Opinion ID: 2640484
Heading Depth: 1
Heading Rank: 4

Heading: Trade Secret Law

Text: [¶4] A cause of action for misuse of trade secrets was first recognized by Roman law, and was well known to the common law. [2] Trade secret laws have their genesis in society's need to encourage innovation and to foster standards of trust in the marketplace: The basis of the law as to trade secrets, apart from breach of contract, is the abuse of confidence or an impropriety in the means of procurement of information. Trade secrets are protected to encourage the development of new inventions, processes, and business techniques, to protect against breaches of faith and the use of improper methods to obtain information, and to maintain standards of loyalty and trust in the business community. An employee owes a duty of fidelity to an employer while the worker is employed by that employer, even where the employment is at will and even though the worker has not signed an agreement not to use trade secrets acquired by the employee; therefore, an employee will be restrained from using the employer's trade secrets learned during employment. Moreover, one who knowingly and for his or her own interests helps employees to violate their duty of fidelity and trust to their employer with respect to trade secrets is also liable to the employer, and will be restrained from use of the confidential information. 54A Am.Jur.2d Monopolies, Restraints of Trade, and Unfair Trade Practices § 1114 (1996 and Supp. 2005). At the same time, however, trade secret law has recognized a counterbalancing need for free competition: It has been said that the law of trade secrets is the result of balancing two conflicting elements essential to society. On the one hand, there is a strong policy favoring free competition, thus entitling an employee to use the skill and knowledge of his trade or profession which he has learned in the course of his employment, for the benefit of himself and the public, if he does not violate a contractual or fiduciary obligation in doing so. On the other hand, in order to promote the progress of science and the useful arts, the law provides certain protections to an originator, one of these being the law protecting trade secrets. P. Guthrie, Annotation, Employee's Duty, in Absence of Express Contract, Not to Disclose or Use in New Employment Special Skills or Techniques Acquired in Earlier Employment, 30 A.L.R.3d 631, § 2 at 636 (1970 and Supp. 2005). [¶5] The body of law on this subject has accumulated over many years and it is well annotated in various authorities. See generally Alois Valerian Gross, Annotation, What is Trade Secret so as to Render Actionable Under State Law its Use or Disclosure by Former Employee, 59 A.L.R.4th 641 (1988 and Supp. 2005); Michael A. Rosenhouse, Annotation, Proper Measure and Elements of Damages for Misappropriation of Trade Secret, 11 A.L.R.4th 12 (1982 and Supp. 2005); K.H. Larsen, Annotation, Former Employee's Duty, in Absence of Express Contract, Not to Solicit Former Employer's Customers or Otherwise Use his Knowledge of Customer Lists Acquired in Earlier Employment, 28 A.L.R.3d 7 (1969 and Supp. 2005); Donald M. Zupanec, Annotation, Criminal Liability for Misappropriation of Trade Secret, 84 A.L.R.3d 967 (1978 and Supp. 2005); and Gregory M. Wasson, Misappropriation of Trade Secret Under the Restatement of Torts, 14 P.O.F.3d 619 (1991 and Supp. 2005). [¶6] Today, there are three primary manifestations of trade secret law. The first is the formulation of the common law tort set forth in the 4 Restatement of the Law of Torts, Division Nine, Part 1, Chapter 36, § 757 at 1-2 (1939): § 757. Liability for Disclosure or Use of Another's Trade Secret-General Principle. One who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if (a) he discovered the secret by improper means, or (b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or (c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person's disclosure of it was otherwise a breach of his duty to the other, or (d) he learned the secret with notice of the facts that it was a secret and that its disclosure was made to him by mistake. [¶7] This version of the common law tort has been supplanted by sections now found in the Restatement (Third) of Unfair Competition (1995). The authors of the Restatement explain that change as follows: Part 1 of the Division covered Interference by Trade Practices and included Chapters 34 (The Privilege to Engage in Business), 35 (Confusion of Source) and 36 (Miscellaneous Trade Practices). The rules relating to liability for harm caused by unfair trade practices developed doctrinally from established principles in the law of Torts, and for this reason the decision was made that it was appropriate to include these legal areas in the Restatement of Torts, despite the fact that the fields of Unfair Competition and Trade Regulation were rapidly developing into independent bodies of law with diminishing reliance upon the traditional principles of Tort law. In the more than 40 years since that decision was initially made, the influence of Tort law has continued to decrease, so that it is now largely of historical interest and the law of Unfair Competition and Trade Regulation is no more dependent upon Tort law than it is on many other general fields of the law and upon broad statutory developments, particularly at the federal level. The Council formally reached the decision that these chapters no longer belong in the Restatement of Torts, and they are omitted from this Second Restatement. If it should be later decided that the law on these subjects ought to be restated, it will be done by separate restatements on the subjects involved. 4 Restatement (Second) of Torts, Division Nine, Introductory Note at 1-2 (1979). [¶8] The commentary accompanying the trade secret provisions now found in the Restatement (Third) of Unfair Competition make it clear that development of these provisions was not meant to be a sea change in the law, but was meant to accommodate the law to developments in the commercial world, especially those wrought by the increased mobility of employees during the industrial revolution. See Restatement (Third) of Unfair Competition, supra, at 425-426. The prohibition against misuse of trade secrets remains a common law cause of action, formulated through case decision, just as before. These new sections provide as follows: § 39. Definition of Trade Secret A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others. § 40. Appropriation of Trade Secrets One is subject to liability for the appropriation of another's trade secret if: (a) the actor acquires by means that are improper under the rule stated in § 43 information that the actor knows or has reason to know is the other's trade secret; or (b) the actor uses or discloses the other's trade secret without the other's consent and, at the time of the use or disclosure, (1) the actor knows or has reason to know that the information is a trade secret that the actor acquired under circumstances creating a duty of confidence owed by the actor to the other under the rule stated in § 41; or (2) the actor knows or has reason to know that the information is a trade secret that the actor acquired by means that are improper under the rule stated in § 43; or (3) the actor knows or has reason to know that the information is a trade secret that the actor acquired from or through a person who acquired it by means that are improper under the rule stated in § 43 or whose disclosure of the trade secret constituted a breach of a duty of confidence owed to the other under the rule stated in § 41; or (4) the actor knows or has reason to know that the information is a trade secret that the actor acquired through an accident or mistake, unless the acquisition was the result of the other's failure to take reasonable precautions to maintain the secrecy of the information. § 41. Duty of Confidence A person to whom a trade secret has been disclosed owes a duty of confidence to the owner of the trade secret for purposes of the rule stated in § 40 if: (a) the person made an express promise of confidentiality prior to the disclosure of the trade secret; or (b) the trade secret was disclosed to the person under circumstances in which the relationship between the parties to the disclosure or the other facts surrounding the disclosure justify the conclusions that, at the time of the disclosure, (1) the person knew or had reason to know that the disclosure was intended to be in confidence, and (2) the other party to the disclosure was reasonable in inferring that the person consented to an obligation of confidentiality. § 42. Breach of Confidence by Employees An employee or former employee who uses or discloses a trade secret owned by the employer or former employer in breach of a duty of confidence is subject to liability for appropriation of the trade secret under the rule stated in § 40. § 43. Improper Acquisition of Trade Secrets Improper means of acquiring another's trade secret under the rule stated in § 40 include theft, fraud, unauthorized interception of communications, inducement of or knowing participation in a breach of confidence, and other means either wrongful in themselves or wrongful under the circumstances of the case. Independent discovery and analysis of publicly available products or information are not improper means of acquisition. § 44. Injunctions: Appropriation of Trade Secrets (1) If appropriate under the rule stated in Subsection (2), injunctive relief may be awarded to prevent a continuing or threatened appropriation of another's trade secret by one who is subject to liability under the rule stated in § 40. (2) The appropriateness and scope of injunctive relief depend upon a comparative appraisal of all the factors of the case, including the following primary factors: (a) the nature of the interest to be protected; (b) the nature and extent of the appropriation; (c) the relative adequacy to the plaintiff of an injunction and of other remedies; (d) the relative harm likely to result to the legitimate interests of the defendant if an injunction is granted and to the legitimate interests of the plaintiff if an injunction is denied; (e) the interests of third persons and of the public; (f) any unreasonable delay by the plaintiff in bringing suit or otherwise asserting its rights; (g) any related misconduct on the part of the plaintiff; and (h) the practicality of framing and enforcing the injunction. (3) The duration of injunctive relief in trade secret actions should be limited to the time necessary to protect the plaintiff from any harm attributable to the appropriation and to deprive the defendant of any economic advantage attributable to the appropriation. § 45. Monetary Relief: Appropriation of Trade Secrets (1) One who is liable to another for an appropriation of the other's trade secret under the rule stated in § 40 is liable for the pecuniary loss to the other caused by the appropriation or for the actor's own pecuniary gain resulting from the appropriation, whichever is greater, unless such relief is inappropriate under the rule stated in Subsection (2). (2) Whether an award of monetary relief is appropriate and the appropriate method of measuring such relief depend upon a comparative appraisal of all the factors of the case, including the following primary factors: (a) the degree of certainty with which the plaintiff has established the fact and extent of the pecuniary loss or the actor's pecuniary gain resulting from the appropriation; (b) the nature and extent of the appropriation; (c) the relative adequacy to the plaintiff of other remedies; (d) the intent and knowledge of the actor and the nature and extent of any good faith reliance by the actor; (e) any unreasonable delay by the plaintiff in bringing suit or otherwise asserting its rights; and (f) any related misconduct on the part of the plaintiff. Restatement (Third) of Unfair Competition, supra, at 425-527. [¶9] In 1979, the National Conference of Commissioners on Uniform State Laws produced the Uniform Trade Secrets Act (UTSA), which is the third current compilation of trade secret law. As amended in 1985, the UTSA is, as its name implies, intended to be legislatively adopted. Because it is a complex statutory scheme with numerous sections, and because we do not consider it appropriate for judicial adoption, we will not set it out here at length. See Uniform Trade Secrets Act with 1985 Amendments §1, 14 U.L.A., 537 (2005). It should be noted, however, that some version of the UTSA has been adopted by forty-four states and the District of Columbia. The states not listed in 14 Uniform Laws Annotated, supra, at 529-30 as having adopted the UTSA are Massachusetts, New Jersey, New York, North Carolina, Texas, and Wyoming. All of these states but Wyoming, however, provide in some manner for a cause of action for misuse of trade secrets. Massachusetts has its own statutes creating tort liability for misappropriation of trade secrets. Mass. Ann. Laws ch. 93, §§ 42 and 42A (Law. Co-op. 1994). North Carolina also has its own statutes. 10 N.C. Gen. Stat. §§ 66-152 through 66-157 (LexisNexis 2005). New Jersey provides protection to trade secrets both under employment agreements and the traditional common law protection afforded to such secrets. Raven v. A. Klein & Co., Inc., 478 A.2d 1208 (N.J. 1984). New York gives recognition to the common law protections articulated in the Restatement of Torts § 757 and the common law. See Leo Silfen, Inc. v. Cream, 278 N.E.2d 636, 639-40 (N.Y. 1972) and Sterling Television Presentations, Inc. v. Shintron Co., Inc., 454 F.Supp. 183, 188 (S.D.N.Y. 1978). Texas recognizes trade secret misappropriation as a common law tort cause of action. Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex.App. 2004).