Determination of trade secret status

Intellectual Property Rights
Presented by
Dr. B.Rajalingam
Assistant Professor
Department of Computer Science & Engineering
Priyadarshini College of Engineering & Technology, Nellore
Unit 4
Determination of Trade Secret
Status

Syllabus
• Trade Secrets:
Trade Secrete Law
Determination of Trade Secrete Status
Liability for Misappropriations of Trade Secrets
Protection for Submission
Trade Secrete Litigation
• Unfair Competition:
Misappropriation
Right of Publicity
False Advertising29 October 2020 2Trade Secret Law: Dr. B.Rajalingam

Determination of Trade Secret status
There are several factors to be considered in determining whether information
qualifies as a trade secret.
1. The extent to which the information is known outside the company.
2. The extent to which the information is known within the company.
3. The extent of the measures taken by the company to maintain the
secrecy of the information.
4. The extent of the value of the information to the company and its
competitors.
5. The extent of the expenditure of time, effort, and money by the company
in developing the information.
6. The extent of the ease or difficulty with which the information could be
acquired or duplicated by others.
29 October 2020 3Trade Secret Law: Dr. B.Rajalingam

1. The Extent to which the Information is
known Outside the Company
 Although information may be known to others outside the company
and still qualify as a trade secret.
 Secrecy need not be absolute.
 The owner of a trade secret may, without losing protection, disclose
it to a licensee or a stranger if the disclosure is made in confidence.
 In sum, if information is publicly known or known within a
specialized industry, it does not qualify for trade secret protection.
 Publication of information on the Internet will cause a loss of trade
secret status.

2. The Extent to which the Information is
known within the Company
 Although an employer or company is permitted to disclose
confidential information to those with a demonstrated “need to
know” the information, if the information is widely known within the
company, especially among those who have no business need to know
the information, it may not qualify as a trade secret.
 Companies should implement policies to prevent the inadvertent
disclosure of trade secret information and limit dissemination of the
material to those who need it to do their work.

3. The Extent of the Measures taken by the
Company to Maintain the Secrecy of the
Information One claiming trade secret protection must take reasonable precautions to protect the
information.
 Courts are unlikely to protect information a company has not bothered to protect.
 A company is not obligated to undertake extreme efforts to protect information, but
reasonable precautions are required.
 Thus, companies that require employees to sign nondisclosure agreements, keep
confidential information in locked desks or rooms, restrict access to the
information, and mark information with legends relating to its confidentiality
are more likely to demonstrate successfully that information is a trade secret than
those that fail to take such ordinary and reasonable precautions against inadvertent
disclosure.

4. The Extent of the value of the Information to
the Company and its Competitors.
 If information has little value either to its owner or to the owner’s
competitors, it is less likely to qualify as a trade secret.
 Conversely, information that is valuable to a company, such as the
recipe for its key menu product, and that would be of great value to
the company’s competitors is more likely to be a protectable trade
secret.
 Nonprofit entities can also claim trade secret protection for their
economically valuable information (e.g., their lists of donors).

5. The Extent of the Expenditure of Time,
Effort, and Money by the Company in
Developing the Information.
 The greater the amount of time, effort, and money the company has
expended in developing or acquiring the information, the more likely
it is to be held to be a protectable trade secret.
29 October 2020 Trade Secret Law: Dr. B.Rajalingam 8

6. The Extent of the Ease or Difficulty with
which the Information could be Acquired or
Duplicated by Others If information is easy to acquire or duplicate, it is less likely to qualify as a trade
secret.
 Similarly, if the information is readily discover from observation or can be easily
reproduced, it is less likely to be a trade secret.
 If it would be a straightforward matter to reverse engineer the product, it may not
qualify for trade secret protection.
 Not all information qualifies for trade secret protection.
 In Buffets, Inc. v. Klinke, 73 F.3d 965 (9th Cir. 1996), the court held that a
restaurant’s recipes for such American staples as barbequed chicken and macaroni
and cheese were not trade secrets because they were so basic and obvious that they
could be easily duplicated or discovered by others.

Liability for Misappropriation of Trade Secrets
Misappropriation of a trade secret occurs when a person possesses,
discloses, or uses a trade secret owned by another without express
or implied consent and when the person:
• Used improper means to gain knowledge of the trade secret.
• Knew or should have known that the trade secret was acquired by
improper means.
• Knew or should have known that the trade secret was acquired under
circumstances giving rise to a duty to maintain its secrecy.

Absence of Written Agreement
 While a written agreement prohibiting misappropriation of trade secrets can be
enforced through an action for breach of contract.
 A company’s trade secrets can be protected against misappropriation even in the
absence of any written agreement between the parties.
 A party owning trade secrets can bring an action in tort for misappropriation or for
breach of the duty of confidentiality, which duty can arise even without an express
agreement.
 Courts will impose a duty of confidentiality when parties stand in a special
relationship with each other, such as an agent-principal relationship (which
includes employer-employee relationships) or other fiduciary or good faith
relationships (such as relationships among partners, or between corporations
and their officers and directors, or between attorneys and clients).

Misappropriation by Third Parties
 A number of other parties may also have liability for misappropriation of trade secrets if they
knew or should have known they were the recipients of protected information.
 For example, assume Lee is employed by XYZ Company.
 In the course of his employment with XYZ Company, Lee learns valuable trade secret
information.
 If Lee leaves his employment with XYZ Company and begins working for New Company,
Lee and New Company may be prohibited from using the information.
 Lee may not misappropriate the information because he was in an employee – employer
relationship with XYZ Company, and New Company may be prohibited from using the
information if it knows or should know that the information was acquired by Lee under
circumstances giving rise to a duty to maintain its secrecy or limit its use.
 In such cases, XYZ Company would generally prefer to sue New Company inasmuch as it is
far likelier to have deep pockets, meaning it is more able to pay money damages than is an
individual such as Lee

Employer - Employee Relationships
Ownership of Trade Secrets in the Absence of Written Agreement
 Use or disclosure of trade secrets by employees and former employees is a
frequently litigated area.
 While employers should require employees who will have access to trade secrets to
sign agreements promising not to disclose the information, even employees who
may not be subject to written nondisclosure agreements have an implied duty not to
use an employer’s trade secrets learned by the employee within the scope of
employment.
 Thus, senior executives, engineers, and scientists are typically subject to a higher
duty of trust and confidence than more junior employees, such as file room clerks.
 In no event, however, may an employee steal an employer’s trade secret.
 If confidential information is learned by or disclosed to an employee in the course
and scope of employment, the employee is subject to an implied agreement to
maintain the information in secret.29 October 2020 Trade Secret Law: Dr. B.Rajalingam 13

Written Agreements
 Employers are generally free to require employees, independent
contractors, and consultants to sign express agreements relating to the
confidentiality of information.
 These agreements are usually enforced by courts as long as they are
reasonable.
 The agreements usually include four specific topics:
(1) Ownership of inventions
(2) Nondisclosure provisions
(3) Nonsolicitation provisions
(4) Noncompetition provisions.

1. Ownership of Inventions
 Most agreements expressly state that any information, inventions, or materials
created by the employee in the course of employment are owned by the employer.
 Better agreements go one step further and state that if for some reason such a clause
is not sufficient to vest ownership in the employer, by the terms of the agreement,
the employee irrevocably assigns the information or invention to the employer.
 Some states have statutes that restrict an employer’s ability to require an assignment
of inventions.
 Under the Leahy-Smith America Invents Act, and effective September 16, 2012,
an assignee may file a patent application directly.
 This provision helps large employers streamline the patent application process.

2. Nondisclosure Provisions
 The agreement should prohibit the employee from using or disclosing
the employer’s trade secrets or confidential information whether
during or after employment.
 The agreement should describe with specificity the information that is
to be protected.

3. Nonsolicitation Provisions
 Most agreement prohibit employees from soliciting or encouraging
other employees from leaving the employer’s business and from
soliciting or attempting to “poach” clients or customers of the
employer.
 Nonsolicitation clauses must be reasonable and should be limited in
time.
 In the absence of an agreement otherwise, departing employees may
solicit their coemployees to join them at their new place of
employment

4. Noncompetition Provisions
 Most agreements include provisions prohibiting employees from competing
against the employer both during and after the term of employment.
 Noncompetition clauses are also referred to as restrictive covenants, and they are
enforceable in most states if they are reasonable.
 Because a covenant precluding an employee from exercising his or her only trade
and earning a livelihood can be so detrimental to an employee, restrictive
covenants are strictly construed by courts.
 In California, noncompetition agreements are automatically void as a restraint
against trade because they preclude people from changing jobs and engaging in
their lawful professions.
 In fact, in one California case, Aetna Inc. was ordered to pay a former employee
$1.2 million after the employee was fired because she refused to sign Aetna’s
noncompete agreement that it used in all states.

Cont…
A variety of factors are taken into account in determining whether such
covenants are enforceable:
Purpose:
Courts often consider whether the restriction is related to a
legitimate business purpose of the employer.
Reasonableness:
The restriction must be reasonable in regard to scope, duration,
and geographic area.
Consideration:
Many states require that a covenant not to compete be supported by
adequate consideration.

Thank You

Determination of trade secret status

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