Many people are familiar with patents, copyrights and trademarks, but what can be just as valuable to a company is its trade secrets. Trade secrets are valuable confidential intellectual property rights that are assets of a company and are protectable under the law. Unlike other forms of intellectual property rights, such as patents, copyrights and trademarks, trade secret protection is not limited to a specific period of time, but rather, the trade secret is protected as long as it remains secret.
Most states have adopted the Uniform Trade Secrets Act. A trade secret is defined under the Pennsylvania Uniform Trade Secrets Act, codified in Pennsylvania at 12 P.S. § 5302 as:
“Information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that:
(1) Derives independent economic value, actual or potential, 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.
(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
Essentially, this means is that in order for something to be considered a trade secret, there are three components that must be satisfied. The thing being treated as a trade secret must be (1) some type of information; (2) reasonable efforts must be taken by the business to protect the information and keep it confidential; and (3) the information must derive independent economic value, whether actual or potential value, from not being generally known. Practically all businesses will have trade secrets that need to be protected.
A business cannot apply for protection of a trade secret by registering it, like it would for a patent, trademark or copyright. Rather, the key to protection of a trade secret is keeping the information that is a trade secret from becoming generally known outside of the business. The information must be kept secret in order to maintain protection under the Uniform Trade Secrets Act.
For this reason, it is vitally important for companies to adopt procedures to protect their trade secrets. The loss of protection of a trade secret can result in the loss of significant value to the business. A company must view its trade secrets like any other asset it owns and do what it can to protect such assets. One way a company can protect its trade secrets is to have a system in place so that anyone that may come in contact with a trade secret signs a non-disclosure agreement. Such agreements should be signed both independent consultants, contractors, and in certain instances vendors, customers, joint venture partners and potential acquirers of the business, as well as employees of the company. The company should also consider making it their policy that employees that will have access to any information that could be deemed a trade secret be required to enter into a non-compete and/or non-solicitation agreement at the time they are first employed. In addition, access to proprietary information that constitutes a trade secret should be limited only to people on a “need to know basis.”
In addition to the protection of the Uniform Trade Secrets Act, Pennsylvania, as well as many other states, have enacted criminal penalties for theft of trade secrets. Under Pennsylvania law, a person can be charged with a felony offense in connection with the theft of a trade secret. See 18 Pa. Cons. Stat. § 3930.
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). The effect of the DTSA was to provide federal jurisdiction and protection for trade secrets. Prior to the enactment of the DTSA, patents, copyrights and trademarks enjoyed federal protection, but civil actions could not be brought in federal court for misappropriation of a trade secret and there were no federal civil remedies for protection of trade secrets. The DTSA does not preempt state law on trade secrets, but rather supplements existing state law.
With the enactment of the DTSA, civil actions for misappropriation of trade secrets may be brought in federal court as long as the trade secret is related to a product or service used, or intended to be used, in interstate commerce. The “intent to use” clause in the DTSA gives businesses a better opportunity to bring an action under the DTSA.
The definition of a trade secret under the DTSA is broad and basically requires that in order to be considered a trade secret, (1) the information must be secret, (2) the owner of the information must have taken reasonable steps to ensure that the secrecy of the information is maintained and (3) the information sought to be categorized as a trade secret must have independent economic value that is derived from its secrecy.
A potentially valuable right under the DTSA is that it permits ex parte seizures of misappropriated trade secrets. This means that the information can be seized by the government without prior notice to the defendant. This could aid the owner of the trade secret in keeping its rights to the trade secret by preventing the trade secret from becoming public very quickly. However, ex parte seizures will only be permitted in extraordinary circumstances and there is a significant burden to prove that such seizure is required.
An important requirement of the DTSA to which businesses must adapt, is a provision intended to protect whistleblowers from any civil or criminal liability for disclosing a trade secret if such disclosure was made to a government official or attorney for the purpose of reporting any violation of law. The DTSA imposes an affirmative obligation on employers to ensure that its employees, including consultants and contractors hired to perform work for the company, are informed of the immunity provisions contained in the DTSA.
There are two ways an employer can satisfy this affirmative obligation. First, the employer can include notice of the immunity provision set forth in the DTSA, in any agreement entered into after May 11, 2016, between the company and an employee, consultant or contractor that governs the use of trade secrets or confidential information. Alternatively, the company may cross-reference in any such agreement, the company’s reporting policy for suspected violations of law. It is critical that companies take action with respect to the affirmative obligation required by the DTSA. Failure to do so may result in the inability of the company to recover exemplary damages or attorney fees in an action brought under the DTSA for misappropriation of trade secrets.
The Economic Espionage Act of 1996 (the “EEA”) was adopted in order to address the increasing threat of the theft of trade secrets. The EEA criminalizes the theft of trade secrets. The EEA is directed towards two types of theft. 18 U.S. Code § 1831 is directed towards foreign espionage, where the theft has been conducted to benefit a foreign government, instrumentality or agency. The penalties under this provision can be fines of up to $5,000,000 or imprisonment of up to 15 years, or both.
18 U.S. Code § 1832 is directed towards the typical commercial theft of trade secrets. Subsection (a) states that a person found to be guilty under 18 U.S. Code § 1832 may be fined or imprisoned not more than 10 years, or both. Subsection (b) of 18 U.S. Code § 1832 applies to organizations found guilty of violating 18 U.S. Code § 1832 and provides that “[a]ny organization that commits any offense described in subsection (a) shall be fined not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.”
The adoption of the DTSA was a revision to the EEA and contained the right to bring a civil cause of action in federal court with respect to theft of trade secrets. It will be interesting to observe how the theft of trade secrets are treated by the federal courts versus the state courts. Having the DTSA as an additional avenue for pursuing those who steal trade secrets can only be beneficial to companies trying to protect their trade secrets. Hopefully, the provisions providing for ex parte seizures will provide real benefit to companies and the hurdles in obtaining such a seizure will not be too difficult to overcome.