Legal Notes: Trade Secrets

You've heard of the intellectual property law concepts called trademarks, copyrights, and patents. There's a fourth concept and it's one that is unknown, forgotten about, or completely misunderstood. That fourth concept is the trade secret. Some regard it as a catch-all category that could apply when the other concepts either don't fit or aren't feasible. To some degree, that's true. However, it's important to note that trade secrets are not the left over stuff that remains from what doesn't apply to the other concepts - specifically patents - because trade secrets tend to be processes, methods, recipes, etc. that aren't known to the outside world. Trademarks and copyrights, by their very nature, aren't secret. Rather, they're exposed to the world as branding and some tangible expression, respectively.

Two of the most famous trade secrets are the Colonel's 11 herbs and spices from Kentucky Fried Chicken and the Coca Cola formula, two of the most famous and consumed brands in the world. We know how they taste. What we don't know is the formulas. KFC (specifically YUM Brands) and the Coca Cola Company go to great lengths to keep these formulas secret. I'll elaborate more on that in the section below on what qualifies as a trade secret.

For a secret process or method to be regarded as a trade secret and to get such protections, it has to be more than a secret. You must take sufficient safeguards to maintain the secret, the components of the secret must not be generally known, and the secret must provide a unique competitive advantage.

What about the technical world? Do trade secrets exist? Indeed they do and one of the most prevalent secrets is Google's search engine algorithm. Many of Amazon's processes and methods are trade secrets as well. You may have some technology-based process or method that isn't known and gives you a competitive advantage. If that's the case, you may have a trade secret that's in your best interest to protect.

Now that you have an idea of some common examples of trade secrets, let's dive into more detail to better define what trade secrets are, how they differ from patents and the governing law around them.

DISCLAIMER: This and future columns should not be construed as specific legal advice. Although I'm a lawyer, I'm not your lawyer. The column presented here is for informational purposes only. Whenever you're seeking legal advice, your best course of action is to always seek advice from an experienced attorney licensed in your jurisdiction.

What Qualifies as a Trade Secret and the Uniform Trade Secrets Act

The following list outlines the general requirements for something to be treated as a trade secret:

• Information, including a formula, pattern, compilation, program, device, method, technique, or process
• Something that derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use and
• Something that's the subject of efforts that are reasonable under the circumstances to maintain its secrecy

The first bullet point illustrates how close trade secrets and patents are, as the list, with the exception of “information” describes patentable subject matter. As the list states, bare information (data, statistics, etc.) can be a trade secret. Clearly, any software program or business process can be a trade secret.

The second bullet point actually refers to multiple related items. There must be actual or potential economic value because of not being generally known or readily ascertainable through appropriate means. There are several things you can take from this. First, just because something is a secret doesn't make it a trade secret. Rather, the fact that it's a secret itself gives rise to some actual or potential economic value. Those two things go hand in hand. The term “appropriate” is meant to convey lawfulness. Another example of a trade secret is a customer list. Chances are, an employee or such other person signed an agreement that states among other things that such information is deemed to be proprietary and a trade secret such that its unauthorized dissemination outside the organization would result in irreparable economic harm. The emphasized text is an example of an expression that you might encounter in an employment or a non-disclosure agreement. Such agreements are examples of reasonable efforts to maintain secrecy and that gets us to the third bullet point.

For a secret process or method to be regarded as a trade secret and to get such protections, it has to be more than a secret. One must take sufficient safeguards to maintain the secret, the components of the secret must not be generally known, and the secret must provide a unique competitive advantage. This is where non-disclosure agreements (NDAs) and other like agreements come into play. In the case of Kentucky Fried Chicken, there are only two vendors that make up the seasoning mix. The vendors don't know the identity of the other and each only makes 50% of the mix. Further, only a very small number of people know the recipe, which is kept locked in a safe. The same goes for the Coca Cola formula. Often, companies require any visitor to their premises to sign an NDA that forbids any disclosure of anything the visitor sees on the premises. All of this may seem over-reaching and draconian. Nevertheless, these efforts have been regarded as reasonable and necessary for the protected subject matter to be regarded as a trade secret.

Why Does It Matter to be Regarded as a Trade Secret?

It's all about legal standing and the Uniform Trade Secrets Act (UTSA). The standard UTSA text can be found here. Statutes, whether they are state or federal, enumerate both the law and the remedies a plaintiff may be entitled to should they seek relief under the statute. Before you can seek statutory relief, the statute must first apply. Whether a statute applies is a burden for the plaintiff to carry. For example, let's assume you have some process, method, or program that you regard as a trade secret and you believe that somebody has misappropriated a trade secret. What damages are you entitled to? That depends in part on whether the UTSA, as adopted by your state, applies. This is where we go back to the three factor test outlined above.

Note: Most, but not all, states have adopted the UTSA. New York, North Carolina, and Massachusetts haven't adopted the UTSA. Nevertheless, these states have laws on the books that adopt much of the operative language. Texas is the most recent state to adopt the UTSA; which it did in 2013.

What if you are, or have the potential to be, a defendant in a law suit? Inevitably, the other side, through a court order, will demand that you produce certain documents, including complete interrogatories, and perhaps submit to a deposition. What if a portion of the information sought is something you consider a trade secret? To prevent disclosure, the defendant bears the burden to establish that the information sought is a trade secret. What if the action is around the information itself? For example, what if the plaintiff alleges that the trade secret was misappropriated by the defendant? This presents an interesting situation because it would seem the defendant would have no choice but to disclose the trade secret details as well as information concerning how they developed the secret. As it turns out, the answer here is not always clear. First, trade secrets are a matter of state law. That means that although each state may have adopted the UTSA, the possibility always exists that from state to state, there can be some variation, no matter how slight, over what defines a trade secret. Second, each state has its own set of court decisions (case law) that interprets its state's trade secret act. In the case of Pennsylvania, where I live, in 2003, the Third Circuit Court of Appeals ruled that a plaintiff bears the burden that the defendant did not independently develop the alleged misappropriated trade secret. Does that mean the defendant doesn't have any burden? The answer is no, but the burden that the defendant carries is light. All the defendant has to produce is some evidence that the trade secret was independently developed. Once that burden is carried, the burden then shifts to the plaintiff. For more information on the Moore v. Kulicke Soffa Industries, Inc. case (a good example of this burden-carrying), see https://caselaw.findlaw.com/summary/opinion/us-3rd-circuit/2003/02/06/114671.html.

Another reason why the UTSA is important to apply is that if you're a plaintiff and you prevail, you're normally entitled to legal costs and fees over and above your other damages that may include, but are not limited to, lost revenue and profits.

Note: Don't get confused by the fact that this PA case was argued in federal court. Often, state law cases are argued in federal court. Whether a case arising under state law can be heard in federal court depends on whether there is a basis for federal subject matter jurisdiction. There are two ways a state law case can be heard in federal court:

• The amount in controversy exceeds $75,000
• There is diversity in citizenship (citizens of different states)

There's a bit more to it but that's beyond the scope of this article. If you're interested in more detail, that can be found here: https://www.law.cornell.edu/uscode/text/28/1332.

In fact, there's no federal trade secrets act. That's not to say that trade secrets have nothing to do with federal law. There's the federal espionage act that addresses the theft of trade secrets (https://www.law.cornell.edu/uscode/text/18/part-I/chapter-90). There are also federal rules that regulate the conduct of public officials and employees (https://www.law.cornell.edu/uscode/text/18/part-I/chapter-93). Both of these, when it comes to defining what a trade secret is, refer back to the UTSA. When it comes to general enforcement of trade secrets outside of specific federal law that may have as a component some trade secret aspect, that's still a matter of state law and specifically, a state's adoption of the UTSA or its own trade secret law (whether by statute and/or case law).

Lately, it's been a hot topic in Congress to pass a federal trade secrets act that would supplant individual state law. That issue is discussed in the sidebar.

The key take away is that when a state adopts the UTSA, there's a bias toward protecting secrets. The UTSA's benefit is that it provides standard definitions and a statutory framework to resolve disputes arising under a trade secret theory. As an individual or an organization that may possess a trade secret, it's important that you understand and are familiar with the legal framework around trade secrets.

Trade Secrets or Patents: Which One Should You Choose?

As you might guess, the simplest answer is that it depends, which isn't much of an answer. Patents require disclosure, which is a completely antithetical concept to trade secrets. If a trade secret is involuntarily disclosed, assuming there was no misappropriation, the trade secret is lost and the subject matter is in the public domain, free for anyone to use. In the United States, a patent is good for 20 years from the date the patent application is filed. Trade secrets have the potential to last forever. The Coca Cola formula is over 100 years old. There's a benefit with patents, which is the limited monopoly for you if a patent is approved. If you're a patent holder, you can prevent others from using the methods covered under the patent, even if somehow the other party independently came up with the idea with no knowledge or input from your method. The same is not true for a trade secret. For example, you may have a trade secret and you want to sue another entity for using methods and processes that make up your trade secret. Unless that other party misappropriated your trade secret, you're out of luck. Obtaining a patent can be a lengthy and costly process. Trade secrets for the most part have no costs other than the costs to protect the secret.

A patent is good for 20 years from the date the application is filed. Trade secrets can last forever.

So, which one should you choose? Look at the Google search algorithm as an example. Google, most likely, wants to keep its competitive advantage for more than 20 years. It already has a near monopoly on Internet traffic. There's nothing to be gained from disclosure. But patents are easier to enforce than trade secrets. In the USA, patents are a matter of federal law whereas trade secrets vary from state to state. Internationally, there's also more uniformity with patents. As with many things under the law, the best decision tends to be more about what constitutes the better business decision.

Summary

It should be fairly apparent now that trade secrets are an important aspect of intellectual property law and business. If you think you have one, the burden is on you to protect it. Things like NDAs and employment agreements are reasonable measures to help protect such information, processes, and methods. At the same time, you also should take practical measures to control access as to who has direct contact and knowledge of these secrets. Be sure to consult your locality, whether that's your state's or country's laws around trade secret protections. In the USA, although there is the Uniform Trade Secrets Act (UTSA), there's currently no standard trade secret enforcement. The UTSA is simply a model template.

In the News: The Latest on the Google/Oracle Java API Case

There's an update to the much publicized Google/Oracle Java API case. In an earlier article, I wrote about the Federal Circuit Court's ruling that the structure and method signatures in an API were copyrightable subject matter. It's well settled that the code inside a method is copyrightable subject matter. The idea that an API's name itself is copyrightable should give cause for concern. This means, at least in theory, that only one entity could copyright a “Customer” API. If you wanted to also have a “Customer” API, you'd have to seek permission from the copyright owner and license the right to use the name. The Federal Circuit Court, which retains sole intermediate appellate jurisdiction over such matters, overruled the Ninth Circuit! The next step was an appeal to the Supreme Court of the United States (SCOTUS). That gets us to the latest news.

On July 29th 2015, the SCOTUS declined to hear the case. This decision was based in part on the Department of Justice (DOJ) rendering its opinion agreeing with the Federal Circuit.

What's next?

The case isn't over yet because Google will attempt to assert the affirmative defense of fair use. This process had already started when the SCOTUS was asked to hear the case. You can find my earlier article on fair use here: http://www.codemag.com/article/1503031. In that article, I wrote my initial discussion on the Google/Oracle Java API case. Now that the SCOTUS has declined to hear the case, the district court in the Ninth Circuit can hear the fair use case.

To review, the Doctrine of Fair Use consists of a four-factor analysis:

• The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes
• The nature of the copyrighted work
• The amount and substantiality of the portion used in relation to the copyrighted work as a whole
• The effect of the use upon the potential market for, or value of, the copyrighted work

Why This Case Matters

Oracle, as reported in this article, http://arstechnica.com/tech-policy/2015/08/all-android-operating-systems-infringe-java-api-packages-oracle-says/, declares that all Android OSs infringe on Oracle's Java API Packages and Oracle is asking a judge to block “continued acts of infringement.” The Android ecosystem is massive and this request, if acted on to Oracle's satisfaction, will adversely affect many people and organizations. This includes thousands of devices. If you use a ChromeBook or Android-based smart phone, you will be affected. What if you're developer? As far as Oracle is concerned, YOU are an infringer.

The question is not a matter of if, but when this case will settle. Based on the court decisions rendered thus far and applying the facts to the four-factor test, I don't see Google winning on its fair use claim. At the same time, there are the costs of disrupting the Android ecosystem and the many ripple-effects therefrom. At some point, the parties (Oracle and Google) are going to need to hammer out a mutually beneficial settlement that would include a licensing agreement. Let's hope that such a settlement will provide protections for the many individuals and organizations in the Android Community.