If you obtain or publish a company's trade secrets, the company may have a legal claim against you for trade secret misappropriation. Generally speaking, a "trade secret" is secret information that confers a competitive business advantage on its owner by virtue of not being known to its competitors. The trade secret owner must exert reasonable efforts to maintain the secrecy of this information, or it ceases to be a trade secret. When a person obtains a trade secret improperly (such as by theft, bribery, or breach of a confidentiality agreement) or publishes it, knowing that someone else acquired it improperly, he or she has "misappropriated" the trade secret. This is the legal wrong against which trade secrets law protects. Possible defenses against a misappropriation claim are discussed in the Publishing Trade Secrets section.
State law governs trade secrets. Most U.S. states have adopted their own slightly modified version of the Uniform Trade Secret Act (UTSA), so there is a good deal of uniformity among state laws on the subject. The discussion below is based on the UTSA. For state-specific information, please see the state pages.
Trade Secrets Law Protects "Trade Secrets"
Under the UTSA, a trade secret has three basic characteristics:
- It is secret
- It confers a competitive advantage on its owner
- It is subject to reasonable efforts to maintain its secrecy
Trade secrets can take many forms. They can be formulas, plans, designs, patterns, supplier lists, customer lists, financial data, personnel information, physical devices, processes, computer software, and a catch-all category of "know-how" -- just about any kind of secret information that relates to a business. Even a compilation of generally known facts can be a trade secret, if the compilation confers a competitive edge to whomever has access to it and is kept secret. The Chilling Effects FAQ on Trade Secrets has additional information on what companies can protect as a trade secret. Below we discuss the three elements of a trade secret, listed above.
(1) The information is secret
For information to be "secret," it must not be generally known by or readily ascertainable to competitors. A trade secret loses its "secret" status if a competitor of the owner knows about it; the public at large need not know about it for it to cease being secret. Take for example the formula for Coca-Cola -- right now, virtually no one knows what it is, so it is secret. If one of the Coca-Cola Company's competitors somehow obtained the formula, the formula would lose its "secret" status under the law, even if the competitor did not disclose it to the public at large. On the other hand, if an individual or small group of individuals gained knowledge of the formula, but the Coca-Cola Company stopped them from communicating it to the company's competitors, the formula would not lose its "secret" status.
As we discuss more fully in Publishing Trade Secrets, if a company's information is widely available on the Internet, it probably isn't "secret" because the entire public, including competitors, has access to it.
(2) The information confers a competitive advantage
The information must also give its owner an economic advantage over its competitors. To determine this, courts look at a number of factors: (a) the value the information has to the owner and its competitors; (b) how much effort or money the owner put into developing the information; (c) how seriously the owner tried to keep the information secret; (d) how hard it would be for others to properly acquire or duplicate the information; and (e) the degree to which other people have placed this information in the public domain or made the information readily ascertainable by applying for a patent or marketing.
To use Coke as an example again, the factors point towards the conclusion that the formula confers a competitive advantage. Most importantly, the industry perceives Coke's formula as so valuable that several people tried to sell it to PepsiCo for $1.5 million in 2006. In addition, the Coca-Cola Company makes serious efforts to keep the information secret -- keeping the original formula in a bank vault and supposedly letting only two executives know the formula at the same time. It is not clear how easy it would be for others to acquire this information -- many people claim to have reverse engineered it, but it has never been proven. The information plainly is not in the public domain.
(3) The information is subject to reasonable efforts to keep it secret
Finally, the owner of a trade secret must make reasonable efforts to keep the information secret. What is reasonable is determined by a cost-benefit analysis that varies from case to case. For example, in Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., 925 F.2d 174 (7th Cir. 1991), the court considered a trade secrets claim by a printing press manufacturer which alleged that a competitor had misappropriated drawings of machine parts. The company had given the part drawings to a limited number of vendors and their own engineers. The court explained that it would not be reasonable to require the manufacturer to forbid any copying of the drawings, forcing all of the vendors and engineers to share a single copy, noting that "perfect security is not optimum security."
To use the Coke example one last time, the company certainly takes reasonable efforts to keep the formula secret. As noted above, it keeps the formula locked in a vault, and only a few executives know it. Such extreme measures won't be necessary or practical for many businesses, and courts will take a case-by-case look at the reasonableness of the measures taken.
Trade Secrets Law Prohibits "Misappropriation" of Trade Secrets
The legal wrong that trade secrets law protects against is "misappropriation" of a trade secret. Section 1(2) of the UTSA provides the following definition for the term:
- "Misappropriation " means: (i) 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 (ii) 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 knowledge of the trade secret was (I) derived from or through a person who has 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 position, knew or had reason to know that it was a trade secret ad that knowledge of it had been acquired by accident or mistake.
While this definition looks technical and complicated, citizen media creators and other online publishers will want to focus on two relatively straightforward points:
First, you commit misappropriation if you personally acquire a trade secret by improper means. "Improper means" include theft, fraud, bribery, industrial espionage, breaching a contractual duty to keep something confidential, or inducing others to breach that duty. For example, if you take home confidential information from your job in violation of your employment contract, that alone could be misappropriation. For another example, if you hack into a company's computer and make copies of confidential files you find there, that likely would qualify as misappropriation. To be clear, if you acquire the information yourself, you do not have to disclose or publish it in order to be liable for misappropriation. The act of acquisition is enough. That said, publishing or sharing information that you acquire improperly would also be misappropriation.
Second, you commit misappropriation if you publish a trade secret and you know that the person who gave you the information acquired it through improper means or under circumstances giving rise to a duty to maintain its secrecy or limit its use. Even if you don't actually know that the person who gave you the information acquired it in this way, you may be liable if you are aware of facts that suggest that this person acquired the information improperly. For example, if documents are stamped "Confidential," or "Secret," this might be enough give you reason to believe that your source acquired them improperly. This type of misappropriation would cover situations where you receive secret documents or information from a source inside the company about which you want to publish. For instance, if your source has signed a confidentiality agreement with his or her employer, then simply giving you secret information would breach that agreement, and your publishing of the information would be misappropriation if you knew or had reason to know that your source was bound by such an agreement. Alternatively, if your source stole secret information or hacked into a company computer to get it, your publishing of the information would be misappropriation if you knew or had reason to know that he or she had done so.
One case has squarely addressed this kind of misappropriation in the citizen media context. In Ford Motor Company v. Lane, 67 F. Supp. 2d 745 (E.D. Mich. 1999), a blogger obtained confidential documents and photographs from current and former Ford employees. The court determined that the blogger had violate the Michigan Trade Secrets Act by publishing the documents and photographs because he had reason to know the employees who gave him the information had breached their duty to Ford not to reveal the information. As discussed in Publishing Trade Secrets, however, the court also held that the First Amendment did not permit it to order the blogger to stop publishing these materials.
Note that trade secrets laws in many states, such as California, state explicitly that reverse engineering is not an "improper means" of obtaining information and cannot be the basis for a misappropriation claim. In those states, if you or your source uses reverse engineering to obtain information that a company claims is a trade secret, you generally cannot be liable for misappropriation. However, you might still run into trouble if you or your source agreed not to engage in reverse engineering in a contract, such as an end-user licensing agreement.
If a court finds that a defendant has misappropriated a plaintiff's trade secret(s), it may impose the following remedies:
- Injunctive Relief: Section 2 of the UTSA empowers a court to order a defendant to stop violating the plaintiff's rights and to take steps to preserve the secrecy of the plaintiff's information. Most pertinently, this means that a court has the authority, as far as the law of trade secrets goes, to order you to stop publishing someone's trade secrets if it finds that your publication amounts to misappropriation. The First Amendment to the U.S. Constitution may limit the court's ability to do so, however. For details, see Publishing Trade Secrets.
- Damages: A court can make a defendant pay money damages to the plaintiff for the economic harm suffered as a result of a trade secret violation. This may include the plaintiff's losses resulting from the misappropriation and the defendant's profits derived from it. In lieu of those damages, a court can also order a losing defendant to pay a royalty to the trade secret owner. If the court determines that the defendant acted willfully or maliciously, it may award the plaintiff punitive damages in an amount up to twice its actual damages.
- Attorneys' Fees: A court may order the defendant to pay the plaintiff's attorneys' fees if it finds that the defendant acted willfully or maliciously in violating the plaintiff's trade secret rights. On the other hand, if the defendant wins the lawsuit, the court may order the plaintiff to pay the defendant's attorneys' fees if it finds that the plaintiff acted in bad faith in filing the lawsuit.
Statute of Limitations
The "statute of limitations" is a term used by courts to describe the maximum amount of time plaintiffs can wait before bringing a lawsuit after the events they are suing over took place. This time limit is typically set by state statute and is intended to promote fairness and keep old cases from clogging the courts. Section 6 of the UTSA sets the statute of limitations for trade secrets claims at three years. However, many states have amended this section of the UTSA, so the statute of limitations for trade secrets claims varies between three and five years depending on the state. See the state pages for the applicable term in your state.
Generally speaking, the limitations period for a trade secret claims runs from the time the plaintiff discovered the misappropriation or the time by which the plaintiff should have discovered it through the exercise of reasonable diligence.