with broad access to documents possessed by the executive branch of the federal government. However, to encourage businesses to file the appropriate records, trade secrets are exempt from the disclosure requirement otherwise imposed on the government by the FOIA. This means that businesses are able to comply with government regulations without necessarily giving up their secrets.

However, although the government is not required to disclose trade secrets under the FOIA, it is often difficult, if not impossible, for an agency official to tell from the information itself whether or not it is considered a trade secret by the company that submitted it. So, to protect their trade secrets, companies submitting trade secret information should clearly label the material as such. If the agency receives a request for the information, the agency is then supposed to contact the company and give it a chance to argue why the information should not be disclosed. If, however, the agency chooses to release the information in question against the company’s wishes, there is little that can be done about it. The courts have prohibited affected businesses from filing lawsuits against the agencies involved (called “reverse FOIA suits”).

freedom of speech and trade secrets

The First Amendment to the U.S. Constitution prohibits the government from placing restrictions on a person’s freedom of speech. One exception to this “prior restraint” rule is that a court may prohibit the publication of trade secrets that have been obtained in violation of an employment agreement. Courts weigh several factors when making a prior restraint determination, including the commercial interest in the trade secrets, the individual’s right to speak freely and the illegal behavior used to acquire the trade secrets.

EXAMPLE: A California man republished computer code from a Norwegian website. The code allowed users to bypass encryption and play DVDs on a computer—a method that was considered a trade secret by the DVD trade association. The trade association sued to stop the republication of the alleged secret but a California appellate court refused to stop republication and ruled that the computer code was pure speech within the scope of the First Amendment. (The court considered the code to be an alternative, unlicensed method of decrypting encrypted DVDs.) The case provoked a great deal of controversy among media and software companies and the California Supreme Court will hear the matter in 2003. DVD Copy Control Association v. Bunner, 93 Cal. App. 4th 648 (2001).

Prohibiting publication is less likely if the trade secrets are obtained by legitimate means.

EXAMPLE: An attorney accidentally attaches trade secret information to a publicly filed court document. A reporter uncovers this inadvertent disclosure and arranges to publish the information in a newspaper. A court is unlikely to restrain this publication since the information was obtained legally.

Keep in mind that some trade secret information, for example a business plan, may be protected under copyright law. In that case, the owner of the trade secret can sue claiming copyright infringement as a result of the unauthorized publication, regardless of whether the information was obtained legally.

Related terms: injunctions in trade secret cases; temporary restraining order; protective order; copyright and trade secret compatibility.

GATT (General Agreement on Tariffs and Trade)

The General Agreement on Tariffs and Trade (GATT) is a treaty among most of the world’s industrialized nations that addresses a number of factors affecting international trade, including how each signing country treats trade secrets belonging to businesses in the other signing countries. Under GATT, most industrial countries have pledged themselves to provide protection to trade secrets owned by residents of all signatory nations.

geographical licenses

See territorial restriction agreements—trade secrets; licensing of trade secrets.

head start rule

When a court finds that a business improperly possesses trade secrets belonging to another business, it sometimes orders that the non-owning business cannot use the trade secrets for a period of time. How long a business is restricted from using another business’s trade secrets depends on the length of time it would have taken the offending business to independently develop the information that constitutes the secret. In other words, the rightful trade secret owner is provided with a commercial “head start” in the information’s use. This head start remedy recognizes that the essential value of a trade secret is the competitive advantage it affords its owner.

Related terms: injunctions in trade secret cases; trade secret misappropriation action.

hiring employees from competitors to obtain trade secrets

See improper acquisition of trade secrets.

idea submission

People often come up with concepts that have not yet been exploited and may have economic value. For example, someone may conceive of an idea for a television show, but unless that person is in the business of producing television shows, the idea does not provide an advantage over competitors. In other words, it may not qualify as a trade secret. The key to protecting these idea submissions is to enter into an arrangement that respects the idea’s potential value and justifies compensation.

Although the rules regarding protection of ideas vary from state to state, the best approach to protecting an idea submission is:

  • maintain it with secrecy since, due to the vagaries of trade secret law, the idea may qualify as secret

  • don’t submit it to a company unless it has been solicited and it is clear that the arrangement is for compensation, and

  • if possible, use an evaluation (or option) agreement to maintain secrecy and to demonstrate solicitation.

    EXAMPLE: In 1983, two men submitted an idea to a movie studio—an African king comes to America, loses his memory, works in a restaurant and marries an American woman and returns with her to his kingdom. The men entered into an agreement that if the studio ever produced a movie based on the idea, they would be compensated from the film’s profits. The studio made Coming to America, a movie based on the idea which grossed over $300 million. The studio claimed it had no obligation to pay the men because the movie was not based on their idea. The men sued and a court ruled in their favor because: (1) the movie studio had solicited the idea; (2) the parties had signed an agreement; and (3) $10,000 had been paid to the men when the idea was submitted. In the Coming to America case, no one factor was conclusive, but collectively these factors established that the idea submission was submitted in confidence and for economic benefit. Buchwald v. Paramount, 13 USPQ 2d 1497 (1990).

Although an evaluation or option agreement may create the presumption that an idea was solicited for compensation, a court will not always enforce it. If an idea is obvious within the industry, an agreement can be invalidated because each party to a contract must contribute something of value. If the submitted idea has no novelty, it has no value, and therefore the contract is void. Nadel v. Play-by-Play Toys & Novelties, Inc., 208 F.3d 368 (S.D. N.Y. 1999).

EXAMPLE: A company submitted a cross-marketing idea to the Mattel toy company and the National Basketball Association; the two entities would jointly market a Cabbage Patch Doll dressed in a basketball uniform. A court later determined that the company submitting the idea had no rights to compensation because the idea was obvious to the NBA and Mattel. Khreativity Unlimited v. Mattel, Inc., 101 F. Supp. 2d 177, (S.D. N.Y. 2000).

Even if a company doesn’t sign an evaluation or option agreement, it’s still possible to get paid for the use of an idea. An agreement can be implied from the circumstances.

EXAMPLE: A toy company, Mattel, invited members of an animation company to submit ideas for licensed characters. The animation company presented several ideas including its “Flutter Faeries” characters. Mattel asked to keep copies of the presentation and soon afterwards produced dolls with characteristics similar to Flutter Faeries. A court of appeals permitted the animation company to pursue Mattel over an implied agreement. Gunther-Wahl Productions, Inc., v. Mattel, 104 Cal. App. 4th 27 (2002).

Under limited circumstances, the originator of an idea may stop someone, to whom the idea is disclosed, from misappropriating it if there is a “fiduciary relationship” between the parties and the idea was not generally known. In a fiduciary relationship one person stands in a special relationship of trust, confidence or responsibility. Fiduciary relationships are often defined by statute or case law. For example, the relationship of an attorney to a client is a fiduciary relationship, and stealing a client’s idea would be a breach of that relationship.

Equally important is whether the parties are in a confidential relationship. If the parties have agreed not to disclose the secret without authorization, a presumption is usually created that the idea has economic value and deserves compensation.

ideas as trade secrets

Ideas alone can be protected as trade secrets only if they are generally unknown in the business community, offer a competitive advantage and are treated confidentially. The real value of any idea will ultimately depend on its commercial success. An idea that offers the possibility of helping a business compete should be maintained as a trade secret until such time as it appears to lack feasibility or others independently think of it. Otherwise, a golden opportunity for obtaining an advantage over potential competitors may be lost.

Although the rules regarding protection of ideas vary from state to state, the maximum legal protection can be obtained by following these principles:

  • Maintain an idea with secrecy and use a nondisclosure agreement, and

  • Don’t submit it to a company unless it has been solicited and it is clear that the arrangement is for compensation.

Trade secret protection is also available for ideas that later become an invention, up to the time that a patent covering the invention issues. Once a patent issues, the underlying ideas become part of the patent, which information is available to the public, and are no longer considered trade secrets.

Trade secret protection for ideas should be contrasted with copyright protection, which only protects the actual expression of the idea and not the idea itself. Because of this difference, trade secret law can often best protect the conception and development stages of a work before it is finally fixed in a tangible medium and published, at which point copyright protection takes over.

Related terms: copyright and trade secret law compatibility; patent application, effect on trade secrets.

illegal restraint of trade

Commercial activity by one business showing a strong tendency to restrict or curtail the free flow of commerce is considered an illegal restraint of trade. Examples of illegal restraints are tying arrangements (requiring the purchase of one product as a prerequisite to buying another), price setting agreements (two or more businesses agree to set prices at a particular level), and territorial restriction agreements (private agreements to restrict the use of a trade secret to certain geographical areas).

Related terms: antitrust law and trade secrets; licensing of trade secrets; territorial restriction agreements—trade secrets.

implied duty not to disclose trade secrets

See duty of trust.

improper acquisition of trade secrets

This phrase describes the situation where a business obtained a trade secret through means that the law considers impermissible, such as:

  • deliberate theft through misrepresentation, burglary or industrial espionage, or

  • knowingly obtaining or using trade secrets that have been obtained by theft or improperly disclosed by a person who breached a nondisclosure agreement, implied duty not to disclose trade secrets or duty of trust.

Under these circumstances, an injured trade secret owner can file a trade secret lawsuit to stop the other company from using the information, and perhaps to recover money damages and punitive damages.

EXAMPLE: The Bayside Graphics company develops and tries to keep secret a program that greatly improves the graphics capability of a popular business-forecasting package. If a competitor discovers the information by illegally spying on Bayside—for instance, the competitor steals Bayside’s trash during a five-minute period when it is left unprotected and thereby discovers the trade secret—improper acquisition has occurred and court relief can be obtained.

The U.S. government may also file criminal charges against the trade secret thief under the federal trade secret statute.

Related terms: damages in trade secret misappropriation actions; federal trade secret statute; industrial espionage; trade secret misappropriation action.

improper disclosure of trade secrets

When someone communicates trade secrets to others in violation of a nondisclosure agreement, duty of trust or confidential employment relationship, it is known as an improper disclosure of trade secrets. Those who improperly disclose trade secrets may be held liable for all resulting harm to the trade secret owner’s economic interests.

Related terms: damages in trade secret misappropriation actions; improper acquisition of trade secrets; nondisclosure agreement; trade secret misappropriation action.

independent conception, defense to trade secret claim

For a trade secret owner to obtain court-ordered relief against a competitor who is using the trade secret, there must be a showing that the competitor improperly acquired it. A trade secret is not improperly acquired if it is independently conceived of, or is discovered by a competitor through parallel research.

To preserve their ability to raise independent conception as a defense to a trade secret infringement action, most large companies will not:

  • sign a nondisclosure agreement tendered by an outsider who wants to sell something to the company, or

  • examine any work developed by an outsider unless the outsider signs a written statement giving up the right to treat the work as a trade secret.

    Related terms: improper acquisition of trade secrets; parallel research; trade secret misappropriation action; unsolicited idea disclosure.

independently developed

See independent conception, defense to trade secret claim.

industrial espionage

In the trade secret context, industrial espionage consists of any activity directed toward discovering a company’s trade secrets by such underhanded or illegal means as:

  • electronic surveillance

  • bribery of employees to disclose confidential information

  • placing of a spy among the company’s employees

  • tapping of a company’s phones, computers or e-mail, or

  • theft of documents containing confidential information.

In the U.S., an owner of trade secrets obtained by an outsider as a result of industrial espionage may recover large damages if the secrets are subsequently used by the guilty party and the thief is subject to criminal persecution under the federal trade secret statute. In some countries, however, trade secret theft through industrial espionage is tolerated as a normal part of doing business.

Related terms: improper acquisition of trade secrets; Federal Trade Secret Act.

industrial innovations as trade secrets

See competitive advantage; trade secret, defined.

industrial secret

Industrial secrets are trade secrets of a technical, technological, scientific or mechanical nature. Secret processes, formulas, unregistered industrial designs, manufacturing techniques and methods, secret machinery, devices, and the like are all examples.

The laws of some countries, such as Japan, distinguish between industrial secrets and commercial secrets. In the U.S., however, courts generally treat all trade secrets alike, regardless of their type. In other words, whether or not a trade secret is business information, industrial know-how or an industrial secret has no legal consequence in the U.S.

Related terms: know-how; trade secret, defined.

inevitable disclosure rule (also known as the inevitability doctrine)

Even without a noncompete agreement, a few businesses have been able to prevent certain ex-employees from working for a competitor under a legal concept—appropriately titled the inevitable disclosure doctrine. This principle was popularized by a 1995 case in which Pepsico successfully argued that a former executive could not help but rely on company secrets at his new job with a rival. (Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).)

Some experts have been dumbfounded by this rule since it allows a business to prevent an ex-employee from competing without the use of a noncompete agreement. From the employee’s perspective, this rule is especially disturbing since it allows a former employer to get a court order preventing employment without any proof of actual or even threatened theft or disclosure of trade secrets. In other words, the rule is used to prohibit employment, not disclosure. (DoubleClick, Inc. v. Henderson, 1997 N.Y. Misc. LEXI 577 (N.Y. Sup. Ct. 1997).)

The use of the inevitable disclosure rule appears to be limited. Only a handful of courts have accepted it, and in many of the cases where it has been applied, the court has required more—for example, a showing of bad faith or underhanded dealing by the ex-employee.

in-house trade secrets

A trade secret may still legally exist—and be entitled to protection—even though many people know about it, as long as the knowledge is kept within the business that owns it. For example, in large corporations, trade secrets may be known by hundreds or even thousands of people on a “need to know” basis. As long as the business takes adequate measures to prevent the secrets from being disclosed to the public or to other businesses, the trade secret status of the information is maintained.

Related terms: notice to employees of trade secrets; reasonably precautionary measures to protect trade secrets.

injunctions in trade secret cases

A court order directed at persons or businesses who have either improperly acquired trade secrets, or who threaten to improperly disclose them, is known as an injunction. Typically, an injunction is sought as part of a trade secret misappropriation action, to prohibit a defendant from using a trade secret belonging to the plaintiff (the party bringing the action) or from disclosing it to others. This type of judicial relief is common in trade secret litigation, since one of the trade secret owner’s primary goals is to stop any further erosion of the competitive advantage gained by keeping the information secret.

Courts are authorized to issue emergency injunctions, called temporary restraining orders (or TROs), when a trade secret owner shows that a trade secret is at risk of being lost as a result of the defendant’s behavior. The court must then schedule a hearing at which all sides may be heard. If, after this hearing, the court still believes that a trade secret is at stake and that the trade secret owner will probably win at trial, it can issue a provisional or “preliminary” injunction. This order will continue to prevent the defendant from using or disclosing the trade secret pending a final decision in the case. As a practical matter, once a preliminary injunction is granted, the parties will often settle, rather than fight the case through to trial and beyond.

EXAMPLE: Space Age Robotics International (SARI) is a small business with five employees. It has developed a computer security system that visually recognizes people and responds to their voice commands. SARI plans to make a product announcement in about a month. In the meantime, Fred Gregory, SARI’s chief engineer, suddenly quits and joins Universal Systems Inc., a competitor. A week later, SARI learns from the grapevine that Fred is working around the clock to build a similar visual recognition system for Universal.

Claiming trade secret misappropriation, SARI immediately files an action against Fred and Universal, and asks the court to first grant a temporary restraining order (TRO), and then a preliminary injunction, preventing Fred from making any further disclosures to Universal and Universal from disclosing anything they have already learned from Fred. The basis for this request (motion) is that if it is not granted, SARI will suffer irreparable injury because its valuable trade secrets will be lost. The court issues a TRO and schedules a hearing 14 days later, at which time SARI’s motion for a preliminary injunction is considered. At this hearing, both SARI and Universal present oral arguments regarding the applicable law as well as written statements of their respective legal positions (called “points and authorities”). Both sides also submit written statements under oath (affidavits or declarations) describing the facts in the case as they see them. Although witnesses occasionally appear in preliminary injunction hearings, that is somewhat exceptional.

The judge determines that a preliminary injunction is necessary to preserve SARI’s trade secrets and that, when the case is finally tried, SARI will probably win. Accordingly, a preliminary injunction is issued to remain in effect pending the trial of the case. Because the trial will not occur for at least a year, and because both SARI and Universal need to get on with their respective businesses, they agree to settle the dispute. Universal agrees to scrap its budding vision project, Fred agrees to keep his knowledge to himself, and SARI agrees to drop its misappropriation action and request for damages in exchange for reimbursement of its legal costs.

Related terms: improper acquisition of trade secrets; improper disclosure of trade secrets; trade secret misappropriation action.

Internet and trade secrets

The publication of confidential information on the Internet will almost always cause the loss of trade secret rights regardless of whether it was done inadvertently or maliciously. The result of such a posting is that competitors who obtain the information legally, that is, those who did not violate trade secret laws to get the information, are entitled to use it.

There are many ways a trade secret is disclosed in cyberspace. Sometimes the disclosure is the result of revenge by an angry employee or contractor, sometimes it occurs because a hacker has uncovered information without permission of the website owner, and sometimes it is the result of carelessness—often by employees of the business who may discuss secrets in online chats.

There are exceptions to the “posting equals disclosure” rule. One court ruled that posting on the Web does not automatically cause the loss of trade secret status because the posting may not result in the secret being “generally known.” The court required a review of the circumstances surrounding the posting and consideration of the interests of the trade secret owner, the policies favoring competition, and the interests—including First Amendment rights—of innocent third parties who acquire information on the Internet. (Religious Tech. Ctr. v. Netcom On-Line Comm. Servs. Inc., 923 F. Supp. 1231 (N.D. Cal. 1995).) In addition to violations of trade secret law, the improper disclosure of trade secrets on the Internet may lead to claims of copyright infringement.

Related terms: email and trade secrets; improper disclosure of trade secrets; copyright and trade secret compatibility.

know-how

Know-how does not always refer to secret information. Sometimes it means a particular kind of technical knowledge that may not be confidential but that is needed to accomplish a task. For example, an employee’s know-how may be necessary to train other employees in how to make or use an invention. Although know-how is a combination of secret and non secret information, businesses usually treat it as a protectible trade secret and require employees and contractors to whom it is disclosed to sign a nondisclosure agreement.

An organization called the International Chamber of Commerce defines “industrial know-how” to include applied technical knowledge, methods and data that are necessary for realizing or carrying out techniques that serve industrial purposes. Industrial know-how differs from business know-how, which normally involves white collar managerial and marketing techniques.

The kind of information encompassed by the term “industrial know-how” will qualify as a trade secret if it is specialized, not generally known in the relevant business community, provides a company with a competitive advantage, and is maintained as a trade secret.

Related terms: industrial secret; methods and techniques as trade secrets.

licensing of trade secrets

A trade secret owner may license a trade secret by permitting others to use the trade secret in exchange for an agreement to treat it as confidential. Licenses commonly are limited to specific time periods, types or fields of commerce and specific purposes. There are no government agencies that oversee trade secret licenses, but trade secret licenses are subject to applicable antitrust prohibitions against monopolistic or restraint of trade activities.

Under a trade secret license, ownership of the trade secret remains with the original owner, while the licensee has the right to use the trade secret as long as it complies with the specific terms and time limits of the license. The license agreement should always include a clause stating that the trade secret in question is confidential information and must be maintained properly as a trade secret by the licensee.

One common type of license provides the owner with a royalty based on a percentage of the retail or wholesale price of each item sold that takes advantage of the trade secret. Many other compensation arrangements are possible. For example, the license may provide for a flat fee for each separate use of the secret, a monthly or annual fee, the reciprocal use of information belonging to the licensee or some combination of all of these arrangements.

Related terms: antitrust law and trade secrets; trade secret owner.

litigation and disclosure of trade secrets

State and federal laws establish rules regarding the use and disclosure of trade secrets during litigation. If one party requests trade secret information from another, a court will balance the interests of the litigants. If the failure to disclose would cause injustice or conceal a fraud, the owner of the trade secret will be required to disclose it. In order to preserve secrecy, the court will issue a protective order that requires that all participants in the lawsuit—the litigants, attorneys, independent contractors—maintain confidentiality. Protective orders can be made by order of the court, or the parties may agree to the protection of confidential information.

Related terms: injunctions in trade secret cases; protective order; temporary restraining order.

loss of trade secrets

Trade secrets, and the judicial protection their status confers, may be lost by any conduct that:

  • releases the trade secret into the public domain, and

  • does not constitute wrongful conduct such as theft, violation of a nondisclosure agreement or breach of a duty of trust.

    EXAMPLE: Sonoma Foods Inc. (SFI) conceives of a new way to lengthen the shelf life of jams and jellies. Initially, SFI takes careful steps to preserve its invention as a trade secret. However, over a few drinks at a trade show, SFI’s chief executive officer tells an employee from another food company about the invention without first asking for a nondisclosure agreement. Such behavior might result in the loss of the idea as a trade secret, especially if the other company proceeds to implement the idea or tell others about it. Should SFI bring a misappropriation suit against the other company, the SFI officer’s disclosure would definitely constitute a defense. Even though the trade secret was lost, however, it might still be possible for SFI to apply for and obtain a patent on its new process.

    Related terms: accidental disclosure of trade secrets; patent application, effect on trade secrets; public domain and trade secrets; public records and trade secrets; reasonably precautionary measures to protect trade secrets.

maintained as a trade secret

Information will not be treated as a trade secret by the courts unless it has been maintained as such. This consists of taking all reasonable measures to preserve the secrecy of information considered to be a company trade secret.

Related terms: reasonably precautionary measures to protect trade secrets.

methods and techniques as trade secrets

Specialized business knowledge related to a specific process or method, commonly known as business know-how, can qualify as a trade secret in many countries if it is so treated. Examples of such know-how include specialized barbecue methods of cooking (including the use of special cuts of meat and secret sauces) and methods and techniques for running group sessions of a how-to-quit-smoking organization.

On the other hand, general business knowledge or expertise not related to a specific process or method is usually not protectable as a trade secret. The courts rarely protect information that is generally known to, or available to, the business community and thus is not secret.

Related terms: know-how; processes as trade secrets; trade secret, defined.

misappropriation of trade secrets

Misappropriation of a trade secret occurs when secret information is acquired by improper means—for example, theft, bribery, misrepresentation, or breach of a duty to maintain secrecy. Misappropriation can also occur if a trade secret is disclosed by someone who used improper means to acquire it. Misappropriation of trade secrets is sometimes mistakenly referred to as trade secret infringement.

money damages

See damages in trade secret infringement actions.

non-competition clauses in employment contracts

See covenant not to compete by employee.

nondisclosure agreement

The term “nondisclosure agreement” is often used interchangeably with “confidentiality agreement” or “NDA.” A nondisclosure agreement is a legally binding contract in which a person or business promises to treat specific information as a trade secret and not to disclose the information to others without proper authorization. If the trade secret is disclosed in violation of the nondisclosure agreement, the trade secret owner can file a trade secret lawsuit, obtain an injunction to stop further use of the trade secret, recover money damages, and possibly recover punitive or treble damages. (A sample nondisclosure agreement is provided above.)

Nondisclosure agreements should be used whenever it is necessary to disclose a trade secret to another person or business for such purposes as development, marketing, evaluation or fiscal backing. Through the conscientious use of nondisclosure agreements, trade secrets can be distributed to a relatively large number of people without destroying their protected status.

Nondisclosure agreements should also be used between employees and employers, in order to require that the employee treat as confidential all trade secrets he or she learns about in the course of employment. If the employer later tries to prevent an employee from using information considered to be a trade secret, the nondisclosure agreement can establish that the employee recognized a duty to cooperate in this endeavor. Competitors who learn of trade secrets through an employee’s violation of a nondisclosure agreement with a former employer may also be prevented from commercially using the information, even if they didn’t know the employee had breached the agreement.

A nondisclosure agreement can also help establish that a business treated particular information as a trade secret—a necessary element to claiming legal protection.

Although nondisclosure agreements are usually in the form of written contracts, they may also be implied if the context of a business relationship suggests that such agreement was intended by the parties. For instance, a business that conducts patent searches for inventors is expected to keep the information about the invention secret, even if no written nondisclosure agreement is signed, since the nature of the business is to deal in confidential information.

Related terms: beta-testing and trade secrets; trade secret misappropriation action.

Sample

start example

Nondisclosure Agreement

This Nondisclosure Agreement (the “Agreement”) is entered into by and between _______________ with its principal offices at _______________ (“Disclosing Party”) and _______________, located at _______________ (“Receiving Party”) for the purpose of preventing the unauthorized disclosure of Confidential Information as defined below. The parties agree to enter into a confidential relationship with respect to the disclosure of certain proprietary and confidential information (“Confidential Information”).

  1. Definition of Confidential Information. For purposes of this Agreement, “Confidential Information” shall include all information or material that has or could have commercial value or other utility in the business in which Disclosing Party is engaged. If Confidential Information is in written form, the Disclosing Party shall label or stamp the materials with the word “Confidential” or some similar warning. If Confidential Information is transmitted orally, the Disclosing Party shall promptly provide a writing indicating that such oral communication constituted Confidential Information.

  2. Exclusions from Confidential Information. Receiving Party’s obligations under this Agreement do not extend to information that is: (a) publicly known at the time of disclosure or subsequently becomes publicly known through no fault of the Receiving Party; (b) discovered or created by the Receiving Party before disclosure by Disclosing Party; (c) learned by the Receiving Party through legitimate means other than from the Disclosing Party or Disclosing Party’s representatives; or (d) is disclosed by Receiving Party with Disclosing Party’s prior written approval.

  3. Obligations of Receiving Party. Receiving Party shall hold and maintain the Confidential Information in strictest confidence for the sole and exclusive benefit of the Disclosing Party. Receiving Party shall carefully restrict access to Confidential Information to employees, contractors and third parties as is reasonably required and shall require those persons to sign nondisclosure restrictions at least as protective as those in this Agreement. Receiving Party shall not, without prior written approval of Disclosing Party, use for Receiving Party’s own benefit, publish, copy, or otherwise disclose to others, or permit the use by others for their benefit or to the detriment of Disclosing Party, any Confidential Information. Receiving Party shall return to Disclosing Party any and all records, notes, and other written, printed, or tangible materials in its possession pertaining to Confidential Information immediately if Disclosing Party requests it in writing.

  4. Time Periods. The nondisclosure provisions of this Agreement shall survive the termination of this Agreement and Receiving Party’s duty to hold Confidential Information in confidence shall remain in effect until the Confidential Information no longer qualifies as a trade secret or until Disclosing Party sends Receiving Party written notice releasing Receiving Party from this Agreement, whichever occurs first.

  5. Relationships. Nothing contained in this Agreement shall be deemed to constitute either party a partner, joint venturer or employee of the other party for any purpose.

  6. Severability. If a court finds any provision of this Agreement invalid or unenforceable, the remainder of this Agreement shall be interpreted so as best to effect the intent of the parties.

  7. Integration. This Agreement expresses the complete understanding of the parties with respect to the subject matter and supersedes all prior proposals, agreements, representations and understandings. This Agreement may not be amended except in a writing signed by both parties.

  8. Waiver. The failure to exercise any right provided in this Agreement shall not be a waiver of prior or subsequent rights.

This Agreement and each party’s obligations shall be binding on the representatives, assigns and successors of such party. Each party has signed this Agreement through its authorized representative.

__________________________________________________

(signature)

__________________________________________________

(typed or printed name)

Date: _____________________________________________

__________________________________________________

(signature)

__________________________________________________

(typed or printed name)

Date: _____________________________________________

Reprinted with permission from Nondisclosure Agreements: Protect Your Trade Secrets and More by Richard Stim and Stephen Fishman (Nolo).

end example

notice to employees of trade secrets

For information to qualify as a trade secret, employers must insure that it is treated as confidential. All employees (and anyone else who may come in contact with the information) must know in no uncertain terms that the information is confidential, and that they have an obligation not to disclose it.

The best way to give this notice is to require all employees coming in contact with the secret to sign nondisclosure agreements. However, an express written notice to employees regarding the status of the information and their obligation of confidentiality will also usually provide a basis for judicially protecting the information in the event of a later threatened or actual disclosure.

Companies often put employees on notice of trade secret status by using:

  • signs on walk-in areas where trade secrets are being stored or used

  • confidentiality labels on documents

  • initial employment interviews in which the business’s trade secrets are discussed and the need to keep them confidential is stressed, and

  • exit interviews where departing employees are cautioned against disclosing the company’s trade secrets in their new employment.

    Related terms: confidential employment relationship; nondisclosure agreements; reasonably precautionary measures to protect trade secrets.

notice to former employee’s new employer

When an employee with knowledge of his or her employer’s trade secrets takes a new job with a competing company, the first employer will often send the new employer a letter. The first employer will emphasize that the former employee is legally bound not to disclose any trade secrets and that, if he or she does, any such disclosure may not be used by the new employer. If the new employer then makes use of the trade secrets, the first employer may obtain greater damages and other enhanced judicial relief.

Related terms: improper disclosure of trade secrets; trade secret misappropriation action.

novelty and trade secrets

For information to qualify as a trade secret, it must generally not be known or used in the relevant industry. Strictly speaking, information constituting a trade secret need not be novel in the sense of “new” or “innovative.” It simply must provide its owner with a competitive advantage.

EXAMPLE: Robotics World rediscovers a principle of movement first pioneered by the nineteenth-century European moving doll industry. If this particular principle has been lost to the modern world, it can qualify as a trade secret, even though it is in no way novel. As long as the principle of movement provides its owner with a competitive advantage, it is legally identical to trade secrets that are independently conceived.

Related terms: competitive advantage; parallel research; trade secret, defined.

obligation of confidentiality

See duty of trust.

ownership of trade secret rights

See trade secret owner.

parallel research

Parallel research refers to situations where similar information or ideas are developed by two or more companies through their independent efforts. Especially where cutting edge technologies are involved, many companies are likely to be engaged in similar research and development activity, which can be expected to produce trade secrets. This means that the same basic information may be properly viewed as a trade secret by many different companies.

EXAMPLE: A new cola company inadvertently creates the exact cola formula used by an existing company. Both the new and old companies are entitled to protect their formulas as trade secrets, even though the second formula is not novel.

Related terms: head start rule; independent conception, defense to trade secret claim; unsolicited idea disclosure.

patent application, effect on trade secrets

To obtain a patent on an invention, the inventor must fully describe the invention in the patent application. The U.S. Patent and Trademark Office (PTO) treats patent applications as confidential, making it possible to apply for a patent and still maintain the underlying information as a trade secret, at least for the first 18 months of the application period. Unless the applicant files a Nonpublication Request at the time of filing and doesn’t file for a patent outside the U.S., the PTO will publish the application within 18 months of the filing date. Because a patent application is published by the PTO, all of the secret information becomes public and the trade secret status of the application is lost.

However, if an applicant files a Nonpublication Request at the time of filing the application, the information in the patent application will become publicly available only if and when a patent is granted. If the applicant is not filing abroad and the patent is rejected, confidentiality is preserved because the PTO does not publish rejected applications. If the PTO approves the patent application, it will be published in the Official Gazette. Inventors are willing to accept this trade-off—loss of trade secrecy for patent rights—because the patent can be used to prevent anyone else from exploiting the underlying information.

Publication after 18 months does provide one advantage for a patent applicant. If a patent later issues, the patent owner can later recover damages from infringers from the date of publication provided that the infringer had notice of the publication.

Related terms: loss of trade secrets; reverse engineering and trade secrets.

patterns and designs as trade secrets

Patterns and designs may qualify as trade secrets if they create a competitive advantage and are kept secret. Examples of patterns and designs that have been protected as trade secrets are advanced design plans for a new minicomputer, designs for electronic circuitry and schematic plans for an innovative metal door frame.

Related terms: industrial secret; trade secret, defined.

physical devices, ability to maintain as trade secrets

Physical devices—for example, tools, products and components—can qualify as trade secrets if they provide their owner with a competitive advantage and are kept secret. Such devices can easily be protected when they are used solely in the trade secret owner’s manufacturing or production process. In addition, if distribution is limited and the devices are licensed rather than sold, the trade secret protection may be preserved if the license prohibits reverse engineering. However, the more the world shrinks and the faster information moves, the harder it will be to preserve trade secrecy by licensing restrictions.

Once products are widely distributed, trade secret status is usually impossible to maintain. Anyone may examine these products and figure out how they work —that is, reverse engineer them. When reverse engineering is accomplished, the trade secret enters the public domain.

EXAMPLE: Jason invents, manufactures and distributes a device that allows people to use their microcomputers to preprogram their VCRs to reject certain kinds of ads. He calls it AdOut. Physically, AdOut consists of an integrated circuit board inside a black box and ports to interface it with a VCR and computer. Jason has designed the box so that it can be opened to replace the circuit board if that component fails. If Caryl Curious were to open the box, examine the board, figure out how AdOut works, and start manufacturing her own device called AdScreen, Jason would have no grounds for relief against Caryl under trade secret laws. Why not? Because Caryl lawfully obtained the necessary information through reverse engineering. If, however, Jason owns either a patent or copyright on some aspect of the AdOut hardware or software that was copied by Caryl, Jason can obtain court relief on those grounds.

Related terms: licensing of trade secrets; reasonably precautionary measures to protect trade secrets; reverse engineering and trade secrets; trade secret, defined.

piracy

A colloquial term, “piracy” refers to any activity directed toward the improper acquisition of a trade secret or other forms of intellectual property that belong to another. The word has no legal significance.

Related terms: improper acquisition of trade secrets; industrial espionage; criminal prosecution of trade secrets theft.

predetermination of rights in technical data

Before hiring a business or consulting firm for research and development projects likely to produce patentable inventions and trade secrets, the government routinely requires a contract that contains clauses predetermining who will own the rights to the patents and secrets in question. Predetermination of rights provisions are also typically found in agreements between universities and corporations, and corporations and independent contractors.

EXAMPLE: The federal government contracts with a biotech firm to “manufacture” a new life form that will survive on the Moon. Because such a project is likely to result in a number of extremely valuable discoveries, the contract between the biotech firm and the government should address in advance who will own intellectual property rights in the new life forms and the discoveries associated with their development.

Although ownership of intellectual property rights can be a subject for negotiation, the government will typically demand ownership of all rights in the main product being developed, but will allow the private party to own the rights to any “side-products,” including information that can qualify as trade secrets.

Related terms: trade secret owner.

preliminary injunctions in trade secret actions

See injunctions in trade secret cases.

premature disclosure

See loss of trade secrets.

price setting

See illegal restraint of trade.

processes as trade secrets

A “process” consists of a series of steps that lead to a particular result. Any process may qualify for trade secret status if it is generally not known in the industry, adds to a business’s competitive advantage and is maintained as a trade secret. Among the processes that have been afforded protection as a trade secret in the past are those involving photographic development, silk screening, centrifugal processing for blood plasma fractionation and the manufacture of chocolate powder and tobacco flavoring. Processes can also be protected under patent law.

Related terms: know-how; methods and techniques as trade secrets; trade secret, defined.

protective order

In the event a trade secret is disclosed as part of a lawsuit, the trade secrecy can be preserved by a protective order. This order prohibits the participants in the lawsuit from disclosing the secret and it “seals” the court record pertaining to the trade secret, making it unavailable as a public document. Protective orders can be made by order of the court or the parties may agree (or stipulate) to the protection of confidential information. Protective orders are authorized under Section 5 of the Uniform Trade Secrets Act and under Federal Rule of Civil Procedure 26(c)(7).

Related terms: litigation and trade secrets; injunctions in trade secret cases; temporary restraining order.

professional client lists

See customer lists.

protecting a trade secret

See reasonably precautionary measures to protect trade secrets.

provisional relief in a trade secret action

See injunctions in trade secret cases.

public domain and trade secrets

Trade secrets are considered to be in the public domain—situations where their owners have no legal recourse under trade secret law against disclosure and use by others—when the owner of the trade secret:

  • is negligent or impermissibly sloppy in keeping it confidential

  • fails to seek relief quickly in court if the trade secret becomes known to others through wrongful behavior (for instance, in violation of a nondisclosure agreement or through industrial espionage), or

  • loses the rights to court protection of the trade secret by doing something forbidden under the law (for instance, using the trade secret in violation of the antitrust laws).

    EXAMPLE: Microwave Systems wants to raise some venture capital to fund the promotion of its new mini satellite dish system, which it plans to sell to consumers for an affordable price. To accomplish this goal, it prepares a magazine article describing its revolutionary system, without intending to disclose its trade secrets. However, Manfred Manufacturer reads this article and learns enough details to start his own dish business. Microwave would not be able to claim misappropriation of a trade secret, since its ideas became a matter of public knowledge through its own disclosure.

Even if the secret becomes public because of someone’s improper actions, such as the breaking of a nondisclosure agreement or industrial espionage, it will still be in the public domain if the information becomes well known. In short, once the trade secret cat is out of the owner’s bag, the trade secret is gone unless the cat stays very close to home and the owner quickly retrieves it.

EXAMPLE: Using the same mini satellite dish business, suppose that no article appeared, and Manfred Manufacturer learns of the details of Microwave System’s dish through the breach of a nondisclosure agreement by one of Microwave’s employees. If only Manfred and a few of his associates know about the information, it may still qualify for trade secret status. If, on the other hand, the employee published the information in a major magazine, the trade secret is lost, regardless of the initial wrongfulness of the employee’s action. Of course, Microwave would be able to sue the offending employee for the loss.

It is possible for information to be in the public domain for the purpose of trade secret law, but still subject to restrictions under another set of laws. For instance, certain trade secrets in a computer program might pass into the public domain under trade secret law but still be entitled to a patent. If a patent is obtained, no one can use the invention comprising the former trade secret without the patent owner’s permission. Similarly, an author may treat his or her novel as a trade secret while it is being written. Once the novel is published, the trade secret aspect of the novel falls into the public domain, but the novel itself will continue to be protected by copyright.

Related terms: loss of trade secrets; trade secret misappropriation action; trade secret owner.

public records and trade secrets

Any information contained in a public record (a document, tape, disk or other medium that is open to inspection by the public) cannot qualify as a trade secret, since by definition it is not confidential. However, because companies are often required by state and federal governments to file documents that, of necessity, contain trade secrets, there are usually laws that allow the withholding of the precise data that make up the trade secrets, even if the rest of the document is released for inspection.

Related terms: Freedom of Information Act, exemption of trade secrets; litigation and disclosure of trade secrets; protective order.

read-only memories (ROMs) and trade secrets

Internal operating instructions and other programs that are a physical part of the computer (for instance, read-only memories or ROMs) do not usually qualify for protection as a trade secret once the computer is marketed. This is because it is usually possible to figure out the design and logic of the ROM through reverse engineering, and any trade secrets that can become known in this manner are considered to be in the public domain.

Related terms: public domain and trade secrets; reverse engineering and trade secrets; software and trade secrets.

reasonably precautionary measures to protect trade secrets

Information will only qualify as a trade secret if its owner takes appropriate measures to keep it secret. What constitutes reasonably precautionary measures depends on the type of secret and the industry involved. This issue usually arises when a trade secret action is filed, and the defendant claims that the information should not be considered as a trade secret because appropriate precautionary measures were not taken. If a court determines that the business claiming misappropriation has in fact taken appropriate measures to maintain the confidentiality of the information, it will be protected. If not, judicial relief will be denied and the information will no longer be considered a trade secret. Clearly, a certain amount of judicial discretion is involved in these decisions.

Measures typically considered to be reasonable precautions include:

  • requiring employees to sign nondisclosure agreements

  • requiring all outside persons with whom the information is shared to sign nondisclosure agreements

  • restricting physical access to areas where trade secrets are located

  • consistently enforcing specific rules formulated by the company regarding confidentiality of the information and physical access to it

  • using encryption or other code-like devices to make sure that trade secret information cannot easily be understood, even if read by an unauthorized person

  • giving notice to all persons coming in contact with the information that it is considered a trade secret

  • posting warnings on the wall of areas where trade secrets are kept or used reminding employees about company rules regarding trade secrets

  • conducting exit interviews with employees, specifically warning them against improper disclosure of trade secrets

  • adequately protecting against unauthorized intrusion into computer databases that contain trade secrets

  • shredding sensitive documents prior to disposing of them, and

  • if the scope of the operation and the value of the secrets warrants it, taking such physical security measures as posting guards, maintaining tight control over keys (including keys to the photocopy machine) and requiring visitors to wear badges.

Not all of these measures are necessary in every context, although the more of them that are employed, the better position the company will be in to claim that reasonable precautionary measures to protect the trade secrets have been taken. Just what measures are considered to be reasonably precautionary in a given case will depend on the size of the company, the value of the trade secrets and the nature of the technology involved.

Related terms: notice to employees of trade secrets; trade secret misappropriation action.

retail customer lists

See customer lists.

reverse engineering and trade secrets

The act of examining a product or device and figuring out the ideas and methods involved in its creation and structure is referred to as reverse engineering. Normally we think of engineering as the intellectual means by which something is built, or an idea is transformed into practice. In this context, “reverse engineering” consists of taking apart and reducing a product or device into its constituent parts and concepts.

The idea of reverse engineering is of crucial importance to trade secret law. This is because of the rule that any information learned about an item through the process of legitimate reverse engineering is considered to be in the public domain for trade secret purposes and therefore no longer protectable as a trade secret. However, the fact that a particular invention or technology can be figured out through reverse engineering has no effect on whether it is entitled to protection under the patent laws.

EXAMPLE: Ivan creates a machine capable of producing holographic games (games consisting of pictures projected onto three-dimensional space so that the images and characters appear realistic). Ivan treats the details of production as a trade secret. Once the machine is marketed, however, it will probably be possible to figure out through reverse engineering how it is constructed. If this is done, the machine can be freely manufactured and sold by the party doing the reverse engineering without Ivan being entitled to any court relief on trade secret grounds. However, Ivan would be entitled to protection under the patent laws if he has sought and obtained a patent on his invention.

There are two caveats when performing reverse engineering:

  • The reverse engineering should only be performed on an authorized copy of the work—for example, it is not permissible to reverse engineer illegally copied software code, and

  • Some companies prohibit reverse engineering through the use of end-user license agreements (also known as EULAs). EULAs are created either when the customer buys the product or first uses it. As a condition of use, the agreement may prohibit reverse engineering. A customer that violates this provision may be enjoined from further use and forced to pay damages. Bowers v. Baystate Technologies, Inc. 2003 U.S. App. LEXIS 1423 (Fed. Cir. 2003).

    Related terms: physical devices, ability to maintain as trade secrets; source code as trade secret. See also Part 2 (Copyright Law): end-user licenses.

sale of business, covenant not to compete

See covenant not to compete by owners of a sold business.

screening incoming information for unsolicited disclosures

See unsolicited idea disclosure.

software and trade secrets

An innovative computer program will often qualify for trade secret status at least during its development and testing stage. From a program’s first conception, information and ideas about it often give an owner a competitive edge as long as they are kept secret. Once a program is fixed in a tangible medium of expression (that is, put down on tape, disk or paper in tangible form), it may still remain a trade secret. In addition, its expression (not the ideas behind that expression) is also protected under the copyright laws.

When a program is distributed, dual copyright and trade secret protections can continue if certain precautions are taken. For instance, if all “purchasers” of the program are required to sign a license forbidding disclosure of trade secrets, both trade secret and copyright protection may be available for distributed copies (the more limited the distribution is, the more likely the trade secret protection will exist). Or, if the owner of the program only distributes object code (usually the case except for programs written in BASIC) and keeps the source code locked in a secure place, it is similarly possible to maintain both trade secret and copyright protection for the program.

If the software owner registers the program with the U.S. Copyright Office, a printout of portions of the object code—or portions of the source code with critical parts blacked out—can be deposited as part of the registration. This will permit the trade secret to be maintained along with the registered copyright.

EXAMPLE: Harry Hildebrand conceives of a utility that will analyze a computer user’s daily use of the computer and produce a report showing which programs were used, for how long and the overall pattern of usage. Because such a utility would have commercial value, the basic ideas behind it will qualify as a trade secret as long as Harry treats them that way. Suppose that Harry decides to press ahead with his idea. All the information produced by the development process, including the first flow charts, the written code (the source code) and the instructions to the computer produced by the compiler (the object code), separately and together, can properly qualify as trade secrets if they are treated as such.

Once the program is “up and running” on the computer, Harry has others test the program to see if it actually works, and whether programming “bugs” need to be corrected. Because Harry still considers the program to be a trade secret, he has the testers sign nondisclosure agreements in which they agree to keep the program confidential and preserve its trade secret status. In addition, because the program is now fixed in tangible form, it is protected under copyright law without losing trade secret status. When Harry registers the program with the U.S. Copyright Office, he deposits the object code.

Related terms: beta-testing and trade secrets; copyright and trade secret law compatibility; reverse engineering and trade secrets; source code as trade secret.

source code as trade secret

The specific instructions written by a programmer to tell a computer what to do are referred to as the source code. The language used to write the source code cannot usually be read directly by the computer and must be translated by a compiler into language the computer can understand, which is called object code.

When software is sold to the public, it is in object code form—that is, it is already compiled. Because object code is mostly a series of ones and zeros, it cannot readily be figured out through reverse engineering (called “decompiling” in this instance). The source code, on the other hand, can be figured out, and any trade secrets that the software owner wishes to maintain in the code can be easily obtained. For that reason, source code is usually kept secret, locked in the owner’s vault.

Related terms: reverse engineering and trade secrets.

specific performance of covenant not to compete

If a former employee or owner of a business threatens to violate a contract (covenant) not to compete with the business, a court may order the owner or employee to comply with the agreement. Whether a court will issue this type of order depends on a number of “fairness” or equity factors, such as:

  • the length of time competition is prohibited

  • in the case of employees, the effect of the agreement on the employee’s ability to make a living, and

  • whether the court concludes that the original covenant not to compete agreement was unnecessarily broad.

Generally, non-competition agreements that are limited in terms of time and scope have a better chance of being enforced than those that are open-ended. And a few states, including Colorado, California, Florida and Oregon, severely restrict the ability of an employer to enforce a non-competition agreement against a former employee.

Related terms: covenant not to compete by employee; covenant not to compete by owners of a sold business; injunctions in trade secret cases.

temporary restraining order

A court order that can be immediately obtained by a plaintiff in an intellectual property lawsuit with little or no advance notice to the defendant is a temporary restraining order (TRO). TROs place events in a holding pattern (“maintain the status quo”) until the court can more fully determine what kind of protection is required, if any. Typically, TROs only last for a few days, or at most, two to three weeks. While the TRO is still in effect, a court will hear the argument of all sides to the dispute and more thoroughly consider the underlying issues.

Related terms: injunctions in trade secret cases; trade secret misappropriation action.

tools as trade secrets

See physical devices, ability to maintain as trade secrets.

trade secret, defined

In most states, a trade secret may consist of any formula, pattern, physical device, idea, process, compilation of information or other information that both:

  • provides a business with a competitive advantage, and

  • is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.

When deciding whether information qualifies as a trade secret under this definition, courts will typically consider the following factors:

  • the extent to which the information is known outside of the particular business entity

  • the extent to which the information is known by employees and others involved in the business

  • the extent to which measures have been taken to guard the secrecy of the information

  • the value of the information to the business, and

  • the difficulty with which the information could be properly acquired or independently duplicated by others.

There is no crisp definition of what constitutes a trade secret. A trade secret is created and defined solely by reference to how certain information is handled, and to the value inherent in keeping it secret. Even if an item or piece of information otherwise qualifies as a trade secret, its moment-to-moment status will depend on how it is treated by its owners.

Related terms: ideas as trade secrets; reasonably precautionary measures to protect trade secrets; software and trade secrets; trade secret misappropriation action.

trade secret misappropriation action

The owner of a trade secret may bring a lawsuit, known as a trade secret misappropriation action, for the purpose of:

  • preventing another person or business from using the trade secret without proper authorization, and

  • collecting money damages for economic injury suffered as a result of the improper acquisition and use of the trade secret.

All persons and businesses responsible for the improper acquisition, and all those who have benefited from such acquisition, are typically named as defendants in misappropriation actions.

Among the most common situations that give rise to infringement actions are:

  • Trade secrets are stolen through industrial espionage.

  • An employee having knowledge of a trade secret changes jobs and discloses the secret to a new employer in violation of an express or implied nondisclosure agreement with the first employer.

  • Trade secrets are improperly disclosed in violation of a nondisclosure agreement.

To prevail in a misappropriation suit, the plaintiff (person bringing the suit) must be able to show that the information alleged to be a trade secret provides the plaintiff with a competitive advantage and has been continually treated by the plaintiff as a trade secret. In addition, the plaintiff must show that the defendant either improperly acquired the information (if accused of making commercial use of the secret) or improperly disclosed it (if accused of leaking the information).

The defendants in trade secret misappropriation cases commonly attempt to defend against the plaintiff’s case by proving that:

  • the information claimed to be a trade secret was known throughout the particular industry, and thus not a secret that should be subject to protection

  • the information was lawfully disclosed by a person having knowledge of it

  • the information was lawfully acquired through reverse engineering

  • the information was the result of an independent conception, or

  • the trade secret was being used by its owner in violation of the antitrust laws.

If the plaintiff can establish that a trade secret was, in fact, improperly used, disclosed or acquired by a defendant, the court can enjoin (stop) its further commercial use. Sometimes such injunctions are permanent—that is, they are final court orders in the case. More commonly, courts will employ the head start rule. This operates to give the rightful owner of the trade secret a “head start” in commercially exploiting it, by prohibiting its use by the competitor for such period of time as the court decides it would have taken the competitor to independently develop the information.

Because lawsuits tend to drag on for years, courts are authorized to issue preliminary injunctions prohibiting the competitor from using the secret in question pending a final determination in the case. These preliminary orders are often viewed by the parties as harbingers of how the case will finally turn out, and accordingly form the basis of a settlement (which precludes a full scale trial).

In addition to injunctive relief (both provisional and final), a court may award damages suffered by the original trade secret owner. These can consist of lost profits resulting from sales by the trade secret thief, profits realized from the wrongfully acquired trade secret and, occasionally, punitive or treble damages, depending on the state where the action is being tried.

Related terms: damages in trade secret misappropriation actions; independent conception, defense to trade secret claim; injunctions in trade secret cases; litigation and disclosure of trade secrets; reasonably precautionary measures to protect trade secrets; reverse engineering and trade secrets.

trade secret owner

The owner of a trade secret has a right to seek relief in court in the event someone else improperly acquires or improperly discloses the trade secret. The trade secret owner is also entitled to grant others a license to utilize the secret, or even to sell it outright.

Ownership of a trade secret is usually determined by the circumstances of its creation. In general, these ownership rules apply:

  • trade secrets that arise from research and development activities conducted by manufacturing concerns belong to the company sponsoring the research and development

  • retail customer lists belong to the business or individual who compiled the list

  • trade secrets developed by an employee in the course of his or her employment belong to the employer, and

  • trade secrets developed by an employee on his or her own time, and with personal equipment, usually belong to the employee.

    EXAMPLE: A chef develops a special recipe and baking process for cheesecake during her off-work hours, and in her own kitchen. Even though she bakes the cheesecake for a restaurant, she would probably be entitled to preserve the recipe and process as her own trade secret. If, on the other hand, the recipe and process were developed at work with the restaurant facilities, the restaurant would own the trade secret.

    Related terms: business information as trade secret; licensing of trade secrets.

trade secrets and antitrust laws

See antitrust law and trade secrets.

Uniform Trade Secrets Act (UTSA)

This model legislation was prepared for the ultimate purpose of creating the same trade secret laws in all 50 states. At present, 43 states and the District of Columbia have adopted it. Overall, the provisions of the Uniform Trade Secret Protection Act are consistent with the general principles of trade secret law adopted by the courts under the common law (law established by court case decisions). (A copy of the Uniform Trade Secrets Act is set out in full at the end of this section.)

unique ideas as trade secrets

See ideas as trade secrets.

unjust enrichment and trade secrets

Some courts deciding cases involving the improper acquisition of a trade secret have ordered the guilty party to pay the trade secret owner all profits earned from the trade secret in question. The legal theory underlying this type of relief is that the wrongful possessor has been unjustly enriched by profiting from these trade secrets.

The unjust enrichment approach has also been used as a theoretical basis for providing judicial protection to trade secrets. Courts have long been willing to entertain disputes where one party was being unjustly enriched at the expense of another, so the improper acquisition of a trade secret is by nature the type of unjust enrichment that deserves judicial relief.

Related terms: damages in trade secret misappropriation actions; trade secret misappropriation action.

unsolicited idea disclosure

Although many people have creative brainstorms, they usually must share their ideas with others to enlist their help in commercially developing or promoting the idea. This process frequently involves approaching a well-known company to see if it is interested in the unsolicited idea.

Although a company may benefit from ideas generated by outside parties, it often will decline to be informed about such ideas. This is because the company may already be working on a similar idea, and wants to avoid later accusations of ripping off the outside party.

Companies tend to be particularly reluctant to consider ideas presented by outsiders when asked to sign a nondisclosure agreement, which treats the idea as a trade secret belonging to the outsider. In that situation, if the company rejects the idea but later markets a product or service that appears to incorporate the idea, the company may be vulnerable to charges of trade secret theft and forced into an expensive lawsuit.

Probably the best way to get past a company’s mechanisms for insulating itself from outside ideas is to trust the company. Very few companies are interested in ripping off creative people; most can be counted on to play straight. On the other hand, if trust does not seem an appropriate approach for one reason or another, companies are usually willing to examine an invention if either a regular patent application or a Provisional Patent Application has been filed on it (in either case the invention is said to have “patent pending” status).

Note

Related entries: evaluation agreement, ideas as trade secrets, idea submission, independent conception, defense to trade secret claim; ideas as trade secrets; ideas submission, trade secret misappropriation action, waiver agreement.
See also Part 3 (Patent Law): Provisional Patent Application (PPA).

waiver agreement for unsolicited idea disclosure

Companies routinely require anyone presenting an unsolicited idea to sign a waiver agreement giving up the right to sue for trade secret infringement. If the “idea person” does not want to sign the agreement, the company will not examine the secret. Many companies go to great lengths to make sure ideas don’t get past the front door absent the signing of such a waiver.

Related terms: evaluation agreement, unsolicited idea disclosure, ideas as trade secrets: idea submission

World Intellectual Property Organization (WIPO)

This organization was formed to facilitate international agreements regulating intellectual property. WIPO is a policy-making body only, with no delegated authority to make binding decisions or impose sanctions. WIPO’s membership consists of representatives from countries, and groups of countries, including:

  • most European countries

  • countries that are members of the United Nations body UNESCO

  • Japan, and

  • the United States.

    Related terms: General Agreement on Tariffs and Trade (GATT).

wrongfully disclosing trade secrets

See improper disclosure of trade secrets. 

wrongfully obtaining trade secrets

See improper acquisition of trade secrets.




Patent Copyright & Trademark
Patent, Copyright & Trademark: An Intellectual Property Desk Reference
ISBN: 1413309208
EAN: 2147483647
Year: 2003
Pages: 152

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