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Trade Secret Protection in USA

What is a trade secret?


A trade secret is any sort of confidential information or secret product used by a business or business owner in order to secure a competitive advantage.

Well, in layman's terms, it is pretty much anything, that -

  1. is secret,
  2. the owner tries to keep it secret, and
  3. it provides the owner with economic benefit by reason of it being secret.

A basic example is that of an email list. A business spends considerable marketing efforts in order to grow its email list. This is usually confidential information.

 

Now, if the list is stolen by a competitor, the business can sue the competitor in order to stop it from using the list or disclosing it or if it is already out in the open, then seek damages from the trade secret infringer.

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The trade secret law in USA is guided via two separate statutes – The Uniform Trade Secrets Act, 1979, as amended on 1985 and a federal statute called the Defend Trade Secrets Act, 2016. 

 

Earlier the trade secret law was guided by the independent state laws which created hardships for inventors and businesses alike and led to high degrees of corporate espionage for companies that operated in more than one state[1]. 

 

The goal that Uniform Trade Secrets Act aimed at achieving was however subject to its adoption by the states in US and although it did succeed to a great extent in achieving that, the issue that predominantly arose and led to the enactment of the Defend Trade Secrets Act, 2016 was the ability of complainants to directly approach the Federal courts in lieu of the state ones.

 

The very fact that the Defend Trade Secrets Act does not repeal and mostly does not pre-empt state laws, allows for complainants to file a suit under the DTSA in federal court and plead a state law claim arising out of the same facts.

 

While protection of trade secret arose from England, it appears that the US was not far behind in recognising the importance of protecting trade secrets, as was evident from the case of Peabody v. Norfolk[2] in which the Massachusetts Supreme Court restrained the engineer who was employed by Peabody from divulging the secrets communicated to him in the course of a confidential employment in order to protect a “breach of trust”. Soon after, the states of the US started legislating their own trade secret law. 

 

However, in light of the lack of uniformity, the Congress created the Uniform Trade Secrets Act, 1979 which was adopted by states making some of their own changes.

 

However soon, the Congress felt the need of an Act that would operate on a federal level and help create a cause for action in case of infringement of trade secrets having a nexus to inter-state commerce in the Country or for export outside US[3] but would not be repealing any provision of the state laws concerned.

Uniform Trade Secrets Act, 1979

Uniform Trade Secret Act is a model trade secret act which protects trade secrets around USA. Its protection depends upon its adoption over the United States of America.


The Uniform Trade Secrets Act aimed at alleviating the uneven development and "uncertainty concerning the parameters of trade secret protection" in different states by recommending a uniform trade secret law but simultaneously allowing the states the flexibility to meet local circumstances by modifying the text as was enacted in each state[4].

 

Thus adoption of the Act did not mean a straight jacket adoption of the entire statute but also being able to change the provisions making it more suited for the state where it applied.

 

Section 1(4) of the Uniform Trade Secrets Act defines trade secret as-

"Trade secret" means “information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(i)     derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

(ii)   is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”[5]

Section 2 of the UTSA provides for injunctive relief if actual or threatened misappropriation of the trade secret is alleged. 

 

However Section 2(b) of the statute provides that the Court may allow for the use of the trade secret in exceptional circumstances upon payment of a reasaonable royalty.

 

As a business owner, you need not worry about Section 2(b) as Courts don't intend to allow your competitors to use your trade secrets subject to providing you with a royalty. The aim behind that Section is so as to allow the Government to use your trade secret if it is useful in times of emergency such as a natural calamity or a war etc.

 

Section 3 provides for damages that the complainant is entitled to in case of misappropriation. Further according to Section 3(b), if willful and malicious misappropriation exists, the Court may order for payment of exemplary damages not exceeding twice the amount ordered under Section 3(a).

Further for misappropriation done in bad faith and / or in a malicious nature, the complainant is entitled to attorney’s fees from the defendant.

Defend Trade Secrets Act, 2016

defend trade secrets act is a federal statute that protects confidential business data, secret products and designs all over the United States. However its applicability depends on facts of the case and the business owners' current scenario.


One might be tempted to think that the considering the protection of trade secrets being sufficient by the Uniform Trade Secrets Act, 1979, what was the use of enacting the Defend Trade Secrets Act, 2016 (hereinafter referred to as “DTSA”).

 

It should be noted that the DTSA helped federalize and make the law concerning trade secrets completely uniform all throughout the country, since all the other Intellectual Property laws were already uniform all across the country. 

 

Also, DTSA extends the Economic Espionage Act of 1996, which criminalizes certain trade secret misappropriations. However, apart from just attaining complete uniformity, DTSA also helped bring in other welcome changes for those who would use its provisions.

 

Firstly, it brought in the concept of ex-parte seizure wherein the Court has been given the power to order for seizing the trade secrets that the accused has been alleged to have had stolen.

 

So, if your competitor has stolen any sensitive data or secret product and has not yet got the opportunity to leak it or make use of it, you can, if you are able to sufficiently prove to the Court as to the data or product theft and the existence of it at a particular location, the Court may order for it to be seized rather than wait around for the end of the litigation to pronounce a judgement.

 

This is a welcome legislation as it can help businesses get redressal in real-time which is a very big concern for small scale startups as they have the most to lose and may even have to close their business if they lose out on an upcoming project that they spent tons of money in R&D.

 

Of course, this being a very powerful weapon in the hands of the complainant, it can only be used by the Courts in extra-ordinary circumstances[6] such as when there is a possibility that the complainant shall not comply with a normal injunction and the damage that can occur to the plaintiff shall be far greater than that of the defendant.

 

As such, US Courts usually prefer using temporary restraining orders in lieu of it.

 

Secondly, it also introduced a welcome provision of whistleblower immunity. By the provision, employees shall not be liable for trade secret disclosure if it is made to an attorney or government official for the purpose of reporting a suspected violation of law.[7]

So, which Statute best helps a business to protect its trade secrets?

which statute will best help a business owner to protect his/her trade secrets


The analysis brings home a clear conclusion - the Defend Trade Secrets Act is a much more comprehensive and complete statute that offers more teeth to business owners for protecting their confidential information, secret product/design/data etc.

 

You can easily sue a person who may have stolen your trade secret in a federal court without having to sue them in their own state court.

 

However, using this provision to sue an infringer, does come with some issues.

 

For example, the complainant has to establish a causal relationship between the trade secret that has been misappropriated and the damages that have been requested for in the Court.

 

Further the complainant has also to show that the misappropriation occurred after the DTSA came into operation[8]. 

 

 

Finally, it also has to be shown that the trade secret related to a product or service in which it is used in, or intended to be used in, is for interstate or foreign commerce.[9]

 

And, it is here that lies the problem. The DTSA has actually been enacted to stop large corporations from stealing and dealing with trade secrets of other businesses. So, you can't sue a business which is not into interstate or foreign commerce.

 

Further, you should also keep in mind, when suing an employee that he may enjoy the whistleblower immunity if the disclosure is to a lawyer or a Government official.

 

Therefore, when and if you need to decide upon which statute you should use in order to seek redressal for a trade secret infringement, you should keep these facts in mind.

 

If you have any questions, do drop them in the comments and I'll get back to you.

 

Read Next:

 

Footnotes:

[1] Uniform Trade Secrets Act, 1979, prefatory note

[2] 98 Mass. 452 (1868)

[3] Title 18 of the United States Code, s. 1832.

[4] Supra note 3

[5] Uniform Trade Secrets Act, 1979, s. 1(4)

[6] Title 18 of the United States Code, s. 1836(b)(2)

[7] Title 18 of the United States Code, s. 1833

[8] Defend Trade Secrets Act, 2016, s. 2(e)

[9] Title 18 of the United States Code, s. 1836

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