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Understanding the Uniform Trade Secrets Act

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  • Posted on: Apr 4 2018

What is a Trade Secret?

At its core, a trade secret is information of commercial value. It can be anything, such as a formula, strategy, device, process, or recipe. It is not generally known to others and is not readily ascertainable by proper means. Since a trade secret is a thing of commercial value, it gives the owner an advantage over competitors who do not know the secret and cannot use it to compete for business. 

New York Law vs. The UTSA

At the state level, the protection of trade secrets is generally governed by the Uniform Trade Secrets Act (“UTSA”). To date, 48 states, including the District of Columbia, Puerto Rico and the U.S. Virgin Islands, have adopted the UTSA in one form or another. (There is some debate about whether Alabama or North Carolina adopted the UTSA; the Uniform Law Commissioners maintain that Alabama has adopted it, while North Carolina has not.)  Only New York and Massachusetts have not enacted the UTSA. 

New York courts define a trade secret as any “formula, pattern, device or compilation of information which is used in one’s business, and which gives [the employer] an opportunity to obtain an advantage over competitors who do not know or use it.” Ashland Mgt. v. Janien, 82 N.Y.2d 395, 407 (1993). To determine if a “trade secret” exists, New York courts examine: “‘(1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the business] to guard the secrecy of the information; (4) the value of the information to [the business] and [its] competitors; (5) the amount of effort or money expended by [the business] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.'” Id. (quoting Restatement of Torts § 757, Comment b).

The UTSA defines a trade secret as “information … that (i) derives independent economic value … 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.” UTSA § 1(4).

The UTSA both narrows and broadens the common-law definition of trade secret. It narrows the definition by making a) the difficulty in independently ascertaining the information, and b) reasonable efforts to maintain secrecy, prerequisites to the finding of a “trade secret.”  It broadens the definition by eliminating the factor concerning the expense or difficulty involved in developing the information. Consequently, commercial information discovered at minimal cost, or even by accident, may be considered a trade secret. 

In addition to the definition of a trade secret, New York common law and the UTSA differ over what it takes to qualify as a trade secret. In New York, to qualify as a trade secret, there must be “a process or device for continuous use in the operation of the business.” Softel, Inc. v. Dragon Med. & Scientific Commc’ns, Inc., 118 F.3d 955, 968 (2d Cir. 1997). A single, discrete event will not do.  In contrast, the UTSA does not require a process or continuous use.

The standard concerning the efforts necessary to protect a trade secret is similar under the UTSA and the common law. Under New York law, for example, if a trade secret is disclosed to an individual who is not under an obligation to protect the confidentiality of the information, the trade secret loses its protection. See, e.g., Big Vision Private Ltd. v. E.I. DuPont De Nemours & Co., 1 F. Supp. 3d 224, 267-69  (S.D.N.Y. 2014). Similarly, the UTSA provides that disclosure may be made only to individuals who are associated with the company and thus have a duty of loyalty not to disclose the information, or to those who have signed a confidentiality agreement and/or non-disclosure agreement. Confidentiality agreements and/or non-disclosure agreements are considered to be “reasonable precautions” for maintaining secrecy under the UTSA and New York law — both agreements create an obligation by the third party to protect the confidentiality of the information.

Misappropriation of Trade Secrets

Generally, trade secret owners have recourse only against the “misappropriation” of a trade secret. Misappropriation is the use of a trade secret without permission. 

Under the UTSA, misappropriation occurs when a trade secret is acquired by “improper means” or from someone who has acquired it through “improper means.” Theft, bribery, and misrepresentation are among the acts considered to be “improper means.”

Under New York common law, a trade secret is misappropriated if it was obtained through corporate spying or other improper manner. In addition, a person or company can be guilty of misappropriation if the information was obtained through a breach of trust, e.g., an employee steals trade secrets from his employer, gives the information to another company, and that company uses the secrets even though it has obtained the information without permission.

Remedies and Fees

If a trade secret is misappropriated, the injured person may seek injunctive relief and damages. Damages include actual loss and unjust enrichment. If the misappropriation is done willfully or maliciously, the plaintiff may obtain exemplary damages — which are limited to twice the actual damages.

Seeking emergency injunctive relief plays an important role in trade secret litigation. The reason: once a trade secret has been disclosed, its value diminishes. Waiting for trial and a final judgment to prevent or stop the misappropriation rarely provides the protection needed to maintain the value of the trade secret. For this reason, plaintiffs often seek emergency injunctive relief prior to trial. The most common types of emergency relief are temporary restraining orders and preliminary injunctions.

Under the UTSA, a plaintiff also may seek a “royalty injunction.” A royalty injunction provides that “[i]n exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited.” UTSA § 2(b). The provision allows a court to impose a royalty instead of a conduct-based injunction, typically in circumstances involving a person’s reasonable reliance upon acquisition of a misappropriated trade secret in good faith and without reason to know of its prior misappropriation. Id. §2 at cmt.¶5

Finally, under the UTSA, a court may award reasonable attorneys’ fees to a prevailing party in specified circumstances as a deterrent to specious claims of misappropriation, to specious efforts by a misappropriator to terminate injunctive relief, and to willful and malicious misappropriation.

Under New York law, in contrast, attorneys’ fees are unavailable in the absence of specific contractual or statutory provisions. Levine v. Infidelity, Inc., 2 A.D.3d 691, 692  (2d Dep’t 2003). New York courts recognize a limited exception to this rule, and award attorneys’ fees to prevailing parties where the plaintiff’s damages “have been proximately related to the malicious acts and the acts themselves [are] entirely motivated by disinterested malevolence on [the defendant’s] part.” Brook Shopping Ctrs., Inc. v. Bass, 107 A.D.2d 615 (1st Dep’t 1985).  As a practical matter, in a trade secrets litigation, this exception is unlikely to arise because the defendant’s motivation is to profit from the theft, not just to harm the plaintiff.

Federal Statute: Defend Trade Secrets Act

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”) into law. (18 USC §§ 1836 et seq.) The DTSA creates a federal, private cause of action for trade-secret protection. Before the DTSA, in the absence of diversity jurisdiction, or an independent federal cause of action, trade secret owners seeking relief (e.g., damages or injunctions) for misappropriation had recourse in state court only. The DTSA provides a uniform statutory scheme to be applied in federal court; it does not pre-empt state law.

In many respects, the DTSA is modeled after the UTSA. Accordingly, the substantive provisions under the DTSA are similar to state regimes modeled after the UTSA, though some material differences exist.

 

 

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