Business Law for engineering Case study

Trade Secret Law

Trade Secret law is very different from the three other areas of intellectual property law we

have studied so far. As an initial matter, trademarks, copyrights and patents may be protected

through a federal registration system. In fact, as we saw in the last few weeks, in order for an

invention to be patented, an application must be filed with the USPTO. There is no common law

protection for patents.

As we will see this week, trade secret law is very different in this regard. The law of trade

secrets was initially protected under state common law and eventually, the Restatement of

Torts provided a framework and guidance for the law. More recently, the Uniform Trade

Secrets Act (UTSA) was promulgated and adopted by most of the states.

Establishing Trade Secret Protection

and

Subject Matter

Establishing trade secret protection is fairly simple; information that has commercial or

economic value must be kept secret through reasonable efforts. That’s essentially the overall

framework. Sounds simple, right?

As defined by the UTSA; trade secret protection may be established when “information,

including a formula, pattern, compilation, program, device, method, technique, or process that

derives … economic value … from not being generally known … and is the subject of efforts that

are reasonable … to maintain its secrecy.”

The subject matter for which trade secret protection is available is not limited in the same way

that patentable subject matter is limited. Trade secret law can protect many different types of

information, so long as the information provides an economic advantage and it is kept a secret.

Recipes and formulas for foods are typically subject matter for trade secret protection. Indeed,

Coca Cola® and the special seasonings for Kentucky Fried Chicken are among the best known

examples of trade secret recipes and formulas.

Methods are also typical subject matter for trade secret protection. A manufacturing method or

business method are both excellent examples of appropriate trade secret subject matter. A

pattern or plans, such as a circuit board plan or the layout for a manufacturing plant are also

examples of information that may be protected as a trade secret. Business information, such as

a customer lists, is also appropriate subject matter for trade secret law and commonly

protected under trade secret law.

What is not protectable under trade secret law? It may seem obvious, but necessary to state;

information that is readily known or easily ascertained may not be protected under trade secret

law. There are several factors that will be considered in the determination of whether specific

information can be protected as a trade secret. Among the factors considered are; how widely

known the information is, the extent to which the information has been kept secret, the value

of the information, the level of difficulty required to duplicate the information and the amount

of money and effort expended to develop the information.

Required Secrecy

The next requirement is that the owner of a trade secret must take reasonable efforts to keep

the trade secret information a secret. Moreover, the information must have been kept a secret

from the beginning.

What constitutes a reasonable effort to maintain secrecy? It all depends on the facts. The

manner in which the trade secret information must be kept secret will vary depending on the

nature of the information and the nature of the relevant business. For example, the recipe for

Coca-Cola® is widely known to be one of the best kept and most valuable trade secrets. In order

to maintain the trade secret status, the company must take certain precautions to keep the

information secret. Within the company, it is said that very few people have access to the

entire recipe. Those individuals who do have access to the recipe or a portion of the recipe

must sign contracts promising that they will not reveal the secret recipe. These contracts are

known as non-disclosure agreements (“NDA”) or confidentiality agreements.

Another way that Coca-Cola maintains the recipe’s secrecy is by delivering the syrup already

prepared to its distributors, having the distributors simply mix carbonated water with the

ready-made syrup. In the alternative, the company could supply each vendor with the recipe for

the beverage and deliver the ingredients, allowing each vendor to combine the ingredients

themselves. However, that type of arrangement would require a lot of non-disclosure

agreements! Coke would have to keep track of everyone who has ever known the recipe and

require them all the sign agreements promising to keep the recipe a secret. Under the

circumstances, this would likely not be considered reasonable?

A method of manufacturing can also be kept a secret by hiding some or all of the manufacturing

process from the public or non essential employees. A customer list can be kept secret through

the use of encrypted computer files and non-disclosure agreements. It all depends on the

circumstances of the situation.

In this regard, it’s essential to educate employees on the appropriate manner of handling

sensitive or confidential information. Corporate email policies can play an important role in

guiding employees on how to handle confidential information in emails. Furthermore, in

businesses in which employees may have to interact with the public as part of their job duties,

it’s important to have policies in place so that employees understand when and how to protect

secret information day-to-day. Something as simple as requiring employees to keep sensitive

and confidential information in folders rather than simply on a desk can be a reasonable

guideline to maintain secrecy.

It’s also important that employees have notice of exactly which information they have access to

should be kept a secret.

As previously mentioned, the use of contracts can be an effective way of maintaining the

secrecy of the valuable information. In many instances, employees must have relevant

information in connection with their employment. Employee confidentiality agreements are

widely used to require that secret information is indeed kept secret and that employees are

contractually obligated to keep the information confidential.

In certain situations, employers may also require employees to sign an agreement known as a

non- compete agreement. Such an agreement typically requires that employees agree not to

work in a competing role after they leave the employer. States differ on the enforceability of

such contracts. In most cases, the requirements of a non-compete agreement must be

narrowly tailored so that employees are not restricted from being able to make a living if they

leave an employer. The law does not favor undue restrictions on individual mobility of

employment. To be enforceable, contractual restrictions on competition must be reasonable

and each state has its own interpretation of what is reasonable. Courts will look at whether

such restrictions are against public policy or too harsh or too oppressive.

Corporate policies should also include contracts that are used to protect secret information

from other corporations with which a company has interactions. In many cases, the sharing of

sensitive and secret information is required in order to do business. In such situations, third

parties must also be required by contract to keep any relevant, secret information they gain

during any kind of business transaction, confidential.

Value “From not being generally known”

We now know that the information must be kept secret in order to fall under the rubric of trade

secret. But it is also required that the holder of the trade secret can realize an economic

advantage because the information is not known by the public. In other words, there is an

competitive advantage because the information is not generally known.

Why do you think it is required that the information give an economic advantage before it will

be protected as a secret? What is the policy argument favoring this requirement? As we have

discussed throughout the semester in the case of trademarks, copyrights and patents, the law

does not take it lightly when intangibles are “locked up” from public use. Thus, before the law

will take methods, processes, formulas or ideas out of the public domain, there must be a

compelling reason to do so. The intangibles as used by their owners must be valuable and must

contribute to economic production. Otherwise, ideas, formulas and methods would be hidden

without any economic benefit to society.

Using an example of your choice, analyze an existing trade secret

applying the elements of trade secret law. Be sure to discuss each

element in detail including the element of secrecy and whether it is

reasonable under the circumstances.