Intro to Trade Secrets
Intro to IP – Prof Merges
4.7.2010
How does trade secret (TS) law
relate to federal statutory IP?
• Preemption cases
• General principles: federalism,
interrelationship
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 Oil
• “Employee mobility” case
• Basic question: is TS law compatible with
federal statutory IP scheme?
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 industry…The 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.)
Bonito Boats
Boat molds
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. . . .
Defining Trade Secrets
• Metallurgical Industries v. Fourtek
• Interesting facts
– Plaintiff was a customer of defendant’s
predecessor; contributed substantially to design
of technology
Very Common Scenario
• Supplier – customer relationship
• Joint work on implementing supplier’s
technology
• Modifications and adaptations to fit
customer’s 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
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 Buyer’s (B)
Precontractual Evaluation
S
i
B
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
Metallurgical’s 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
Metallurgical’s 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