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Trade Secrets
South Texas College of Law Houston
Page, Phillip E.

Trade Secrets Outline

Phillip Page – South Texas College of Law Houston

Spring 2017

Chapter 1: Introduction

Intro to TS Law

Encourages innovation, invention, and creativity.
Facilitates the sharing of information.
Promotes business ethics.
Theoretically, any information that is “secret” and has potential “independent economic value” can be protected by trade secret law so long as it is subject to “reasonable efforts to maintain its secrecy.”
Clorox Co. v. S.C. Johnson & Son, Inc. (2009)

A former Clorox executive was hired by SCJ, and Clorox claimed misappropriation of TS.
The executive was alleged to have information concerning Clorox’s financial info and financial strategic plans, as well as a R & D project where he saw “a key component used in a number of products common to Clorox and SCJ.”
SCJ Motion to Dismiss for Failure to State a Claim

Arg: Clorox didn’t state a claim because they didn’t allege that SCJ actually acquired or used Clorox’s TS, didn’t allege SCJ was going to do so, and only relied on the inevitable disclosure doctrine.
Motion denied.

Complaint alleged executive obtained TS and upon info and belief he and SCJ have used, disclosed, or threated to use or disclose them. Further, Clorox could present a set of facts establishing that SCJ is actually threatening to misappropriate Clorox’s TS.

TRO and Preliminary Injunction

Clorox failed to show likelihood of success on the merits.
Even assuming they met this element, balancing test: if injunction granted, executive would suffer tangible harm by being unable to pursue his career at SCJ.

SCJ instructed executive not to disclose Clorox’s confidential info.
Executive is still bound by confidentiality agreement with Clorox.

Bimbo Bakeries USA, Inc. v. Botticella

Ct considered likelihood of success on the merits, possible irreparable harm to Bimbo, the harm to Boticella caused by injunctive relief, and the public interest.

The Emergence of the Common Law of Trade Secrecy (1800 to 1939)

Three overriding approaches

Contract

NDAs, Non-Competes

Reasonable, sometimes legal, way of protecting interests

Confidentiality Agreements
Governs interactions ex ante (before they occur).
Fallbacks:

In the absence of an express (written or oral) agreement of confidentiality, Ps in TS cases are forced to argue that the circumstances gave rise to an implied-in-fact agreement of confidentiality.
Remedies for breach of K typically do not give rise to injunctive relief (specific performance), so Ps wanting injunctive relief would have to get creative to establish this by:

Establishing a basis for specific performance under K law (typically based upon the assertion of property rights or the alleged breach of an obligation of confidentiality);
Plead and prove the commission of a tort for which injunctive relief was available; or
Seek relief in a ct of equity which generally had greater powers than a ct of law to “do justice”, including injunctive relief and restitution.

Where there’s a 3rd party:

K claims of relief are not useful in situations where P’s TS fall into the hands of a 3rd party.
Only parties in privity of the K are bound by its terms.
To reach 3rd parties, it was necessary for tort and equitable principles to emerge that provided a way to impose a duty on 3rd parties in certain circumstances.

From these fallbacks, unfair competition and property claims arose.

Unfair competition (tort)

A “fundamental Doctrine of Equity…requires that a person shall not use a position of advantage naturally arising from the relationship of the parties to profit at the expense of the other,” and the courts will not permit one to profit from acts of unfair competition or violation of business ethics.

Property (tort)

Strict liability offense.
May want to be careful labeling TS as property b/c would have to show D acted improperly, otherwise no strict liability.
Intent overlay makes TS as property difficult to prove.
As property, a TS can be held in trust, can constitute the subject of a license agreement, is transferable inter vivos and by descent and distribution, is taxable, and becomes part of a bankrupt’s estate.

Cincinnati Bell Foundry Co. v. Dodds (property approach)
Allen-Qualley Co. v. Shellmar Products Co. (unfair competition approach)

Difference between Legal and Equitable Relief

TS DON’T EXPIRE, unlike copyright/trademark

Think Coca-Cola

TS wither away.

Is it secret enough? Does amount of secrecy affect remedy?

Actual or threatened misappropriation may be enjoined.

General proof requirement for P

There was a secret;
D improperly acquired, disclosed, or used P’s TS in a violative manner; AND

Can misappropriate TS if acquire TS in circumstances where D had a duty to maintain confidentiality

D’s action damaged P

TS originally for protection and/or maintenance of business ethics and prevention of unfair competition.
Originally in common law could only use tort or K theories, however:

Relief is difficult through K.

Argue implied-in-fact K.
Remedies would not provide injunction.
Third parties not in privity are not included.

Tort

Courts default theory.
Unfairness appreciated, but not falling under K.

Property

Can sell a TS, so property-like.
Intellectual property.
Power to use TS to exclusion of world.
Inventor has a property interest, equities should be available

Difference between TS and Patent

Patent is a monopoly against the world.
TS has no right “except against those who have contracted, expressly or by implication, not to disclose the secret.”

The Restatement (First) of Torts

Section 757: Sets forth the general principle of liability for the disclosure or use of another’s TS.

One who discloses or uses another’s TS, without privilege to do so, is liable to the other if:

He discovered the secret by improper means, or
His disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or
He learned the secret from a third person with notice of the fact that it was secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of duty to the other, or
He learned the secret with notice of the fact that it was secret and that its disclosure was made by mistake

Section 758: Concerns liability in the event of the “innocent discovery” of another’s TS, essentially attempting to deal with the problem o

his property. He wanted the money he was awarded for such info to be taxed at the lower capital gains rate instead of the ordinary income rate.
SC denied property interest in the info he provided to gov.

Property right exists if TS is:

an interest capable of a precise definition,
capable of exclusive control, and
the owner must have established a legitimate claim to exclusivity

Why does classification matter?

Legal consequences – SL, evidentiary concerns, remedies, etc.
If K law,

Wrong is breach of K.
But doesn’t always work because there may not be a binding K between parties

If unfair competition,

Wrong is engaging in some act deemed contrary to business ethics.
But too much information could thereby be protected.
Focus on bad acts of D than on secrecy of information sought to be protected.

If property,

Wrong is interfering with, or destroying someone’s property.
But may deemphasize importance of free competition and employee mobility.
Professor Eric Claeys observes that if TS are property, then everyone (other than the TS owner) owes a duty in tort not to take the TS.

Chapter 2: What Can Be a “Trade Secret”?

Introduction

Almost anything can be a TS, but proper application of TS definition filters out TS from other confidential information

TS can be high-tech, low-tech, no-tech so long as satisfies other things.
Courts have a lot of discretion and evaluate on a case-by-case basis.

TS are recognized to promote:

Commercial morality;
Inspire innovation;
Share knowledge;

Avoid self-help because can’t share with effective partners if can’t control.

Commercial privacy;

I.e., treatment of employees
Wouldn’t be proper to video how employees treated

Free labor and mobility;
Free enterprise.

Definitions of a Trade Secret

Restatement First

Didn’t really give an exact definition of TS
May include any formula, pattern, device, or compilation of information which is used in one’s business and which gives a competitive advantage.
A process or device for continuous use in the operation of a business.

UTSA

More specific
Information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

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
Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

Note: Does NOT require the secret be “in use