5.2 The Foundations of Trade Secrets Law

Trade secrets have evolved from common law principles to a sophisticated legal framework. The 1868 Peabody v. Norfolk case first recognized businesses' rights to protect confidential information, while later developments refined definitions and established key factors for determining trade secret status.

The Uniform Trade Secrets Act, adopted by most states, harmonized laws across jurisdictions. It defines trade secrets and misappropriation, provides remedies, and establishes a statute of limitations. This framework protects valuable business information and maintains fair competition in the marketplace.

Historical Development and Legal Framework of Trade Secrets Law

Historical development of trade secret law

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• Early recognition of trade secrets in the United States
  • Initially protected under common law principles
  • First acknowledged in the 1868 case Peabody v. Norfolk which recognized a business's right to protect confidential information
• Restatement of Torts (1939) provided a general definition of trade secrets
  • Established factors for determining the existence of a trade secret such as the extent of measures taken to guard secrecy and the value of the information to the business and competitors
• Restatement (First) of Unfair Competition (1995) updated the definition of trade secrets
  • Refined the factors for determining trade secret status to include the ease or difficulty with which the information could be properly acquired or duplicated by others
• Economic Espionage Act (1996) criminalized trade secret theft at the federal level
  • Applies to trade secrets related to products or services used in interstate or foreign commerce (pharmaceuticals, software)

Key provisions of Uniform Trade Secrets Act

• Model law drafted by the Uniform Law Commission in 1979
  • Adopted by 48 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands which harmonized trade secret law across jurisdictions
• Defines trade secrets and misappropriation
  • Trade secrets include formulas, patterns, compilations, programs, devices, methods, techniques, or processes that derive independent economic value from not being generally known
  • Misappropriation involves the improper acquisition, use, or disclosure of trade secrets
• Provides for injunctive relief to prevent actual or threatened misappropriation
  • Allows for damages including actual losses, unjust enrichment, and reasonable royalties
• Establishes a 3-year statute of limitations for bringing trade secret claims
  • Allows for protective orders to maintain secrecy during litigation (sealing court records, restricting access to confidential information)

Concept of trade secret misappropriation

• Acquisition of a trade secret through improper means
  • Improper means include theft, bribery, misrepresentation, breach of a duty to maintain secrecy (employee NDA violation), or espionage (hacking, dumpster diving)
• Use or disclosure of a trade secret without consent
  1. By a person who acquired it improperly (industrial spy)
  2. By a person who knew or had reason to know it was acquired improperly (company that hires employee with knowledge of competitor's trade secrets)
• Legal implications of misappropriation
  • Injunctive relief prohibits further use or disclosure of misappropriated trade secrets
  • Damages compensate for actual losses (lost profits), unjust enrichment (disgorgement of profits from misappropriation), or reasonable royalties
  • Exemplary damages up to double the amount of actual damages for willful and malicious misappropriation (intentional theft of trade secrets)
  • Attorney's fees awarded in cases of bad faith or willful and malicious misappropriation

Economic and Competitive Aspects of Trade Secrets

• Trade secrets provide economic value by maintaining a company's competitive edge in the market
• Proprietary information can offer a commercial advantage over competitors
• Trade secret protection is an essential component of intellectual property rights
• Companies can maintain their market position through independent development of similar innovations
• The value of trade secrets lies in their ability to provide a unique commercial advantage that cannot be easily replicated