Demystifying Trade Secrets

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When ownership and misappropriation disputes arise, the precise nature of trade secrets takes center stage 

By Randall E. Kay

Kay

Mystery surrounds the makeup of many trade secrets — understandably so. By their nature, trade secrets are not publicly known. The government does not have any registration process for trade secrets. Companies often do not have formal written descriptions of their own trade secrets. When ownership and misappropriation disputes arise, though, the precise nature of the claimed trade secrets takes center stage. The fundamental question remains: What exactly is a trade secret?

Laws governing trade secrets

Both state and federal laws govern trade secret protection. Under California law, the California Civil Code contains the statutes governing civil trade secret practice. Criminal trade secret law is governed both by the California Penal Code and the federal Economic Espionage Act.

Defining a trade secret

California Civil Code definition
“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique or process that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Cal. Civ. Code §3426.1(d) (West 1997). Thus, trade secret holders suing for misappropriation must first establish the three elements of a trade secret:

• Information. That the trade secret is information that can be described with sufficient particularity to separate it from matters of general knowledge in the trade.
• Value from being unknown. That it derives independent economic value from not being generally known.
• Secret. That the efforts to maintain its secrecy are reasonable under the circumstances.

Analyzing these three elements is the key to determining the existence of a protectable trade secret under California law.

Key words and phrases in the statutory definition
A trade secret holder must establish all of the elements in the definition in order to have a protectable trade secret. Dissecting the words and phrases in the definition illustrates the many facts for which plaintiffs need to marshal evidence and defendants need to challenge.

“Information” — What Information Qualifies as a Trade Secret?

Many different types of information can constitute protectable trade secrets. Trade secrets range from customer lists to software programs to recipes. A classic trade secret that has lasted for over a century is the formula for Coca-Cola®. The Coca-Cola Company has maintained the recipe for this soft drink as a trade secret, just as Kentucky Fried Chicken has kept its original recipe blend of 11 herbs and spices as a trade secret. Trade secret information can include all kinds of knowledge, facts, data, communications, and intelligence.

Types of information recognized as trade secrets by the courts

Courts have found many types of information that can constitute legally protectable trade secrets (subject to the trade secret holder satisfying all of the statutory requirements).  Types of information that can constitute trade secrets under California law (or at a minimum have survived pretrial challenges by demurrer, motion to dismiss or motion for summary judgment) include:

• Advertising strategies, plans and techniques including advertising allowances. 
• Business strategies and methods. 
• Combinations of generally known elements. 
• Cost information. 
• Customer lists and customer information. 
• Data. 
• Databases. 
• Engineering drawings and blueprints. 
• Information in one’s head or memory. 
• Insurance premiums and renewal dates. 
• Manufacturing processes for alarm screens. 
• Marketing research, strategies, plans, and techniques, such as marketing concessions. 
• Methods of producing die-cut masks and overlapping disks in machinery. 
• Negative research. 
• Pricing information, including pricing concessions, volume rebates and rebate incentives. 
• Product plans and designs. 
• Production techniques and methods and manufacturing processes. 
• Profit margins. 
• Promotional discounts. 
• Religious materials. 
• Software. 
• Strategic plans. 
• Technical know-how. 
• Technical specifications.

These examples of trade secrets come from published court decisions. 

Types of Information Failing to Qualify as Trade Secrets in Court

Some information, such as patented inventions, can never have trade secret status. Other types of information, though, may or may not have trade secret protection depending on all the facts and circumstances. For example, some customer lists qualify for trade secret protection while other customer lists do not. Trade secret rights depend upon the nature of a particular customer list and whether the trade secret holder can demonstrate all of the criteria for protection (information, value, unknown and secret).

California courts have held that — at least in particular instances — the following types of information failed to constitute protectable trade secrets:

• Business forms and procedures. 
• Client names and addresses. 
• Contact people at prospective customers. 
• Course materials, training materials and instruction techniques. 
• Customer identity. 
• Design features. 
• Die drawings. 
• Distributor lists. 
• Information from reverse engineering products. 
• Process for manufacturing diodes. 
• Proposal methods and pricing estimates. 
• Real estate listings and related financing commitment and prospective purchaser information. 
• Religious materials or scriptures. 
• Salary information. 
• Sales telemarketing scripts and pitch materials. 
• Technical know-how. 
• Workers’ compensation premiums and renewal dates. 

“Value” — When is Information Valuable?

For information to constitute a trade secret, the information must derive “independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use.” Cal. Civ. Code §3426.1(d) (West 1997); Cal. Penal Code §449c (West 1999). The California trade secret statute expressly provides that value can be either actual or potential.

In other words, a trade secret must have current or future value. If the economic value to information was solely in the past, for example, because the information has become public, then it does not currently have value from a trade secret perspective.

Furthermore, the value must be economic. Thus, noneconomic value such as spiritual, sentimental or historical value is insufficient. 

“Unknown”—When Is Information “Not Generally Known to the Public or to Other Persons Who Can Obtain Economic Value From its Disclosure or Use?”

By definition, trade secret information must not be generally known. The definition recognizes two audiences: (1) the public; or (2) other persons who can obtain economic value from its disclosure or use. Cal. Civ. Code §3426.1(d) (West 1997). The UTSA requires that trade secret information have value to others who are unaware of the information and who could put that information, if known, to beneficial use. ABBA Rubber Co. v. Seaquist, 235 Cal. App. 3d 1, 19 (1991).

“Secret” — When Is Information Secret?

Trade secret protection is the “marathon” of intellectual property protection. Unlike patents and copyrights, trade secret protection lasts however long the protectable information remains secret.

Courts require that trade secret holders take “reasonable” steps to maintain the secrecy of their trade secrets. California law does not require “absolute secrecy.” Courts do not require that companies take all measures conceivable to maintain the secrecy. Rather, the measures simply must be reasonable under the circumstances.

In almost every case of trade secret misappropriation, secrecy measures fail at some level. Misappropriation usually only occurs because of a breach of secrecy. Therefore, it is no defense for the defendant to argue that the misappropriation itself shows that secrecy measures were inadequate. It is usually a given that secrecy was compromised. Instead, the relevant inquiry is the efforts that the trade secret holder can show it undertook to protect its trade secrets.

Facts that may support a secrecy finding in one case may not support such a finding in another case. What is necessary to show secrecy for software may be insufficient for secrecy of hardware. Similarly, reasonable efforts to keep a customer list secret may not suffice to keep source code secret. Although no single measure of protection will demonstrate that a trade secret has been kept secret, a single knowing or deliberate public disclosure of a trade secret by the trade secret holder itself can cause the loss of trade secret status.

Factors Influencing Courts That Information Is Secret

Some of the most obvious secrecy measures include limiting access to the trade secrets, marking documents as confidential and obtaining signed employment agreements, confidentiality agreements and nondisclosure agreements that confirm protection for trade secrets. Yet, no single measure controls in any given case. California courts assessing secrecy have found that the following measures supported a finding of reasonable efforts to maintain secrecy under the circumstances of the particular cases:

• Attaching electronic sensors to trade secret documents. 
• Communicating expectations of secrecy to employees who have access to the trade secret. 
• Disclosing trade secrets exclusively to higher level employees. 
• Disclosing trade secrets only in a confidential setting. 
• Educating employees regarding what constitutes a trade secret. 
• Having a written trade secret protection plan and following the plan. 
• Keeping hard copies of secret materials in a locked vault, safe or cabinet. 
• Limiting and monitoring the number of copies of a trade secret to the extent necessary to accomplish work projects. 
• Limiting the availability of the trade secret within computer systems. 
• Limiting the information made available to vendors and subcontractors. 
• Maintaining logs identifying trade secrets. 
• Marking documents as confidential or trade secret. 
• Obtaining employment agreements acknowledging employees’ obligations to treat information as secret. 
• Obtaining orders sealing court records that contain information that discloses the trade secret. 
• Protecting against physical access to trade secrets, including the use of security systems and personnel, escorts and visitor badges. 
• Requiring confidentiality agreements or nondisclosure agreements (“NDAs”). 
• Requiring the use of passwords for access to soft copy trade secret material. 
• Screening employees exposed to trade secrets to determine whether they present a risk of disclosure. 
• Separating sensitive departments or processes from the central facility. 
• Transporting trade secret materials under lock.

Factors Courts Have Found Show a Failure of Secrecy Efforts

A single knowing disclosure of a trade secret into the public domain can destroy trade secret protection. While no single factor controls the secrecy determination, a finding of one or more of the following disclosures could bar trade secret protection:

• Disclosing trade secrets through marketing and sales efforts. 
• Displaying the trade secret at a trade show. 
• Failing to designate information as a trade secret in governmental filings. 
• Failing to investigate or bring suit when suspicious or aware of misappropriation. 
• Failing to obtain signed nondisclosure agreements or confidentiality agreements. 
• Having domestic or international patent applications published that disclose the trade secret. 
• Leaving documents disclosing a trade secret in garbage cans at the street curb without shredding. 
• Posting trade secret information on the Internet or Web sites. 
• Publishing professional journal articles, technical literature or service manuals that disclose a trade secret. 
• Relying on a hidden or undisclosed intention for secrecy. 
• Selling a product that discloses the trade secret or enables reverse engineering. 
• Showing a trade secret to professional colleagues who have not signed NDAs or confidentiality agreements. 

No single factor controls the secrecy determination in any given case. In each case, the court considers all of the circumstances surrounding the particular trade secrets to determine whether the secrecy efforts were reasonable. With sufficient planning and effort, trade secret holders such as The Coca-Cola Company can maintain trade secrets for more than a century.

The State Bar of California recently published a comprehensive practice guide on trade secret law, entitled “Trade Secret Litigation and Protection in California,” that can be ordered online at www.ipsection.org.

• Randall E. Kay is a partner in the Intellectual Property group of DLA Piper Rudnick Gray Cary US LLP in San Diego, where his practice focuses on intellectual property litigation. He is a member of the executive committee of the State Bar’s Intellectual Property Section.

Certification

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Self-Assessment Test

Indicate whether the following statements are true or false after reading the MCLE article on trade secrets. Use the answer form provided to send the test, along with a $25 processing fee, to the State Bar. If you do not receive your certificate within four to six weeks, call 415-538-2504.

1. Marking documents as trade secret or confidential supports a finding of reasonable efforts to maintain secrecy of information. 
2. The California Department of Corporations handles registration of trade secrets.
3. Trade secret protection is governed solely by state law.
4. Trade secret protection is governed by civil and criminal laws.
5. Trade secret protection requires proof of absolute secrecy.
6. Trade secret protection requires showing that the trade secret information derives independent economic value from not being generally known.
7. A customer list can be a trade secret. 
8. Proof of “independent economic value” can be shown by spiritual, sentimental or historical value.
9. A formula can be a trade secret. 
10. A trade secret can only last for 50 years.
11. A trade secret must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
12. A compilation can be a trade secret. 
13. Software cannot qualify for trade secret protection.
14. Trade secret information must not be generally known to the public or to other persons who can obtain economic value from its disclosure or use.
15. The independent economic value of a trade secret can be actual or potential. 
16. Negative know-how or research can have trade secret protection. 
17. Leaving documents disclosing a trade secret in garbage cans at the street curb without shredding can cause the loss of trade secret status. 
18. Displaying a trade secret at a trade show can cause the loss of trade secret status.
19. Trade secret information must be in writing to be protectable. 
20. An invention can at the same time have patent and trade secret protection.