Reverse engineering of a trade secret or patent.

As discussed elsewhere, a trade secret is confidential information deriving independent economic value from being a secret, is not easily discoverable using proper means, and is subject to reasonable secrecy efforts. A patent includes the discovery or invention of a new and useful process, and must be disclosed. Patentable information can be protected as a trade secret. Before a patent application is filed, it starts out as a trade secret. Confidential information protectable as a trade secret can often be patented.

The discovery or invention cannot be both a trade secret and patent. Trade secrets require secrecy, while patents require disclosure. A proprietor of such information must choose one or the other. If the invention or discovery has been on-sale or otherwise in the public for one year, it is no longer patentable. If it is not new and useful, but it derives economic value from being a secret, it is not patentable but is protectable as a trade secret.

Whether to seek patent protection or protect the information as a trade secret is an economic consideration. If your information is likely to be discovered within 20 years by reverse engineering, then you should seek patent protection. If you have a patent and someone reverse engineers it, they are still guilty of patent infringement. You would be able to get damages from infringers and licensing revenue from competitors during the 20-year period.

If you choose not to seek patent protection, and protect the information as a trade secret, it is theoretically protectable in perpetuity. This is much longer than the 20-year period for a patent. That being said, there is risk in that another party can reverse engineer your discovery or invention. Reverse engineering is a proper means of discovering a trade secret, and you would have no recourse against that party.

Just how big can trade secret verdicts get?

This is an interesting link that shows the 10 largest trade secret verdicts on record. The stakes are very high in trade secret cases, because the stolen information can be extremely valuable.

The benefit of early discovery in defending trade secret claims.

This is a good article on the benefits of early discovery in defending trade secret claims. The author's justification centers around requiring the plaintiff to define exactly what he or she considers a trade secret. Early discovery often surprises the other party, but it also makes early settlement more difficult. Requesting discovery draws the proverbial battle lines. So if you propound early discovery requests, expect the battle to be at least temporarily prolonged.

How secret must a trade secret be?

I previously discussed trade secrets, and the importance of maintaining the confidentiality of your proprietary information. Unlike patents, copyrights or trademarks, there is no federal registry for trade secrets. So, trade secret status can only be determined at trial. Consequently, large companies typically take every precaution imaginable in safeguarding proprietary information, in the event of later litigation. The more evidence a company has that it protected its proprietary information, the more likely it will be considered a trade secret.

The Uniform Trade Secrets Act requires "reasonable efforts under the circumstances" to maintain secrecy. The reasonableness of efforts is determined by the facts of each case. Every little thing matters. If you think you have a trade secret, you should do everything you can to protect it, in the event of later litigation. You should not just take a "belt and suspenders" approach, but a quadruple belt and quintuple suspenders approach to ensure that you are making reasonable efforts under the circumstances to protect your proprietary information.

Trade secret cases have hinged on such things as keeping the information in a locked desk as opposed to an unlocked desk, or keeping information in an unlocked office to which numerous people had access. It matters whether all of your employees have access to it, or only those that need it. It matters whether the employees sign a nondisclosure or confidentiality agreement. It matters whether you post too much information about it on your website. Again, everything matters. Any measure you can implement to persuade a jury that the information was confidential and proprietary is valuable in a later trial.

To be a trade secret, information must derive independent economic value.

Previously, I wrote about the necessity of using a trademark in commerce for it to be a valid mark. Without using a mark on or in connection with goods or services, you do not have a trademark; you only have a creative design, phrase or name. Concomitantly, someone could use it on or in connection with goods or services, and own all the rights to it as a trademark. It does not matter if you were the creative genius behind the mark.

By definition, trade secrets cannot be used on or in connection with goods or services. But they do need to derive independent economic value from not being generally known or readily ascertainable by proper means. In other words, they need to make you money and give you a competitive advantage over competitors by virtue of their secrecy.

A trade secret can be any information in the form of a formula, pattern, compilation, program, device, method, technique or process. This includes recipes, business secrets, and even business experience gained from one company that inevitably must be relied upon when going to work for a competitor. Not all of the latter qualifies as a trade secret, but in some cases it can.

To protect your information as a trade secret, it must be kept secret. Even if the secret is wrongfully divulged by a competitor or disgruntled employee, it still loses its status as a trade secret. If this happened, you could seek damages from the wrongdoer, but these would probably still pale in comparison to what you might make in the long run had the secret not been divulged.

All about trade secrets.

Earlier this week, I posted my trademark compendium. On this Friday afternoon, I thought I would do the same for trade secrets:

- Introduction to Trade Secrets.
- Part 2, Introduction to Trade Secrets.
- Trade secrets and inventiveness.
- What is an example of a trade secret?
- If you think you have a trade secret, you must protect it.

The law of trade secrets is interesting, because it is governed by state law. Most states have enacted the Uniform Trade Secrets Act, but the lack of federal governance differs from copyrights, patents and trademarks. The latter are governed by the Copyright Office and Patent and Trademark Office, respectively.

If you think you have a trade secret, you must protect it.

Trade secrets are a form of intellectual property protected by state law. Copyrights, patents and trademarks are all protected by federal law. But most states have enacted the Uniform Trade Secrets Act, which provides a nearly de facto form of national trade secret protection. A trade secret is information that provides actual or potential economic value from not being generally known or easily discovered, and is subject to reasonable efforts to maintain its secrecy (under the circumstances).

The determination of whether information is a trade secret is not determined until it is contested. So, you would not know if you have a trade secret until the matter is contested at trial. Theoretically, one could file for declaratory judgment to determine whether the information is protectable as a trade secret, but that would be incredibly wasteful. It would resolve nothing, because a new inquiry into secrecy efforts would need to be done in a later trial.

If you think you have a trade secret, keep it secret. Do not allow people to access to the information unless they need it. Do not post the information for the general public to see it. If you keep it in a desk drawer, lock the drawer. Every little thing you do or do not do in protecting an alleged trade secret is important in determining whether it qualifies as a "trade secret" in the legal sense.

A good IP Awareness Assessment for businesses and entrepreneurs.

This is a good intellectual property (IP) evaluation tool from the United States Patent and Trademark Office (USPTO) and National Institute of Standards and Technology. The assessment is designed to test the awareness of businesspersons and entrepreneurs about intellectual property. There are two assessments: a pre-assessment and full assessment. The pre-assessment consists of five questions. The full assessment takes 20-30 minutes, and provides more individualized results.

The assessments are not legal advice, so the individual circumstances of your situation may suggest a different form of IP protection than is suggested by these online assessments. These just provide some general guidance for what type of IP protection you might need. The assessments cover copyrights, patents, trademarks and trade secrets.

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.

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

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.

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

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.

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

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.

Citations:

[1] Wikipedia, Uniform Trade Secrets Act, http://en.wikipedia.org/wiki/Uniform_Trade_Secrets_Act (last visited May 17, 2012).
[2] University of Pennsylvania Law School, Uniform Trade Secrets Act with 1985 Amendments, http://www.law.upenn.edu/bll/archives/ulc/fnact99/1980s/utsa85.htm (last visited May 17, 2012).