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INTELLECTUAL PROPERTY RIGHTS

March 24, 2014

U.S. TRADE SECRET LAWS

 

Many proprietors keep their discoveries secret in order to perpetuate their unique products or services for an unlimited period of time. Trade secret may be defined as any formula, device or information used in a trade or business, which give the owner an advantage over competitors. It may be a chemical formula, tool, customers list, product specifications, marketing plans, bookkeeping or other office management method, a code for determining discounts, rebates or other price concessions, etc. Barbecue sauce recipe, product manufacturing data, chemical formula for a soft drink or perfume, personnel evaluation, economic research, or marketing plan are vivid examples of trade secrets. Trade secrets must be kept secret but they may continue in perpetuity or for an unlimited period of time.

 

Novelty and invention are not requisites of a trade secret, but secrecy and absence of general knowledge in the trade or business, or public knowledge of the item, are. However, some originality is required, i.e. replacing vacuum tubes with transistors would not qualify for a trade secret, because it is not sufficiently original. The summary of factors including the above named trade secret existence factors can be delineated as follows:

 

(1) The secret's novelty;

(2) Whether the secret is a secret;

(3) Proprietor's time, labor and money expended in development of the trade secret;

(4) Continuous efforts to maintain the information secrecy within and outside proprietor's business;

(5) Confidentiality of the relationship between the parties knowing the secret;

(6) The value to the trade secret owner and to the competition;

(7) Difficulty of reverse engineering.

 

Trade secret protection is particularly advantageous for a production method, while patent protection is advantageous for a product made by that method. Many companies keep their secrets secret instead of patenting them. For example, Colonel Sander's seasoning mix for Kentucky Fried Chicken, perfume formulae, and Coca-Cola syrup (a secret since 1885) keep their value mainly due to the secrecy surrounding their ingredients and preparation processes. Trade secrets are a valuable commodity, which may be worth millions of dollars.

 

Trade secrets (e.g., a buyer's list, market research or sale force analysis) can be combined with patent protection. A license agreement involving both patents and trade secrets may oblige a licensee to pay royalties beyond the life of the licensed patents for the use of trade secrets but not for the use of the patented product or process. Therefore, different royalty rates may be allocated for licensed trade secrets and patents.

 

In all trade secret cases, the courts must determine whether an alleged trade secret is proprietary to the employer or merely a part of the employee's general knowledge and skill. Former employees may continue to enjoy their trade or vocation if the alleged secret information is general business information not proprietary to the employer, i.e., it couldn't be learned elsewhere. Information pertaining to single or transient business event is not qualified for trade secret protection, e.g. terms of a secret contract bid, salary of particular employees, securities investments made or contemplated, announcement dates of a new product or plan, etc. Information, which can be protected as trade secrets constitutes a process, system or device for continuous use in business operations. Examples of items protectable by Trade Secrets:

 

1. Product Formulae, Recipe & Specifications (e.g. “Listerine” Formula, “KFC” Recipe)

2. Suppliers’ List

3. Customers’ List

4. Manufacturing Process

5. Proprietary Techniques/Research/Tests Results

6. Created Databases

7. Process-Related Software

8. Distributors and Sales Routes

9. Engineering Blueprints

10. Unpatented Technology

11. Knowledge of lead times in component supply

12. Collection of quotations

13. Data as to sales performance of the key sales personnel

14. Compilation of standard and non-standard formulae kept in the employees' memory 15. Research data and analysis

 

Trade secret protection is lost as soon as it becomes publicly available by publication in a patent, advertising brochures, technical papers, or a technology pooling agreement. For instance, information, such as a customer or supplier list, stored on a disk, which is sold together with a computer to a third party loses its trade secret protection. But trade secret would not be lost if disclosed to thousands of people in confidence. Confidential disclosure is a requirement to maintain an action for misappropriation of an idea.

 

Trade secrets may be lost due to inadequate security measures. A classic example of what is inadequate was illustrated in a case Motorola Inc. v. Fairchild Camera and Instrument Corp. Fairchild offered a financially seducing arrangement to the Motorola's chief executive. He accepted it and also gave to Fairchild names and ball park compensation figures of five other key employees at Motorola who might be called upon. Each of them plus two more managers applied for jobs with Fairchild and were hired by this executive. That means eight key employees went almost, at once, to a competitor. One may call it a "brain raid", or a "brain drain," or mass exodus of employees. The court said there was no misappropriation of trade secrets because: (1) no contract of employment was executed, i.e., each employee was free to leave at any time (contracts were terminable at will); (2) no evidence of bad faith or intent to hurt Motorola; (3) a general non-disclosure agreement did not specify what processes, know-how or other things were considered proprietary; (4) no identification of trade secrets was ever made during employment and at termination, e.g., by acknowledging listed trade secrets in writing; (5) non-competition covenant was not executed; (6) the trade secrets were revealed in the marketed product, issued patents, known to those skilled in the trade, "or consisted of information easily acquired by persons in the industry from patents, literature or known processes"; (7) customers, employees of competitors (considered for employment), and the equipment supplier toured the production line incorporating the claimed trade secrets without any warnings of secrecy, and no statements as to information confidentiality were made or signed; (8) no warning signs were posted in the area; (9) the trade secrets could be learned from observing the production line and talking to operators of the line equipment; (10) Motorola's movies revealed substantially all alleged trade secrets.

 

In general, a trade secret is considered misappropriated when it was (a) disclosed in confidence and then used in breach of that confidence; or (b) obtained by unlawful means. The adequacy of security measures for maintaining qualified (absolute secrecy is unnecessary) secrecy depends on circumstances. For example, signing of a non-disclosure agreement may be sufficient to preserve trade secrets. But as a rule, implementation of as many protection measures as possible would manifest secret protection. For instance, substantial or qualified secrecy would not be compromised if parts drawings were occasionally shown to outsiders (vendors, consultants) for certain purposes. Trade secret security measures create an impression or appearance of the extant secrecy and influence a judge or a jury that the sensitive information was in fact secret.

 

Another example concerns the bottlers of the diet Coca-Cola products, who sued the manufacturer because it forced them to enter into "regular Coke" contracts. The Coca-Cola Company refused to disclose drink formulae and taste-test results requested by the bottlers to prove that there's no difference between the diet and regular drinks. The manufacturer refused to disclose the secrets even to the judge. The court decided to call secret ingredients as "Merchandise No.5, 7x, etc." and established undisputed facts for bottlers.

 

Under state law, the misappropriation of trade secrets may lead to the recovery of actual and punitive damages, attorney's fees, injunction (usually limited to the period needed to "reverse engineer" or independently develop the secret), and even criminal liability. A former employee who misappropriated the employer's trade secrets may be sued for unfair competition, conversion, unjust enrichment, breach of contract, tortious interference with contractual and business relations. A preliminary injunction is generally easier to obtain in trade secret cases than in patent litigation. Such an injunction forces many defendants to abandon their activities before a trial.

 

One of the advantages of trade secret licenses is that the licensee must pay royalties the entire contract term, even if the trade secret entered the public domain. This is because the licensee assumed the risk that this may happen.

 

Non-public information, such as the availability of a business for acquisition, advice on acquisition, opportunities, and finding such business, do not qualify as a trade secret because such information is not used to run the business but is the product of the business. Illustration: A service business “search of corporate acquisition targets” to prove the existence of trade secrets would need to:

 

1. Maintain secrecy of publicly unavailable information;

2. Have a manual on how to set up acquisition deals;

3. Maintain a list of contracts;

4. Create standard letters, boiler plate language and blank forms.

 

All intangible assets, such as patents, trademarks, copyrights, trade secrets, know-how and technical assistance can be licensed separately or in combination. Licenses can be exclusive (preventing the licensor to practice the invention, unless agreed otherwise) or nonexclusive (giving the right to use the invention without being sued for infringement). A license may restrict the use, manufacture, or sale of the underlying property, and the territory may be split between different licensees. But the bottom line is that the licensor shares its technological achievements with the licensees in return for royalties. Therefore, in order to get the most advanced, or desirable product, or service, one may just buy it in small increments, to-wit, by paying quarterly or yearly royalties, or in a lump sum, or both royalties and an initial down payment. 

 

For more detailed information and legal advice, please consult with an attorney.

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