Thursday, May 31, 2012

What is an example of a trade secret?

I have introduced you to the legal definitions and criteria relied on by courts when determining whether information is a trade secret. I have not yet given you a real world example to which to compare the legal criteria.

In 1995, the Seventh Circuit enjoined an employee with confidential information about pricing, marketing and distribution from working with a competing company for a period of time. The employee learned this information and his job skills while in his previous employ and could not help but rely on confidential information in his prospective job. While the employee was eventually allowed to go work for the competing company, the court prevented him from doing so for a reasonable period of time. The court also prohibited the employee from ever divulging any of his previous company's trade secrets. [1]

In determining for how long to grant an injunction, courts never exceed what is "reasonable" under the circumstances. The goal is not to punish wrongdoers, because in many cases there are none. Unless there is a person misappropriating trade secrets in bad faith, both parties may very well believe they are in the right and have legitimate arguments in their favor.

A company will not automatically get an injunction when a former employee with confidential information goes to a competitor. It is not always inevitable that a former employee will divulge trade secrets and rely on them when performing his or her new job.

Trade secrets do not have to be written down, which this example illustrates. While just one example in a body of law, it does help illustrate the sort of information that can be considered a trade secret. In this case: confidential marketing, distribution and pricing information.

PepsiCo, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995).

Wednesday, May 30, 2012

Trade secrets and inventiveness.

As discussed earlier, there are a number of factors that courts examine to determine whether information is a trade secret. Dutifully adhering to these factors is one of the best things a business can do to help in any future litigation involving a trade secret. It is also helpful to have your employees sign a non-disclosure agreement. No factor or non-disclosure agreement is dispositive, however, because the information may be sufficiently general to prevent it from becoming a trade secret.

Courts generally view information learned by employees in two separate classes. "First, an employee may obtain information of a general nature simply by being on the job. An employer would have no reasonable expectation that such information would be treated as a trade secret. An employee is free to use or disclose this type of general information." Second, there is information "which the employer intends to keep secret by, for example, physically hiding it from view or[] . . . requiring confidentiality." [1] The former is not entitled to trade secret protection, but the latter may be.

One can see that a purported trade secret must not be generally known. It must also be economically valuable. But we already knew that. If a trade secret consists of patentable subject matter, it does not need to have the same standard of inventiveness as a patent. [1] Ipso facto, trade secrets need only be in a Goldilocks' Zone -- to steal a term from astrobiology -- between which they must not consist of general information but do not need to be so inventive that a hypothetical patent could be obtained.

Cemen Tech, Inc. v. Three D Industries, LLC, 753 N.W. 2d 1, 7-8 (Iowa 2008).

Friday, May 25, 2012

Is it a sale or lease?

A common mistake that businesspersons who deal in goods may make is to characterize a transaction improperly. At first glance, it would seem that it is easy to delineate what constitutes a sale from what constitutes a lease. If it is a sale, Article 2 will apply. If it is a lease, Article 2A will apply. The line between sales and leases becomes fuzzy when security interests are involved. A sale intended for security occurs when goods are purchased on credit but the seller retains the right to foreclose on the goods if the buyer stops making payments. In such a case, Article 9 also applies.

The "Economic Realities" test offers salient guidance. It posits that a purported lease is actually a sale when the lessor/seller is scheduled to receive the goods back with little or no economically useful life remaining. The UCC goes beyond merely asking whether the putative lessor would receive the goods back with any economically useful life. The UCC does not follow the Economic Realities test, even though the test is subsumed in it.

Article 1 of the UCC distinguishes a lease from a security interest. It defers to the facts of each case. If the lessee/buyer cannot terminate the lease and is obligated to pay for the entire term of it, there is a security interest if: (a) there is no remaining economic life to the goods after the lease expires; (b) the lessee/buyer must renew the lease; or (c) the lessee/buyer has an option to renew the lease for little to no additional payment.

If you lease goods in your business, you should take care to ensure that your leases are not disguised sales. If they are disguised sales and a security interest is created, you would be remiss to not take advantage of Article 9 by perfecting your security interest. Generally, to perfect, it is necessary for the security interest to "attach" and to file a financing statement with the Secretary of State. Generally, a security interest attaches only when it becomes enforceable against the buyer. Perfecting your security interest helps establish priority over other creditors. A perfected security interest has priority over later-in-time perfected security interests. A perfected security interest has priority over unperfected security interests, even those that attached before perfection.

Wednesday, May 23, 2012

Introduction to Commercial Law.

Commercial law is the body of law governing business and commercial transactions. [1] In the United States, the Uniform Commercial Code ("UCC") is indispensable to the discussion of commercial law. All 50 states have enacted some form of the UCC, even if they have made minor changes. The UCC's scope is wide. Article 1 contains general provisions. Article 2 deals with the sale of goods. Article 2A deals with leases. Article 3 deals with negotiable instruments (e.g., checks). Article 4 deals with banks and banking deposits. Article 5 deals with letters of credit. Article 6 deals with bulk transfers and bulk sales. Article 7 covers warehouse receipts, bills of lading and other documents of title. Article 8 deals with investment securities. Article 9 deals with secured transactions.

If one had to say that there is a "most commonly used" article of the UCC, it would likely be Article 2. As mentioned above, Article 2 deals with the sale of goods. For sales of services, the UCC does not apply. When transactions involve goods and services, there are different rules that may be applied, depending on the jurisdiction in which the case is being tried.

The majority approach is the "Predominant Purpose" test, where courts decide whether the predominant purpose of the transaction is to sell goods or services. If it is goods, then Article 2 applies. The UCC will apply to the whole transaction, even the services portion. If the predominant purpose is services, then Article 2 does not apply to any part of the transaction. [2]

Another common approach is the "Gravaman of the Action" test. Under this test, the inquiry is whether the source of the complaint is with the goods or services portion of the transaction. If the source of the complaint lies with the goods, then Article 2 applies even if the predominant purpose of the transaction is services rather than goods. If the source of the complaint lies with the services, then Article 2 does not apply even if the predominant purpose of the transaction is goods rather than services. [2]

Outside the United States, the Convention on Contracts for the International Sale of Goods ("CISG") is indispensable to the discussion of commercial law. Its scope is the same as the scope of Article 2 in the U.S. As of August 2010, the CISG had been ratified by 77 countries, including the United States. [3] The CISG applies when there is a sale of goods between contracting states to the CISG, or when the rules of private international law lead to the application of the law of a contracting state to the CISG.

It is also important to note that parties to a contract can often provide for rules differing from those of the UCC and CISG. Very generally, parties of equal bargaining power can vary the terms of the UCC and CISG. If two large businesses contract for a transaction in goods, a general rule is that the parties can input contractual provisions to modify the UCC or CISG. However, if a transaction in goods is between two parties of unequal bargaining power (sometimes the difference in bargaining power must be profound), then generally the UCC or CISG cannot be modified through contracting. Please note that the point of the general rule is that it does not necessarily hold throughout its sphere of application.

Identifying the major players in commercial law is only the tip of the iceberg. It will take many more posts to reveal more of that hypothetical iceberg.

[1] Wikipedia, Commercial Law, (last visited May 23, 2012).
[2] Lynn M. LoPucki, Elizabeth Warren, Daniel Keating, Ronald J. Mann, Commercial Transactions: A Systems Approach, 12 (Aspen Publishers 4th ed. 2009).
[3] Wikipedia, United Nations Convention on Contracts for the International Sale of Goods, (last visited May 23, 2012).

Tuesday, May 22, 2012

Part 2, Introduction to Trademarks.

If you are a businessperson and are confident that you have an inherently distinctive trade name, or have a descriptive trade name but can prove that it has attained secondary meaning, it is imperative that you verify no one else has already registered the mark in the same class with the USPTO. The Trademark Electronic Search System, or TESS, is the starting point for this inquiry. The "Basic Word Mark Search" is the search that all first-time users should utilize. Upon entering the search term in the parameters, there may be several entries indicating that the mark is registered. If you click on an entry, it will show the mark and particulars such as the attorney of record, the class of the mark, and the mark's limitations.

If two or more entities have the same mark, it does not mean that there was a mistake. It does not mean that the USPTO erred in issuing multiple registrations on the same mark. It simply means that the marks are in different classes. For example, "Delta" is a registered mark for a faucet and other bathroom fixtures, a manufacturer of electrical power products, an airline and many more.

Due Diligence, for purposes of a trademark search, includes searching for live and dead marks, and how litigious the mark holders are even if they are not in the same market. "Patent trolls" are individuals or entities that have multiple patents and do not implement them, only surveying the market to sue other companies they feel might be infringing. The results of a particular trademark search might reveal that a company with the same or substantially similar trademark might commonly bring suit against similar and not so similar marks. Even if the suit has little merit, it must be defended. The presence of a "trademark troll" with the same or similar mark can result in a large amount of legal fees.

Due Diligence also includes researching the dead marks and inquiring whether the marks are still used. A "dead" trademark does not mean it is no longer being used. It only means that for one reason or another, the registration was not maintained. This could result from the company making a mistake in the renewal process, the mark being cancelled, or a number of other things. It does not necessarily mean that the mark is no longer being used in commerce.

Search Engines are also powerful tools in determining whether an entity is using a trademark in commerce. There are a multitude of small businesses that do not register or seek to register a mark, but nonetheless conduct business with a particular trade name. They could have common law rights in a particular mark that could not be revealed without using a search engine.

While it is possible for an individual to do their own trademark search to determine whether a prospective trademark would pass muster with the USPTO, an attorney is the most adept at using various methods to determine the risk of litigation when attempting to protect a particular mark.

Monday, May 21, 2012

Introduction to Trademarks.

There are two types of trademark protection: State and Federal. State trademark protection is typically through common law, but many states do have statutes and a registration process. Federal trademark protection is through the Lanham Act in Title 15 of the U.S. Code. Tautologically speaking, state trademark rights only extend to that state's border, whereas federal rights cover the entire United States.

If an entity does not have a mark registered with the United States Patent and Trademark Office ("USPTO") or in the state or states where they do business, there still are remedies likely to be available. Unfair competition laws will be available in any state, and suit can be brought in federal court under the Lanham Act under the provision for "False Designation of Origin." Remedies for violations of state common law trademark rights may also be available.

There are five types of marks: Generic, Descriptive, Suggestive, Arbitrary and Fanciful. "Generic" marks refer to a set of which a particular product is a subset. For example, "Beer" as a trademark for the alcoholic beverage beer would be generic. "Computer" for computers would also be generic. Generic marks are never registrable with the USPTO, and they should never be protected in any state.

"Descriptive" marks are those that describe a quality or characteristic of the goods. Descriptive marks are protectable only when they have attained "secondary meaning." "Secondary meaning" means that there is an association in consumers' minds between a mark and product. If a descriptive mark does not have secondary meaning, it is not protectable. "Suggestive" marks require a degree of imagination in order to determine the product to which a mark refers. There is no description of the product in the trademark, only a suggestion of it. Suggestive marks are inherently distinctive, and protectable without evidence of secondary meaning.

"Arbitrary" marks use common words in new and unique ways. The best example of an arbitrary mark is "Apple" for electronic devices. Arbitrary marks are inherently distinctive and protectable without secondary meaning. "Fanciful" marks are words invented for use as a trademark. They are inherently distinctive and protectable without secondary meaning.

Basically, the more creative a trade name is, the more easily protected or protectable it is as a trademark. If a businessperson or entity comes up with a trade name and it is easy to determine the field or industry in which the business competes, it is probably not a good trademark. If you are a person or business that already has come up with a trade name that happens to be descriptive, you can still have a protectable mark if you can prove that the mark has gained secondary meaning. If you have a generic trade name, it cannot be protected as a trademark.

Friday, May 18, 2012

Part 2, Introduction to Trade Secrets.

In my last post, I discussed what a trade secret was. My succinct definition was that a trade secret is something that must derive actual or potential independent economic value from not being well-known and not easy to figure out without using dishonest means, and must be kept reasonably secret under the circumstances.

To determine whether information is a trade secret, courts consider a variety of factors. Again, courts in different jurisdictions may consider different factors. However, if a state adopted the UTSA, their factors are probably similar to what Iowa uses. First, a court looks at the extent to which the information is known outside of the business. Second, they look at the extent to which it is known by employees and others involved in the business. Third, they look at the extent of measures taken to guard the secrecy of the information. Fourth, they look at the value of the information to the business and its competitors. Fifth, the courts look at the amount of effort or money expended in developing the information. Sixth, they look at the ease or difficulty with which the information could be properly acquired or duplicated by others. [1]

One can see that there are numerous factors that a court examines when determining whether information is protectable as a trade secret. If you are a businessperson and think you may have a trade secret, you may be asking yourself, "how can I get protection for a trade secret?" Well, one cannot get protection for a trade secret, a priori, meaning that one cannot get protection for a trade secret before there is a lawsuit. When one has a valid patent or trademark, that is prima facie evidence of a patent or trademark. As a result, when it comes to the lawsuit, one does not need to prove that it is protectable. With trade secrets, there is a fairly large gamble, because there is no register or process one can go through to prove that they have a trade secret. If one thinks they have a trade secret, they have to treat it as such, and sit back and wait for a misappropriator to come along before they can prove it in court.

It is a gamble, no doubt. It is also cheaper than getting a patent. It all comes down to an economic analysis: If you think your company can make more money in the long-run from keeping your formula, pattern, compilation of data, computer program, device, method, technique, process, or other form or embodiment of economically valuable information secret, then a trade secret may be for you. This assumes that another company will not reverse engineer or otherwise stumble across your secret through proper means. Reverse engineering is a proper means of discovering a trade secret. If you have information that is likely to be discovered in the amount of time it would take for a putative patent to expire, then you would want to go through the patent process. That way you could at least earn fruits from your labor when another company reverse engineers your trade secret.

[1] See Kendall/Hunt Pub'g Co. v. Rowe, 424 N.W. 2d 235, 246 (Iowa 1988).

Thursday, May 17, 2012

Introduction to Trade Secrets.

Forty-six of the 50 states have enacted some form of the Uniform Trade Secrets Act ("UTSA"). The UTSA was written by the Uniform Law Commission in 1979 and amended in 1985. [1] There are a number of Uniform Acts written by the ULC in order to streamline the legal process in the United States. For obvious reasons, there are benefits to having substantially similar laws throughout the states.

There is a tension between the grant of patent rights and a trade secret. Patents must be disclosed while trade secrets must not be. Even if a trade secret is improperly disclosed, once it is out it is out. There is no getting it back. You can sue whomever responsible for damages, but your secret is no longer protected.

The prefatory note to the UTSA explicates this dichotomy. "A valid patent provides a legal monopoly . . . in exchange for public disclosure of an invention. If, however, the courts ultimately decide that the Patent Office improperly issued a patent, an invention will have been disclosed to competitors with no corresponding benefit. In view of the substantial number of patents that are invalidated by the courts, many businesses now elect to protect commercially valuable information through reliance upon the state law of trade secret protection." [2]

Unlike patents which are covered by federal law, trade secrets are protected under state law. States that have enacted the UTSA may have some variations over what they consider a trade secret. They will have case law that has developed independently since their state adopted of the UTSA. Nevertheless, most have the following definition of a trade secret or something substantially similar to it:

A "trade secret" is information including but not limited to a formula, pattern, compilation, program, device, method, technique, or process that: (a) derives actual or potential independent economic value from not being generally known to, and not being readily ascertainable by proper means by a person able to obtain economic value from its disclosure or use; and (b) is subject to reasonable efforts under the circumstances to maintain its secrecy. [2]

So, there you have it. A trade secret must derive actual or potential independent economic value from not being well-known and not easy to figure out without using dishonest means, and must be kept reasonably secret under the circumstances. As long as they are kept secret, they are theoretically protectable in perpetuity.

When hiring new employees, a small business may be unsure of whether their formula, pattern, compilation, program, device, method, technique or process is legally protectable. Sometimes, they will have an employee sign a nondisclosure agreement to prohibit them from competing after their employment ends. Other times, the employer may just take it on faith that the employee will not surreptitiously steal information or otherwise abscond with valuable company information.

Future posts will include more information on trade secrets and how a business can approach their treatment. They will also cover several other fields of law related to business and commerce.


[1] Wikipedia, Uniform Trade Secrets Act, (last visited May 17, 2012).
[2] University of Pennsylvania Law School, Uniform Trade Secrets Act with 1985 Amendments, (last visited May 17, 2012).