Protecting Your Chocolate Chip Cookie Recipe: Trade Secret Protection Law
“Wally Amos was a talent agent at William Morris, who became known for baking cookies for his clients. The cookies became so popular that he started selling them, using a variation of his aunt’s secret recipe, which allegedly included ingredients not generally found in chocolate chip cookies. Today, Famous Amos is a product of the Kellogg’s brand, and while many bakers have tried to closely replicate the cookies, the recipe itself remains a company secret.” [i]
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Introduction
Despite common perceptions that patents, copyright, trademarks and designs are the most common forms of intellectual property protection, businesses actually rely more often on trade secrets to protect competitive advantage. [ii] The World Intellectual Property Organization defines a trade secret as “any confidential business information which provides an enterprise a competitive edge”. [iii] International standards for protecting trade secrets were enacted in the TRIPS agreement under Article 39: “member states shall protect ‘undisclosed information’ against unauthorized use ‘in a manner contrary to honest commercial practices’ (this includes breach of contract, breach of confidence and unfair competition)”. [iv] Enforcement, however, is left to civil judicial proceedings. [v] “Because national judicial systems, including the methods for granting access to evidence, vary greatly, enforcement of trade secret rights around the world is generally viewed as uneven.” [vi]
This “uneven enforcement” is amplified for businesses operating in the United States due to the unique trade secret legal regime. Unlike trademark, copyright, and patents which are governed by federal law, trade secret is governed by state common law. In a country with fifty states, this means that there are effectively fifty different interpretations regarding trade secret compliance. This also means confusion and uncertainty. To eliminate these problems and to make sure companies receive the proper protection their trade secrets deserve, a Federal Trade Secrets Act (FTSA) must enacted.
The History of Trade Secret Protection
Early in the United States, trade secret misappropriation was categorized as a tort claim. Trade secret also shares many elements with property. Thus, trade secret misappropriation can also be seen as an “infringement of a trade secret owner’s right to exclude others from using the [owner’s] information.” [vii] Under either view, tort or property, trade secret falls with the common law left to the states to determine.
The Restatement of Torts
The first attempt at trade secret unification was the Restatement of Torts in 1939.[viii] The purpose of the Restatement, generally, was to “address [the] uncertainty in law through a restatement of basic legal subjects that would tell judges and lawyers what the law was.” [ix] Specifically for trade secrets, Section 757 provides that a trade secret “may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” [x]
Although the Restatement gained wide recognition and acceptance, it failed to provide a uniform trade secrets law because it was not binding: courts were able to freely accept or reject whatever principle from the Restatement they wanted. [xi] Additionally, even though many courts did cite to the Restatement, each court interpreted it differently. This difference of interpretation and application had a lot to do with the timing of the Restatement: states that had more commercial centers adopted more in-depth trade secret laws while states that were more agriculturally based just adopted the minimum set out in the Restatement. [xii]
Uniform Trade Secrets Act
The second attempt at achieving a uniform trade secrets law was the Uniform Trade Secrets Act (“UTSA”) in 1968.[xiii] The UTSA was adopted by the Uniform Law Commission whose goal was to “codify existing common law standards and to provide a uniform approach to trade secret misappropriation among the states.” [xiv] The UTSA expanded the Restatement’s definition of trade secret and simplified the standard for determining when information is confidential enough to qualify for protection. [xv] For example, unlike the Restatement, the UTSA’s definition of trade secret was not restricted to business: under the UTSA, a trade secret includes: “formula, pattern, compilation, program, device, method, technique, or process” that has “actual or potential” independent economic value and where reasonable efforts were used to maintain its secrecy. [xvi]
Additionally, unlike the Restatement, the UTSA gives more guidance as to when misappropriation arises and what “improper means” include. The UTSA provides that misappropriation arises when the infringer “knew or had reason to know that his knowledge of the trade secret” was: 1) derived from improper means; 2) acquired when there was a duty to keep it under secrecy; or 3) acquired through another person who has a duty to maintain its secrecy. [xvii] The UTSA also provides that improper means include: “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” [xviii]
Despite these efforts, the UTSA fell short of making a uniformed trade secrets law. First, not all states have adopted the UTSA: so far only 46 have so far adopted the UTSA. [xix] Additionally, the four states that have yet to adopt the UTSA (Massachusetts, New Jersey, New York, and Texas) represent over 22% of the United States Gross Domestic Product. [xx] Moreover, even states that have adopted the UTSA have not applied it identically. [xxi] These different interpretations include: differences in what qualifies as a trade secret, differences in when misappropriation arises, and differences in remedies.
Economic Espionage Act
The most recent step towards unification happened in 1996 when Congress passed the Economic Espionage Act (“EEA”), an act making misappropriation of trade secrets a federal crime. [xxii] The EEA was enacted for several reasons: 1) the continued growth of trade secrets and the failure of state and federal law to provide an accurate remedy for misappropriation;[xxiii] 2) Congress’s frustration with state trade secret laws that only “protect . . . proprietary economic information . . . haphazardly;”[xxiv] and 3) the recognition that “the available civil remedies are not adequate” and that federal civil action is needed.” [xxv] Despite this major step, there is still no unifying law for private civil actions.
Reasons for Enacting a Federal Trade Secrets Act
The most obvious reason for enacting a FTSA is to standardize both substantive and procedural trade secret jurisprudence. Differences between states lead to a number of litigation issues and, ultimately, less protection and security for businesses.
Unnecessary Litigation Costs
Differences in trade secret laws can lead to immense amounts of litigation fees and eat up prolonged hours of the court. Aside from litigators having to expend resources and money in finding and litigating amongst these differences, another problem that may arise is discovery costs. When businesses plan to expand their operations to multiple states, they need to be cognizant of the fifty different trade secret laws they must comply with in order to receive the utmost protection. [xxvi] These investigative measures typically involve: understanding what laws protect what information, personal jurisdiction and choice-of-law issues, and which state’s laws will control in litigation. If a FTSA were in place, these investigative costs would be reduced.
Economic Inefficiencies and Wasteful Expenditures
Trade secret protection is continuously being undermined due to the numerous disagreements among states and courts regarding the application of trade secret law. Although some states have modeled their statutes after the UTSA, arguments still arise because the common elements adopted from the UTSA are being interpreted in different ways. Most importantly, elements such as: 1) what are “improper means,” 2) what are “reasonable” efforts to maintain secrecy, and 3) what the appropriate standard should be when granting an injunctive relief, are all ill-defined amongst states.
Due to the lack of uniformity in trade secrets law, businesses may reconsider expanding outside of their home state. For example, if a California based business wants to move to Colorado, the corporation would have to incur unnecessary overhead understanding the differences between the two jurisdictions. Businesses that do decide to expand or already have multistate operations are unable to develop company-wide plans to ensure trade secret protection since each state requires different efforts by trade secret owners in order to be afforded protection. Moreover, what constitutes “reasonable efforts” is still a mystery, especially if fifty different states interpret “reasonable efforts” in fifty different ways. [xxvii]
Encourage Innovation
Due to the differences in trade secrets law across the United States, trade secret misappropriation remedies are essentially undermined. Trade secret owners decide to create innovative products only if they are sure that their confidential information will be protected. If protection is uncertain, or if protection to maintain secrecy is too burdensome on the owner, then the trade secret owner will be less willing to innovate.
Current Status and Progression of an Emerging Federal Trade Secrets Act
Both the Senate and the House have bills suggesting that a FTSA will soon be enacted. Based on the draft bills, this FTSA would include: 1) subject matter jurisdiction for a trade secret claim in federal court; 2) an extended Statue of Limitations of five years after the date on which the misappropriation is discovered; and 3) a new opportunity for expedited relief, otherwise known as a right of ex parte seizure.[xxviii] Perhaps the most significant departure from the UTSA is the ex parte seizure provision. Under this provision, it would provide emergency relief to aggrieved trade secret owners to prevent the dissemination of their trade secret and protect such information to the extent necessary.[xxix]
The House version of this provision states that “a federal court may issue an ex parte order to seize property necessary to preserve evidence or to prevent dissemination of the trade secret if the plaintiff can show the following things clearly . . . from specific facts”: 1) injunctive relief under Fed. R. Civ. P. 65 is inadequate; 2) plaintiff will suffer immediate and irreparable injury; 3) harm to plaintiff outweighs harm to both defendant and any third parties; 4) plaintiff is likely to show both misappropriation and defendant is in possession of trade secret; 5) particular description of seizure and the location; 6) defendant would move, hide, or destroy the material; and 7) plaintiff has not publicized the requested seizure. [xxx] The Senate version, however, allows “ex parte orders for preservation of evidence and seizure of any property used, in any manner or part, to commit or facilitate a violation of the statute, using the procedure contained in the Lanham Act.” [xxxi] Accordingly, the “House bill provides even more restrictions and safeguards on the ability to obtain an ex parte seizure order.”[xxxii] Thus, the most significant differences between the two bills are “the clarification and refinement of the seizure order and the exclusion of section 1831 and 1832 civil claims.” [xxxiii]
Currently, the Senate has referred its bill to the judiciary committee and the House has placed its bill on the Union Calendar. [xxxiv] This federal trade secrets legislation attempt has support from both sides of the political spectrum.
Conclusion
Trade secrets, like all intellectual property, transcend boarders: violations occur whenever and wherever someone uses a trade secret impermissibly. This unique feature of trade secrets is a major problem for companies because it is currently virtually impossible to foresee which state’s law will be applied when such a misappropriation occurs. Without a cohesive and uniformed understanding of trade secret law protection, companies will be left in the dark and infringers will be free to roam. To put an end to this practice (and protect your chocolate chip cookie recipe), the Federal Trade Secret Act must be enacted.
[i] Chiara Atik, 5 Famous Best-Kept Secret Recipes, Today (Nov. 10, 2011), http://www.today.com/food/5-famous-best-kept-secret-recipes-1C9004863.
[ii] James Pooley, Trade Secrets: the Other IP Right, WIPO Magazine (June 2013), http://www.wipo.int/wipo_magazine/en/2013/03/article_0001.html.
[iii] What is a Trade Secret?, WIPO, http://www.wipo.int/sme/en/ip_business/trade_secrets/trade_secrets.htm (last visited Jan. 17, 2016).
[iv] Pooley, supra note 2.
[v] Id. (citing Arts. 42, 49).
[vi] Id.
[vii] Christopher Pace, The Case For a Federal Trade Secrets Act, 8 Harv. J. L. & Tech. 427, 428 (1994).
[viii] See Restatement (Third) of Unfair Competition § 29 cmt. a (1995) (chronicling the early history of trade secret law).
[ix] American Law Institute, Institute Projects (Mar. 5, 2009), http://www.ali.org/index.cftn?fuseaction=about.instituteprojects; see also James Pooley, The Top Ten Issues in Trade Secret Law, 70 Temp. L. Rev. 1181, 1183 (1997).
[x] Restatement of Torts § 757 cmt. b (1939).
[xi] David Almeling, Four Reasons to Enact a Federal Trade Secrets Act, 19 Fordham Intell. Prop. Media & Ent. L.J. 769, 772 (2009).
[xii] See Id.; Unif. Trade Secrets Act, prefatory note, 14 U.L.A. 531 (2005) (“[The] development [of state trade secret law] has been uneven. Although there typically are a substantial number of reported decisions in states that are commercial centers, this is not the case in less populous and more agricultural jurisdictions.”).
[xiii] Though proposed in 1968, the Commission did not adopt the USTA until 1979. Unif. Trade Secrets Act, prefatory note, 14 U.L.A. 369 (1985).
[xiv] Pace, supra note 1, at 432.
[xv] Pace, supra note 1, at 434.
[xvi] Unif. Trade Secrets Act § 1(4).
[xvii] Id. at § 1(2).
[xviii] Id. at § 1(1).
[xix] Marina Lao, Federalizing Trade Secrets Law in an Information Economy, 59 Ohio St. L.J. 1633, 1650 n.99 (1998).
[xx] Bureau of Econ. Analysis, U.S. Dep’t of Commerce, State Economic Growth Slowed in 2007 (June 5, 2008), available at http://www.bea.gov/newsrelease/regional/gdp_state/2008/pdf/gsp0608.pdf.
[xxi] Lao, supra note 13, at 1649-50 (“[T]he UTSA never won the support of all the states, and even the states that did not adopt the UTSA modified it. Trade secret misappropriation continues to vary from jurisdiction to jurisdiction.”).
[xxii] Economic Espionage Act of 1996, 18 U.S. C. §§ 1831-39 (2006).
[xxiii] H.R. Rep. No. 104-788, at 4-7 (1995), reprinted in 1996 U.S.C.C.C.A.N. 4021, 4023-25.
[xxiv] S. Rep. No. 104-359, at 11 (1996).
[xxv] 104 Cong. Rec. S12201, S12208 (daily ed. Oct. 2, 1996) (statement of Sen. Spector).
[xxvi] See generally David W. Slaby et al., Trade Secret Protection: An Analysis of the Concept “Efforts Reasonable Under the Circumstances to Maintain Secrecy,” 5 Santa Clara Computer & High Tech. L.J. 321 (1989) (discussing the legal and situational efforts that are put in for trade secret owners to understand reasonableness).
[xxvii] Id.
[xxviii] Susan Hargrove & Kayla Marshall, The Prospect of a Federal Trade Secret Claim: Why Now and What Would It Mean For You (Feb. 4, 2015), http://www.smithlaw.com/updates-alerts-Trade-Secret-Claim.html
[xxix] Id.
[xxx] Law360, Inside Pending Federal Trade Secrets Legislation (Dec. 3, 2014), http://www.law360.com/articles/599936/inside-pending-federal-trade-secrets-legislation.
[xxxi] Defend Trade Secrets Act of 2014, S. 2267 113th Congr. (2014).
[xxxii] Trade Secrets Protection Act of 2014, H.R. 5233, 113th Congr. (2014).
[xxxiii] Seyfarth Shaw, supra note 52.
[xxxiv] S. 2267 (In the Senate, on April 29, 2014, it was read twice and referred to the judiciary committee), H.R. 5233 (In the House, on December 11, 2014, it has been placed on the Union Calendar, Calendar No. 494).