The Past and Present of Trade Secret Legislation

The Past and Present of Trade Secret Legislation

In order to better understand the past and present state of trade secret legislation, it is important to understand what a trade secret is and why it is often viewed differently from other intellectual property rights.

What is a Trade Secret?

Trade secrets can include a broad range of proprietary information, including product development plans, customer information, and even formulae. In order to have your trade secret protected, you:

  • must be using the trade secret
  • the trade secret must be conferring you with an economic advantage
  • the trade secret must not be generally known in the industry
  • the trade secret must be protected in a way that safeguards its confidentiality

If all of these elements are met, the owner of the trade secret may file a suit when the secret is acquired, used, or disclosed by illegal means.

Why are Trade Secrets different from other IP rights?

Unlike patents and copyrights that are governed by federal statutes, trade secret rights fall under state law. This usually makes trade secrets the “odd man out.” Congress is now considering making a federal civil action for trade secret misappropriation, including remedies that are currently unavailable under state law. Not only does Congress believe state law for trade secrets is inadequate, they also have expressed concern about the threat posed by international espionage.

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History of Trade Secret Legislation

Trade secret laws developed from common law principles of agency, trusts, and torts. Since these principles varied from state to state, the Uniform Trade Secrets Act (UTSA) was adopted by many states beginning in the 1980’s. 47 states have adopted the UTSA today.

The statute directed at trade secrets is the Economic Espionage Act of 1996, in which the EEA created criminal penalties for trade secret misappropriation. However, there was no room to bring were civil action for damages. Congress amended the EAA in 2012 to clarify that the EAA applied to trade secrets in use or intended to be in use. They also increased the range of available criminal penalties.

Proposed Legislation on Trade Secrets

House Bill 5233, known as the “Trade Secrets Protection Act of 2014” hoped to make a path for civil action for misappropriation of trade secrets. The bill also proposed a civil seizure remedy that would authorize the court to enter an Ex Parte Seizures to preserve evidence or to prevent the “propagation or distribution” of a misappropriated trade secret. Lastly, the bill hoped to create expanded remedies, including compensatory and punitive damages.

The Senate hoped to pass a similar bill, the Defend Trade Secrets Act of 2014, and both the House and the Senate had the support of many industry groups, who believed such a bill would protect trade secrets and combat any industrial espionage efforts. Critics argued that Congress did not need to step in if the current system of state laws worked. These critics further added that adopting federal statutes would erode state activity in the trade secret areas, resulting in fewer trade secret laws in the future. However, President Obama  made some changes to trade secret legislation in the past few days.

Defend Trade Secrets Act of 2016 (DTSA)

On May 11, President Obama signed into law the DTSA. This enables companies to go to federal court to sue for misappropriation of trade secrets. The DTSA now allows for Ex Parte Seizures in “extraordinary circumstances.” The law also expands remedies, such as adding Exemplary Damages and rewarding attorney’s fees. Injunctive relief is also provided and expanded with the DTSA.

With the passing of the DTSA, private parties do not have to rely solely on state law when it comes to protecting their trade secrets. The hope is that this new trade secret protection will allow trade secrets to function like other intellectual property rights and provide secret holders with more protection.

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Sources referenced:

  1. JD Supra (2014)
  2. JD Supra (2016)

 

 

 

What is a Trade Secret?

What is a Trade Secret?

Last week we discussed the past and future of trade secret legislation. This week we take a step back and look at how a California court broadly defined the information that would fall under the category of a trade secret. The case brought forth in the California Appeals Court,  Altavion, Inc. v. Konica Minolta Systems Laboratory Inc., added to our knowledge of trade secret law in this state. This case was notable because it expanded what qualifies as a trade secret and permitted a more general recovery for trade secret misappropriation. Let us take a closer look at the case on hand.

Altavion v. Konica Minolta Systems Laboratory

KMSL and Altavion had attempted to work together before this lawsuit came about. Defendant KMSL manufactured printers and plaintiff Altavion was a small company that “invented a process to create self-authenticating documents by using barcodes with encrypted data about the contents of the original document that enable detection if the document had been altered from the original.” KMSL approached Altavion about their technology and the pair discussed embedding Altavion’s technology into KMSL’s printers. After more than forty meetings about the possible licensing deal, the two were not able to come up with a suitable agreement.

About a year later, Altavion saw that KMSL was filing for patents with Altavion’s barcoding technology. Altavion immediately filed suit against KMSL for trade secret misappropriation. A bench trial revealed that KMSL had misappropriated trade secrets Altavion disclosed to KMSL during negotiations for a licensing deal. The trial court found more information about the misappropriation and awarded Altavion $1 million in damages, $513,400 in prejudgment interest, and almost $3.3 million in attorneys’ fees.

KMSL appealed the trial court’s decision by saying generalized ideas and inventions are protected under patent law, not trade secret law. The court disagreed and cited California’s UTSA, section 324, which states there is substantial overlap between patent and trade secret law. The Court of Appeals also determined that Altavion’s barcode has some independent economic value. KMSL made a second argument by saying that Altavion did not take the necessary steps to protect its trade secret because it publicly disclosed he concept of verifying documents using a unique barcode technology. Once again, the court did not agree and said Altavion only disclosed how the technology could be used, not its unique detail designs.

Future Implications

This ruling by a California Court of Appeals provides us with a better understanding of what exactly falls under the broad definition of a trade secret. We know now that trade secrets are more than a specific formula or a set of lists. Trade secrets can be concepts and designs to solve problems. This means technological innovations can also fall under trade secrets. We may be seeing an increase in the number of trade secrets in the near future.

Source referenced: Lexology

 

The Future of Trade Secret Law

The Future of Trade Secret Law

As patents are becoming more and more difficult to obtain and enforce, many intellectual property owners are beginning to see trade secret law as a way to protect their IP assets. Congress is also considering providing federal private right of action for trade secret misappropriation. However, before deciding whether you should protect your IP with trade secret law, it is necessary to make sense of the history behind trade secret legislation.

Federal Trade Secret Legislation

The Supreme Court ruled in 1974 that state trade secret laws may “protect inventive subject matter without running afoul of the federal patent system.” After this ruling, states continued what they were doing and also continued to keep an eye out for trade secret misappropriation. When Congress saw that states varied on the type of trade secret legislation, they passed that Uniform Trade Secrets Act (UTSA) in 1979. This permitted companies with operations in several states to function more easily and with more protection. Although most states have adopted the UTSA in part or in whole, state court ruling have often led to differences for trade secret protection.

Commonalities Across States

When looking at trade secret legislation across different states, there are some common features that exist among them. First of all, the definition of trade secrets is common. The majority of the states define trade secrets as “information that derives some independent economic value.” States also agree that it is the duty of IP owners to keep information away from those who would use it for their own economical value.

Similar to the definition, states also agree on the scope of of trade secret law. While the scope of patents is often debated, most states tend to agree that “any information relevant to a business’ economic success” would fall in the category of a trade secret. State also agree that the IP owner must actively takes steps to protect and maintain the secrecy of his/her information. Lastly, states agree in saying that trade secret misappropriation should be criminalized. This is because states find that misappropriation usually occurs through theft, bribery, misrepresentation, or a breach of duty to protect secrecy.

More Trade Secret Legislation

Congress passed the Economic Espionage Act (EEA) in 1996 to criminalize trade secret misappropriation by foreign actors or governments. In addition, the EEA criminalized domestic trade secret misappropriation that impacted interstate commerce. Although high profile convictions under the EEA have increased awareness of misappropriation consequences, only a few number of criminal cases have actually been brought under the EEA.

Congress hoped to amend the EEA to “create a federal private right of action for trade secret owners to obtain redress for misappropriation.”  The Defend Trade Secrets Act (DTSA) would allow a trade secret owners to bring a federal civil action in response to acts of misappropriation or foreign economic espionage. The proposal also highlighted damages, injunctive relief, fee-shifting, and treble damages. The most important part of the DTSA would be that it provides “an ex parte order for preservation of evidence or seizure upon the verified complaint or affidavit of a trade secret owner.”

Another proposal to amend trade secret law was the Trade Secret Protection Act (TSPA) of 2014. The TSPA is fairly similar to the DTSA, but it preserves the right of the Attorney General to seek an injunction through a civil proceeding against someone who commits trade secret misappropriation. Unlike the DTSA, the TSPA puts additional restrictions on the civil seizures. This proposal was made in the House, while the DTSA was proposed in the Senate.

The Future

Federal trade secret law could be expanding in the new future and this is good news for IP owners across the nation. Both the DTSA and the TSPA will create a civil right of action for trade secret misappropriation. We recommend all intellectual property owners to carefully consider the changes DTSA and TSPA will bring to their business and their IP rights.

Source referenced: JD Supra

 

 

Giving away your Trade Secrets to protect them?

Giving away your Trade Secrets to protect them?

California Code of Civil Procedure Section 2019. 210 is something to consider if you want to pursue trade secret litigation, especially if you are the one alleging the trade secret misappropriation. California’s Section 2019. 210 requires that the party alleging the misappropriation must identify the allegedly stolen trade secret “with reasonable particularity” before commencing discovery in litigation.

This may not seem as a problem right away, but imagine being in the following situation. Your company has three key trade secrets. One of your employees decides to leave your company and work for your competitor. She also takes a briefcase full of documents with her, but you do not know which documents she took. In order to sue the former employee and get any discovery in the case, you must identify those stolen trade secrets. Now, the question is whether you should give away all three trade secrets, or only two. What if you identify two trade secrets and the employee only had one? Clearly, the person alleging the trade secret misappropriation faces a lot of trouble.

On the other hand, Section 2019. 210 can be a powerful weapon to fight frivolous lawsuits and discovery requests. However, the key point here is that if you are looking to file a trade secret misappropriation case, you should probably consider other options before starting a lawsuit.

Source referenced: JD Supra

Keeping a Secret Takes Work

A Superior Court decision in Massachusetts sets new grounds for companies endeavoring to keep their trade secrets safe. The key point in this case is that in order to keep trade secrets safe, companies must actually demonstrate an effort to do so. Such information must be appropriately kept safe from independent contractors. If not, companies risk legally losing their trade secrets.

In the case of C.R.T.R. v Lao, C.R.T.R was suing for misappropriation of trade secrets. C.R.T.R was an “e-waste” company that recycled non-working electronics. Jimmy Lao became one of C.R.T.R’s 20 buyers back in 2007 and sold his shares to buyers in Asia. Eventually, Lao began negotiations in the hopes of purchasing C.R.T.R. through his own company, Honour Crown Asia. During the negotiations, Jimmy Lao’s nephew, Kenneth Lao, began working as an independent contractor for C.R.T.R, as well as working for Honour Crown Asia, as known by C.R.T.R. When negotiations between Jimmy Lao and C.R.T.R. fell through, Kenneth resigned from his position and took  C.R.T.R’s company lists, accounting information, and other confidential information with him.

As a result, Kenneth was sued for misappropriation of trade secrets, while Jimmy Lao and Honour Crown Asia were sued for “unfair and deceptive business practices.” Summary judgment, on both counts, was granted by the court after discovery, as requested by the defendants. The court explained that C.R.T.R. did not take the appropriate steps to protect its trade secrets, knowing that Kenneth Lao was simultaneously working for Honour Crown Asia while working for its company. C.R.T.R. never had Kenneth sign a confidentiality agreement. Nor did it maintain a confidentiality policy regarding its information, which employees are required to follow. As for Jimmy Lao and Honour Crown Asia, summary judgement was granted on the grounds that, “C.R.T.R. had not presented any evidence that the defendants’ conduct was immoral, unethical, oppressive or unscrupulous.”

This case serves as a great reminder to all employers that being lax on confidentiality policies and agreements can be quite costly. When working with our employer clients, we always advise they protect their trade secrets by keeping such policies on the matter up to date, as well as protecting their confidential information through agreements that last through and after a contract of an independent contractor. By demonstrating proactive efforts in protecting your trade secrets, you will more likely be able to uphold such efforts in a court of law.

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The Bad-Faith, Fee-Shifting Provision has Teeth!

“The bad-faith fee-shifting provision of the Uniform Trade Secrets Act has ‘teeth’.” This piece highlights the importance of bringing forth legitimate allegations regarding trade secrets. Baseless trade secret claims can cost plaintiffs large sums and are preferably avoidable. http://ow.ly/i7iCT