9.2 Trade secrets and confidential information

Trade secrets are valuable business information kept secret to maintain a competitive edge. They include customer lists, manufacturing processes, and business strategies. To qualify for legal protection, trade secrets must have economic value due to their secrecy and be subject to reasonable measures to maintain confidentiality.

Misappropriation occurs when trade secrets are acquired, used, or disclosed without consent. This can happen through improper means like theft or espionage, or by breaching confidentiality agreements. Companies must take reasonable steps to protect their trade secrets, including physical and electronic security measures, employee training, and monitoring.

Definition of trade secrets

• Trade secrets are a type of intellectual property that consist of valuable business information not generally known to the public
• To qualify for legal protection, trade secrets must derive independent economic value from not being readily ascertainable by others who could obtain economic value from their disclosure or use
• Examples of trade secrets include customer lists, manufacturing processes, formulas, and business strategies

Requirements for protection

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• Information must be kept secret and not generally known within the relevant industry
• Owner must take reasonable measures to maintain secrecy (restricted access, confidentiality agreements)
• Information must have commercial value because of its secrecy
• Trade secrets do not require registration or formal application process, protection attaches automatically if requirements are met

Types of confidential information

• Technical information: designs, formulas, source code, algorithms
• Business information: customer lists, pricing strategies, marketing plans
• Financial information: budgets, sales data, profit margins
• Negative know-how: failed experiments, research dead-ends, ineffective processes

Misappropriation of trade secrets

• Misappropriation occurs when a trade secret is acquired, used, or disclosed without the owner's consent
• Misappropriation can occur through improper means or breach of confidentiality obligations
• Defendant must have known or had reason to know that the trade secret was acquired by improper means

Improper means of acquisition

• Theft, bribery, misrepresentation, espionage
• Breach of a duty to maintain secrecy (confidentiality agreements, fiduciary duties)
• Inducing others to breach a duty to maintain secrecy
• Reverse engineering is generally not considered improper means unless prohibited by contract

Breach of confidentiality agreements

• Employees, contractors, and business partners often sign confidentiality or non-disclosure agreements (NDAs)
• Breach of an NDA can constitute misappropriation of trade secrets
• NDAs typically prohibit unauthorized use or disclosure of confidential information during and after employment or business relationship

Inevitable disclosure doctrine

• Some courts have adopted the inevitable disclosure doctrine, which allows a former employer to enjoin a former employee from working for a competitor
• Doctrine applies when the former employee's new job duties will inevitably lead to the use or disclosure of the former employer's trade secrets
• Controversial doctrine, not universally accepted, requires fact-specific analysis

Confidentiality agreements

• Confidentiality agreements are contracts that prohibit the unauthorized use or disclosure of confidential information
• Used to protect trade secrets and other sensitive business information
• Can be stand-alone agreements (NDAs) or included as provisions in employment or business contracts

Non-disclosure agreements (NDAs)

• NDAs are the most common type of confidentiality agreement
• Typically define the scope of confidential information, permitted uses, and obligations of the recipient
• Can be unilateral (one-way) or mutual (two-way)
• Often used when disclosing information to potential investors, business partners, or employees

Scope and duration

• NDAs should clearly define the information covered and excluded from confidentiality obligations
• Duration of confidentiality obligations can be perpetual or for a specified term (3-5 years common)
• Some jurisdictions limit the enforceability of perpetual confidentiality obligations
• NDAs should have exceptions for information that becomes public through no fault of the recipient

Enforceability considerations

• NDAs must be supported by consideration (value exchanged)
• Overly broad or unreasonable NDAs may be unenforceable as restraints of trade
• Courts may modify or "blue pencil" overly broad NDAs to make them enforceable
• Choice of law and forum selection clauses can impact enforceability

Protecting trade secrets

• Companies must take reasonable measures to protect trade secrets
• Failure to take reasonable measures can result in loss of trade secret protection
• Reasonable measures depend on the nature of the information and the industry

Reasonable security measures

• Physical security: restricted access areas, locked cabinets, security cameras
• Electronic security: passwords, encryption, firewalls, access controls
• Document controls: confidential markings, shredding, secure disposal
• Security policies and procedures

Employee training and policies

• Employees should receive training on identifying and protecting trade secrets
• Policies should address confidentiality obligations, acceptable use of company information, and reporting suspected misappropriation
• Confidentiality agreements should be used for employees with access to trade secrets
• Exit interviews should remind departing employees of ongoing confidentiality obligations

Monitoring and auditing

• Regular audits can identify vulnerabilities and improve security measures
• Monitoring employee activity can detect and prevent misappropriation
• Data loss prevention (DLP) tools can monitor and restrict the transfer of sensitive information
• Audits should be documented and recommendations implemented

Remedies for misappropriation

• Trade secret owners can seek civil remedies for misappropriation under state and federal law
• Remedies include injunctive relief, damages, and attorney's fees
• Criminal penalties may also apply under federal Economic Espionage Act and some state laws

Injunctive relief

• Temporary restraining orders (TROs) and preliminary injunctions can prevent further use or disclosure of trade secrets pending trial
• Permanent injunctions can prohibit future use or disclosure after trial
• Injunctions may require the return or destruction of misappropriated materials
• Courts balance the equities and consider the public interest when granting injunctive relief

Damages: actual vs punitive

• Actual damages can include the trade secret owner's losses or the misappropriator's unjust enrichment
• Reasonable royalty may be awarded if actual losses or unjust enrichment cannot be proven
• Punitive damages may be awarded for willful and malicious misappropriation (up to 2x actual damages)
• Some states require a showing of actual harm for punitive damages

Attorney's fees and costs

• Many states allow the prevailing party to recover attorney's fees and costs for bad faith or willful and malicious misappropriation
• DTSA allows attorney's fees if the misappropriation is willful and malicious or if a claim of misappropriation is made in bad faith
• Attorney's fees can be a significant deterrent and incentivize early settlement

Trade secrets vs patents

• Trade secrets and patents are two different forms of intellectual property protection
• Choice between trade secret and patent protection depends on the nature of the invention and business strategy
• Some inventions may be eligible for both trade secret and patent protection

Differences in protection

• Patents require public disclosure of the invention in exchange for a limited monopoly (20 years from filing)
• Trade secrets require secrecy and can potentially last indefinitely
• Patents protect against independent invention and reverse engineering
• Trade secrets do not protect against independent development or reverse engineering

Advantages and disadvantages

• Trade secrets: no registration costs, potentially unlimited duration, no public disclosure
• Trade secrets: risk of independent development or reverse engineering, difficult to enforce
• Patents: strong exclusivity rights, protection against independent invention
• Patents: limited term, high costs, public disclosure, may be designed around

Employee mobility considerations

• Tension between employer interests in protecting trade secrets and employee interests in job mobility
• Restrictive covenants (non-competes, non-solicitation agreements) can limit employee mobility
• Doctrine of inevitable disclosure can restrict employee mobility even without a non-compete

Balancing employer and employee interests

• Courts balance the legitimate business interests of the employer with the employee's right to work and earn a living
• Employers must show that restrictions are reasonable in scope, geography, and duration
• Overly broad restrictions on employee mobility may be unenforceable as restraints of trade
• Some states (California) prohibit non-competes altogether or have strict limitations

Non-compete agreements

• Non-compete agreements prohibit employees from working for competitors for a specified period after employment ends
• Typically limited to a specific geographic area and scope of activity
• Must be supported by consideration (at-will employment may be sufficient in some states)
• Enforceable if reasonable in scope, geography, and duration

Inevitable disclosure and employee mobility

• Some states reject the inevitable disclosure doctrine as a de facto non-compete
• Other states apply the doctrine narrowly and require a showing of bad faith or actual threat of misappropriation
• Doctrine is controversial and can have a chilling effect on employee mobility
• Courts may fashion injunctions to allow employees to work for competitors with restrictions to protect trade secrets

International trade secret protection

• Trade secret protection varies by country and can be challenging in a global economy
• International agreements (TRIPS, USMCA) provide minimum standards for trade secret protection
• Choice of law and forum selection clauses can be important in international trade secret disputes

Differences in laws across jurisdictions

• Definition of trade secrets and requirements for protection vary
• Remedies and enforcement procedures differ (civil vs criminal, injunctive relief, damages)
• Some countries have specific trade secret laws (US, China, Japan) while others rely on general unfair competition or tort law
• Lack of harmonization can create challenges for global businesses

Trade secret protection under TRIPS

• TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) is an international agreement that sets minimum standards for intellectual property protection
• Article 39 requires WTO members to protect undisclosed information (trade secrets) against unauthorized use or disclosure
• TRIPS does not require a specific form of protection (civil, criminal, or administrative)
• Enforcement and remedies are left to individual countries

Enforcement challenges in global economy

• Cross-border trade secret misappropriation is increasingly common
• Differences in substantive law and procedural rules can make enforcement difficult
• Obtaining evidence and enforcing judgments across borders can be challenging
• International arbitration may be a preferred forum for cross-border disputes
• Proactive measures (employee training, security controls) are important for global businesses