Trade Secret Basics*

by
Dennis W. Chiu, Esq.
Owner
PRODIGY
LAW

Trade Secrets are unique in intellectual property law, because it is not registered with the government like a patent, trademark or copyright.

DEFINITION

In basic terms, a trade secret is information where you can make money, if the information in unknown to the public, AND that is kept secret.

Trade Secrets are defined under California Civil Code, section 3426.1(d):

"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."

Note: The State of California is more protective of trade secrets then in other states in the nation, because its trade secret laws protect secrets that might be easily reverse engineered. Other states' trade secrets laws usually provide a complete defense that information is not a trade secret, if it is easily reverse engineered.

COMMON TYPES OF TRADE SECRETS

For businesses, the most common types of trade secrets are:

- Customer Lists
- Vendor Lists
- Manufacturing Methods
- Marketing Plans
- Pricing Information
- Finance Plans
- Restaurant Recipes (e.g. Coca-Cola formula, KFC Original Recipe)

Trade secrets can also include something more esoteric, like information about what NOT to do. For example, if a business has developed a plan that streamlines manufacture of a silicon chip, and this gives the business a real financial advantage, because it can get its chips to market faster, then this information of what steps to exclude can be a trade secret.

Negative information that a process does not work can also be a trade secret.

The key is if you added effort to collect or obtain the information, which makes it a trade secret. However, it cannot be general skills and knowledge.

UNLIKE PATENT & COPYRIGHT, TRADE SECRETS LIVE FOREVER IF PROTECTED

One of the special qualities of Trade Secrets is that they do not expire. Patents and Copyrights expire, but Trade Secrets, if kept secret, live on forever. In fact, a business would not want to apply for a patent or copyright for certain core secrets that will always be central to the core of the business. This may be rare, but they do exist. Examples are the formula for Coca-Cola and Colonel Sander's Secret Fried Chicken Recipe. As long as the Coca-Cola company and KFC keep their recipes secret, they will always have their trade secret, where no company may infringe.

THE STATUTE OF LIMITATIONS FOR TRADE SECRET INFRINGEMENT

In California, the Statute of Limitations for bringing an action for trade secret infringement is three (3) years.

CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES TO MAINTAIN TRADE SECRETS


Do be aware that confidentiality agreements to protect Trade Secrets and other intellectual property should be signed at the start of employment, if possible. It is not settled in the California courts, as to confidentiality agreements created to protect intellectual property that are entered into with an employee after the beginning of their employment. The courts are undecided on whether those post-hiring confidentiality agreements are supported by sufficient consideration. This is not to say that they are unenforceable, but that it should be the practice of all businesses that they require applicants to sign confidentiality agreements during the acceptance of their employment.

REASONABLE EFFORTS TO PROTECT TRADE SECRETS


A business needs to make reasonable efforts to maintain trade secrets, for example, locked doors, confidentiality agreements, alarm systems, etc. If a former employee tries to steal trade secrets, the business needs to prove through testimony or declarations that they have protected their trade secrets to prevent or stop the former employee's trade secret theft. "Reasonableness" is decided on a case-by-case manner. It is not required that there by absolute secrecy, but as long as "reasonable efforts" are made.

MISAPPROPRIATION OF TRADE SECRETS


Under California Civil Code, section 3426.1, states:

"3426.1.  As used in this title, unless the context requires
otherwise:
   (a) "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Reverse engineering or independent derivation alone shall not be considered improper means.
   (b) "Misappropriation" means:
       (1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
       (2) Disclosure or use of a trade secret of another without express or implied consent by a person who:
           (A) Used improper means to acquire knowledge of the trade secret; or
           (B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:
               (i) Derived from or through a person who had utilized improper means to acquire it;
               (ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
            (iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
           (C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
   (c) "Person" means a natural person, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.
   (d) "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."

There is no "intent" requirement to meet the misappropriation standard. The act of improperly obtaining the trade secret is the offense. If a business knew or should of known that they are receiving trade secrets from another company, the company may be liable for Constructive Knowledge Misappropriation.

However, inevitable disclosure has not been adopted in California, because it can be seen as a de facto non-compete clause so an individual (not a business) cannot find work.

REMEDIES

There is no assumption of irreparable harm for trade secret misappropriation.

If you cannot prove unjust enrichment, you can use reasonably royalty rates to set actual damages directly arising out of the misappropriation.

Punitive, Special & Exemplary Damages are available in a trade secret misappropriation matter. Treble (3 times) damages are not available in California, only double (2 times) actual damages are allowed by the California courts.

CONCLUSION

For many business owners, understanding Trade Secrets and how to protect them are a mystery, and we hope this article was able to give you a good introduction to the topic. If you would like assistance with protecting your business' Trade Secrets, Prodigy Law stands ready to assist you at www@prodigylaw.com.

*PRODIGY LAW ARTICLES ARE CREATED BY DENNIS W. CHIU ARE FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY. ANY SUGGESTIONS CONTAINED IN THE ARTICLES IS ONLY THE GENERAL OPINION OF DENNIS W. CHIU. PRODIGY LAW ARTICLES ARE NOT WRITTEN WITH ANY SPECIFIC FACT PATTERN OR CASE IN MIND. THEY DO NOT REPLACE ORIGINAL LEGAL RESEARCH AND CONSULTATION WITH AN ATTORNEY REGARDING YOUR SPECIFIC MATTER OR CASE. PRODIGY LAW ARTICLES ARE PRESENTED "AS-IS", AND DO NOT GUARANTEE THE ACCURACY OF THE INFORMATION CONTAINED THEREIN, SINCE CASE LAW AND LAW CAN CHANGE RAPIDLY.