Trade Secret Protection Overview

Terms:


Trade Secret:
Confidential information regarding the process, method or design that a manufacturer or seller uses to design, market, or otherwise develop a product.

Discovery:
During litigation, each party is entitled to request that the other turn over certain information relevant to the trial. It is ultimately up to the court to compel the disclosure of the information requested if it is not voluntarily provided and if disclosure is appropriate under the circumstances.


Among the various protections of intellectual property beyond copyrights, trademarks, and patents, the law of trade secrets is perhaps the most fragile. The realm of trade secrets involves subject matter which cannot be protected within the three major areas of intellectual property law.

EXAMPLE: Ted is a motorcycle enthusiast who works at the local dealership for a major motorcycle manufacturer, Gnarly-Sellargesum. Years of experience coupled with passion has led Ted to develop a design for a new motorcycle. While no new, useful technology is involved (i.e., there is nothing he could patent), the motorcycle would have a different overall look and feel. He would like to submit the design to the Gnarly-Sellargesum company, but is afraid that once he shows them his diagrams they will simply take his idea and use it as their own. Without someone knowledgeable in the world of intellectual property law, Ted will either be frozen by fear or unnecessarily exposed to the risk that he will be taken advantage of by the more sophisticated party.

As with other areas of intellectual property, there are competing societal interests here. Most people would agree that Ted should be able to prevent the company from stealing his idea after he makes the pitch. On the other hand, we don’t want to give Ted a complete monopoly on this motorcycle design; if someone at another company independently thinks up a similar design, we wouldn’t want to prevent that other company from making the motorcycles.

Recall that with patent law, an innocent party who independently stumbles upon something identical to a patented invention will not be able to make use of her invention; independent creation is not a defense to patent infringement. When an idea falls outside of the reach of patent law (generally because it is not novel, or not useful, or both not novel and not useful) independent creation protects the second-comer. Further, legally obtaining the information will fully protect the second-comer.

With trade secrets, the value is derived from the fact that the secret is not generally known or readily ascertainable. It is the very secrecy of the trade secret which makes it valuable. Once those who could make use of the information gain access to that information, its value to the original holder is lost. When such parties gain access to the information in what we feel is an inappropriate and unfair manner, the impulse is to prevent those parties from profiting from the idea. Consider the following three scenarios:

  1. Ted approaches Gnarly-Sellargesum and submits his idea. They send him home telling him that the design is no good. The next month they begin production of a motorcycle almost identical to Ted’s. Fairness dictates that we protect Ted here.
  2. One of Ted’s coworkers, Lance, knows of Ted’s idea and thinks it’s a cool design. He surreptitiously makes his way into Ted’s office at night (after first picking the lock) and photocopies the design. Lance should not be allowed to profit from his malfeasance.
  3. Lance has thought about breaking into Ted’s office but realizes that he has no idea how to pick a lock (they make it look so easy in the movies). Instead he peaks at Ted’s drawings every chance he gets and then quickly sketches out whatever he could glimpse. After weeks of stopping by Ted’s office “just to say hello,” Lance has basically the entire design. While this behavior might seem only slightly less culpable than the break-in, Ted might not be protected here.

Car manufacturers today are faced with a serious dilemma somewhat similar to Ted’s. They need to put their new cars to the test by running them on tracks and through simulated driving conditions. At the same time, they do not want other manufacturers to get an early look at the new design, for fear that this would give their competition just that much more time to design a competing vehicle.

The only protection they have, therefore, is to build their testing tracks in highly remote areas and  “mask” their new cars to the best of their ability while conducting their outdoor testing. For example, according to www.carpages.co.uk, there is a “secret winter test world in a snow-bound venue north of the Arctic Circle” which belongs to Volvo. Certainly, this would qualify as remote!

In most cases, such as the “secret Audi hybrid” which was the subject of a September 20, 2005 article posted on www.theautochannel.com, there is likely patentable technology at play. But the very fact that a certain manufacturer is working on a certain project is valuable in itself. Because competing companies don’t want to be left behind, it is to their advantage to learn as quickly as possible about what new cars are being developed. 

Whether designing motorcycles, cars, buildings, boats, pencils, sunglasses, hybrid tomato seeds, or any other product, there is sometimes valuable information which is not protected by any other body of law and which derives its value from the fact that it is not known to others. This is where the law of trade secrets enters the picture.

But beyond product development, trade secrets could include such things as:

  • Corporate hiring plans designed to attract top employees.
  • Human resources tactics to prevent wrongful discharge lawsuits and keep employees happy and productive.
  • A company’s list of current and prior customers.
  • Information related to manufacturing and labor costs.
  • Business plans for growth.
  • Strategic planning information related to marketing or acquisition of other companies.
  • Methods for delivering products to distributors.
  • Almost any other information related to past, present, or ongoing business activities which is valuable to the holder simply because it is unknown to others who could use it to their advantage, and which would become less valuable to the holder if these others were to obtain the information.

When a business takes reasonable measures to maintain the secrecy of valuable information, others who improperly gain access to that information, or anyone who improperly uses or discloses that information, can be held accountable. Note, that the emphasis here is on the improper nature of the event which leads to use or disclosure. Feigning a good faith interest in a partnership and then taking the design as one’s own (scenario "a") would seem to most to be an improper way to gain access to information. Similarly, illegal conduct such as breaking-and-entering (scenario "b") would lead to liability.

What about scenario "3"? This is akin to photographers standing at the border of a car manufacturer’s property waiting to catch a glimpse of the new car. Because this method of access merely takes advantage of information readily ascertainable by the public (anyone standing there could see the thing), trade secret law will not protect the car maker from these prying eyes.

The example of Ted’s motorcycle idea is just one classic conflict in trade secret law: the inventor/idea-developer versus the business. Keeping in mind the vast variety of information which might fall under trade secret protection, other classic scenarios of conflict (adapted from Intellectual Property: Examples and Explanations, Stephen M. McJohn, pp. 291–293, Aspen Publishers 2003) include:

  • Business v. Former Employee: An employee who leaves a job might take with her anything from product designs and manufacturing secrets to customer lists and marketing plans, all of which could fall under the umbrella of trade secret law. This would similarly hold for a current employee who improperly discloses trade secrets in exchange for payment or for some other purpose.
  • Employer v. Subsequent Employer: This conflict is also based on a former employee who leaves a company with trade secrets, but the wrath of the former employer is aimed at the new employer who enticed the employee to make the move.
  • Business v. Former Partner: Partnerships which come to an end (similar to the potential partnership between Ted and Gnarly-Sellargesum which never came to be) can result in a departing party taking trade secrets with her.
  • Business v. Competitor: The “investigators” taking pictures of concept cars are often employees of the target company’s competitors. If information is obtained wrongfully, such as by trespassing onto the target company’s land, illegally entering a building, bribing an employee, etc., the competing company can be held liable. McJohn points out that there are borderline cases, such as helicopter surveillance and rooting through trash, in which there might be some question as to whether the information was improperly acquired.
  • Business v. Person Who Discloses: An independent investigator or other party who improperly gains and discloses secret information can be held accountable even if that information was only passed along to a third party who eventually made use of it.
  • Business v. Agency or Court: There are a variety of situations in which a court or government agency might attempt to compel disclosure of a trade secret. During the discovery process, for example, a party might initially refuse to hand over certain documents. If a court tries to compel cooperation, the party wishing to prevent disclosure might claim trade secret protection to convince the court to permit nondisclosure.

Because trade secrets are valuable property, they are protected by state law in various ways. The most common forms of protection come from state statutes, such as those based on the Uniform Trade Secret Act, and from the law of contracts, insofar as contractual agreements between the parties exist.