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Intro to Trade Secrets

Intro to IP Prof Merges 4.3.2012

How does trade secret (TS) law relate to federal statutory IP?
Preemption cases
General principles: federalism, interrelationship

Sources of TS Law
Common law (business tort) State statutory law
Uniform Trade Secret Act Similar to the UCC Uniform (model) Act, codified in 44+ states

Trade Secret Claim Major Elements


TS eligible subject matter: not generally known; UTSA 1(4) (definition of TS)
TS Holder has taken reasonable precautions to keep info secret Defendant has misappropriated the TS; UTSA 1(2) (def. of misappropriate)

Features of TS Law
Protection of potentially unlimited duration (as long as info is (a) valuable and (b) secret)
TS cases often, but not always, arise from pre-existing relationships
Employment contracts Expectations of confidentiality

Kewanee Oil
Employee mobility case Basic question: is TS law compatible with federal statutory IP scheme? Answer: Yes; mutually supportive incentive systems, TS law and patent law

Kewanee Oil v. Bicron


The trade secret at the center of this case was a process that would create 17-inch crystals useful in detecting radiation. A division of the plaintiff firm, Harshaw Chemicals, was involved in the refining of uranium during World War II for the Manhattan Project. Both companies involved in the case were later bought out. Harshaw became a part of Engelhard Corporation, while Bicron joined with Saint-Gobain Crystals and Detectors.

Kewanee holding:
State trade secret law is not preempted by federal IP scheme
TS law is a sieve, as opposed to a barrier like patent law
Why? Reverse engineering/independent invention; commercial ethics as well as innovation policy

A weaker, and quite different, form of IP law

Survey evidence: Yale survey (Levin, Klevorick, Nelson, and Winter 1983) Carnegie-Mellon survey (Cohen, Nelson, and Walsh 1994) Berkeley-Kauffman Survey 2009 Firms value trade secret protection more highly than patent, copyright, TM in protecting investment in innovation

(T)rade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industryThe future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property. --Rockwell Graphics (Posner, J.)

Defining Trade Secrets


Metallurgical Industries v. Fourtek Interesting facts
Plaintiff was a customer of defendants predecessor; contributed substantially to design of technology

Very Common Scenario


Supplier customer relationship Joint work on implementing suppliers technology Modifications and adaptations to fit customers production process

Trade Secret Protection


Can apply either way: on part of supplier (more common) or customer
Here, the customer is the plaintiff; arguing that the supplier learned from it and misappropriated its technology

Facts
Metallurgical sued when Fourtek signed K with a Metallurgical competitor
Common situation: the (informal) joint venture, leading to technology exchange, leading to an IP conflict

What improvements did Metallurgical make?


They added chill plates, changed crucible design, and redesigned heating elements Series of minor changes led to significant performance enhancements

A Transactional View of Property Rights, 20 Berkeley Tech. L.J. 1477 (2005)

Robert P. Merges

Property Rights Create a Legal Field Around an Information Asset (i), Protecting Seller (S) During Buyers (B) Precontractual Evaluation

Metallurgical Industries
Were the incremental and public domain contributions by plaintiff trade secrets as defined by Texas law?
Unitary heating elements, vacuum filters, chill plates: all combined to form a useful and secret set of improvements in furnace design

Metallurgical holding
*Trial court+ abused discretion in excluding evidence
New trial, with evidence of existence of TS

Trade Secret in General


In general, a trade secret can be defined as any commercially valuable information or compilation of information that is not generally known to others who can profit from its disclosure or use

Definition of TS
Information, including a formula, pattern, compilation, program, device, method, technique, or process, that: derives independent economic value from not being generally known or readily ascertainable by proper means by other persons and; is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

UTSA
Provides cause of action for misappropriation of trade secrets 3 year statute of limitations - action must be brought within 3 years after misappropriation is discovered or should have been discovered

IPNTA 5th ed. at 41


Metallurgicals particular modification efforts can be as yet unknown to the industry. A general description of the zinc recovery process reveals nothing about the benefits unitary heating elements and vacuum pump filters can provide to that procedure. That the scientific principles involved are generally known does not necessarily refute Metallurgicals claim of trade secrets.

Blum testimony
First, notice the complex organization of this new piece of technology
Supplier customer consultant

Importance of IP assignment contracts!!

Disclosures: Degree and impact


Consarc La Floridienne Euro licensee
Not enough to eliminate TS protection

Definitional issue
[It is a TS if it] . . . 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

State Law Protection Uniform Trade Secrets Act


Trade secrets are protected under state law Uniform Trade Secrets Act - Model Act Amended in 1985 44 states have enacted statutes modeled after UTSA 2 states (AL and MA) have separate state statutes protecting trade secrets 7 states protect trade secrets under the common law

UTSA Basic Issues


What is a Trade Secret? When is there liability for misappropriation of TS? What are improper means?

Trade Secret - definition


(4) 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.

(2) Misappropriation means: (i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or

(B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who had utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(C) before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. . . .