Intellectual Property Law

Chapter 22 Lecture Notes

Major points to be in the chapter materials include the following:

1. A trade secret is any kind of information that can be used in the operation of a
business and that is sufficiently valuable and secret to afford an actual or potential
economic advantage over others.

2. Trade secrets can include recipes, customer lists, methods of conducting business,
price lists, marketing plans, or even negative information (that a certain process is not
effective).

3. There is no requirement that a trade secret be unique or complex. Even something
simple and nontechnical (such as a customer list) can qualify as a trade secret.

4. Trade secret law is derived from cases, state statutes, the Restatement, the Uniform
Trade Secrets Act, and the new Defend Trade Secrets Act of 2016. Additionally,
protection is often gained through contractual arrangements, such as when employers
require employees to sign agreements promising not to disclose confidential
information or when companies enter into such agreements with each other.

5. To qualify for trade secret protection, information must:

• Be valuable;
• Not be publicly known; and
• Be the subject of reasonable efforts to maintain its secrecy.

6. Trade secret rights and copyright and patent rights often overlap. For example, while
a company is in the process of developing a written marketing plan, the material can
be a trade secret. Once the marketing materials are distributed to customers, they
cannot be trade secrets (because they are not being kept secret), but the written
materials may qualify for copyright protection. Similarly, software that is being
developed may be a trade secret during the development process and then may be
protected under copyright law or perhaps patent law as well. Once the information is
disclosed, however, as is the case when copyrighted material is published and a patent
is published or granted, trade secret status is destroyed.

7. Information that is properly protected as a trade secret may maintain that status
forever, while patents and copyrights have definite duration. Thus, a company might
want to protect information under trade secret law and never apply for a patent
(because once the patent is issued, the entire file is available to public inspection and
eventually, after the term of the patent expires, the invention will fall into the public
domain).

8. Trade secrets can be sold to another and can be licensed to another to use (as long as
the information will still be protected by the licensee).

9. Several factors are considered in determining whether information qualifies as a trade
secret:

• The extent to which it is known outside the company. Although information
can be known by others outside the company, widespread dissemination of trade
secret information may cause it to lose its protected status. Secrecy need not be
absolute but if the owner disseminates it widely, courts are more reluctant to
protect it. Publication of the information on the Internet will cause a loss of trade
secret status.
• The extent to which the information is known within the company. The
information should only be known or disclosed to those with a need to know it.
Widespread dissemination to those who have no need to know the information
may exclude it from trade secret protection.
• The extent of the measures taken to protect the information. One claiming
trade secret protection must take reasonable precautions to protect the
information. Thus, policies should be implemented to keep the information
confidential (restricting access, using encryption and passwords, keeping it in
locked files/offices, marking it with legends, etc.).
• The value of the information to its owner and competitors. If information has
little value it is less likely to qualify as a trade secret. Conversely, if information
would be of great value to a competitor, it is more likely to qualify as a trade
secret.
• The effort, time, and cost involved in developing the information. The more
effort, time, and money a company has invested in developing a trade secret, the
more likely it will be protected.
• The ease or difficulty of acquiring or duplicating the information. If
information is easy to acquire or duplicate, it is less likely to qualify as a trade
secret.

10. Misappropriation occurs when a person possesses, discloses, or uses another’s trade
secret without authority and when the person:

• Used improper means to gain knowledge of the trade secret;
• Knew or should have known that the trade secret was acquired by improper
means; or
• Knew or should have known that the trade secret was acquired under
circumstances giving rise to a duty to maintain its secrecy.
A mistake or accident by which information is disclosed and that is caused by a
lack of reasonable precautions will destroy trade secret status.

11. Improper means include bribery, theft, breach of duty, or espionage. Thus, theft of a
trade secret occurs when a trade secret is lawfully acquired but then improperly used
or when it is acquired by improper means.

12. A company’s trade secrets can be protected against misappropriation even in the
absence of written agreement. An owner of trade secrets can sue in tort for breach of
the duty of confidentiality, which duty can arise without written agreement. The duty
of confidentiality arises when parties occupy a special relationship to each other (such
as agent–principal, employer–employee) or other good faith relationships, such as
those among partners. Moreover, the new Defend Trade Secrets Act of 2016 allows
victims of trade secret theft to bring an action in federal court.

13. In the absence of a written agreement, courts may find an implied agreement to
protect another’s trade secrets, such as when a company discloses trade secrets to
another and the conduct of the parties shows they intended the information to be
confidential.

14. Other parties might also be liable for misappropriation of trade secrets if they knew or
should have known they were receiving protected information. If a new employer
received information innocently, it would have no liability; however, if it knows the
information is a trade secret it may generally not use the information. Employers
should protect themselves by requiring new employees to verify in writing that they
are not disclosing trade secrets of their former employer.

15. The duty of employees not to use an employer’s trade secrets survives termination of
the employment relationship. Generally, the higher the level of expertise of the
employee, the more likely it is that a confidential relationship exists.
16. Information discovered by the employee on his/her own time (weekends and
evenings) or before or after the employment relationship is owned by the employee.

17. Employers often require employees to sign written agreements relating to confidential
information. The agreements generally include four topics:

• Ownership of inventions. Most agreements state the employer will own any
information or inventions created by the employee in the course and scope of
employment. Some agreements go further and include a trailer clause, whereby
an employee assigns to the employer not only the inventions made during the
period of employment but also those invented for some period thereafter. Such
provisions are enforceable if they are reasonable.
• Nondisclosure provisions. Agreements generally prohibit the employee from
using or disclosing trade secrets during and after employment.
• Nonsolicitation provisions. Most agreements prohibit employees from
encouraging other employees to leave the employer’s business.
• Noncompetition provisions. Most agreements prohibit employees from
competing against the employer during and after employment.

18. Noncompetition clauses are also called restrictive covenants and they are enforceable
in most states if they are reasonable; however, they are strictly scrutinized by courts
because they impair the ability of employees to earn a living. Courts consider the
following in determining the validity of such clauses:

• Purpose. The purpose of the covenant must be related to a legitimate business
purpose of the employer, such as retaining high-level and well-trained personnel.
• Reasonableness. The restriction must be reasonable as to scope, duration, and
geographic area.
• Consideration. Many states require that a restrictive covenant be supported by
adequate consideration, such as occurs when the employee begins employment. If
required by an employer after the employee has begun employment, “fresh” or
new consideration (in the form of money or stock) should be granted to the
employee.

19. If a restrictive covenant is held by a court to be invalid or unreasonable, some courts
will modify the restriction to make it fit the intent of the parties by a process called
blue penciling.

20. Even states that prohibit restrictive covenants (such as California) recognize their
validity in certain circumstances, such as when a party sells a business to a new
owner and then covenants not to compete with the new owner.

21. Courts will not enforce restrictive covenants if the employer has breached the
employment agreement.

22. In many instances, individuals submit ideas to companies in the hope the company
will develop their ideas. Submitters should submit the idea pursuant to an evaluation
agreement whereby the reviewer agrees to evaluate the idea to consider a future
business relationship and agrees not to circumvent the submitter.

23. Unsolicited ideas and manuscripts present problems. Courts have taken a variety of
approaches:

• Some courts allow the recipient to develop the idea, holding that the submitter
should have protected his/her own interests.
• Some courts find that an implied contract exists, with the recipient impliedly
agreeing to compensate the submitter if the idea is used.
• Some courts rely on an unjust enrichment theory and forbid the enrichment of the
recipient at the submitter’s expense.
• Some courts consider industry custom and practice.
In any event, the idea submitted must be sufficiently developed so that it can be
protected.

24. Submission of information to government agencies might be protected by blocking
out confidential information so it is not released under FOIA.

25. A variety of defenses may be asserted in a trade secret action:

• Lack of trade secret status. The defendant might assert that the information does
not qualify as a trade secret because it is generally known or ascertainable.
• Lack of secrecy. The defendant might assert that the information was not
reasonably protected and has lost its status as a trade secret.
• Independent creation. Independent creation of information that is a trade secret
of another is permissible. Thus, reverse engineering is generally a protected form
of independent creation (if there is no improper conduct involved).
• Privilege. A party might be compelled to disclose information in a judicial or
administrative action.
• Unclean hands or laches. The defendant might assert that the plaintiff’s
inequitable conduct bars it from seeking relief or that the trade secret owner has
delayed in protecting its information and the delay caused the defendant
prejudice.

26. A variety of remedies are available in trade secret actions:

• Injunctive relief. A court may enjoin a party from further using or disclosing
trade secrets. Courts may issue injunctions to prevent the inevitable disclosure of
trade secrets, reasoning that it will be inevitable that the employee will disclose
trade secrets in the new employment position, and forbidding the employee from
taking the position for some period of time (or possibly forever).
• Money damages. A plaintiff may recover its actual losses as well as the
misappropriator’s unjust enrichment (that is not taken into account in determining
actual losses). Punitive damages can be awarded in cases of a defendant’s willful
or malicious conduct.
• Attorney’s fees and costs. The UTSA allows an award of attorney’s fees to the
prevailing party if bad faith or willfulness is shown.
• DTSA Remedies: The new Defend Trade Secrets Act of 2016 allows for an
action to be brought in federal court and allows for the following remedies:
o Seizure. In “extraordinary circumstances,” a court can order an ex parte
(meaning no notice is given to the alleged misappropriator) seizure or
recovery of misappropriated trade secrets to prevent their dissemination.
- Injunctive relief. An injunction may be awarded to prevent misappropriation.
- Damages. Damages may include damages for actual losses and unjust
enrichment (or a reasonable royalty for use of the trade secret), and
attorney’s fees and exemplary damages up to two times the amount of
actual damages (if there is willful and malicious misappropriation).

27. If a trade secret is disclosed, a plaintiff may be able to assert an action for breach of
contract (if an agreement between the parties exists). If no written agreement exists,
the plaintiff may rely upon case law and/or state statutes or the new federal DTSA
statute to protect trade secrets. The DTSA does not preempt state laws; thus, the
victim of trade secret theft may, at his/her option, bring an action in federal court or
state court.

28. One difficult issue that arises in trade secret litigation is how to protect the
confidential information and the methods its owner used to safeguard it. Courts can
issue protective orders (prohibiting parties from any further disclosure), can seal court
records, and can hold private hearings in order to ensure information is properly
protected.

29. To protect their trade secrets, companies should implement trade secret protection
programs, including physical protection measures (keeping information under lock
and key, controlling access to information, maintaining alarm systems, securing
computers with passwords, etc.) and contractual protections (by requiring those with
access to confidential information agree in writing not to disclose it during and after
employment). Companies can also use trademark, copyright, and patent law to
protect, respectively, logos and slogans, written materials, and inventions.

30. Electronic security measures through the use of passwords, encryption and coding of
documents, etc. are now used by many companies and considered by courts in
determining if a company has taken reasonable measures to protect its information.
Generally, reasonable measures are all that is required of a company, and the
measures that are reasonable will vary from one company to the next.

31. New criminal statutes also punish wrongdoers who wrongfully use or disclose
confidential information.

32. NAFTA complements U.S. trade secret law by requiring member countries to protect
trade secrets from unauthorized disclosure or use.

33. The WTO provides for adjudication of trade secret disputes, and under Trade-Related
Aspects of Intellectual Property Rights (TRIPS), member countries must provide
effective remedies for misappropriation of trade secrets owned by residents of other
member countries.