What is a Trade Secret? (Part 2)

Part 1 explored the basics of trade secrets, including what they are, how they can be protected, and well-recognized examples, like the famous Coca-Cola secret formula.

In this installment, we identify laws that protect trade secrets, and damages available in the event of misappropriation.

What laws protect trade secrets?

Both federal and state civil laws protect trade secrets. These laws protect trade secrets from unlawful “misappropriation,” which means unauthorized acquisition, disclosure or access.  These laws give trade secret owners money damages and equitable remedies, such as injunctions, in the event of misappropriation.

• State Trade Secrets Laws – Every state, except New York and North Carolina, has adopted a version of the Uniform Trade Secrets Act (“UTSA”).  The UTSA was promulgated by the Uniform Law Commission in 1979 to make trade secret law uniform across the nation.

Under the UTSA, “misappropriation” of a trade secret means acquisition or disclosure of a trade secret by improper means, such as theft, bribery, or misrepresentation, or breach of a confidentiality obligation or other duty.  Misappropriation under the UTSA can result in damages, and in some instances, an award of attorneys’ fees.

• New York Common Law – New York has not enacted its own variation of the UTSA, but instead relies on an extensive body of common law (prior court decisions) to govern trade secret claims.  New York courts employ a six-factor test to determine the existence of a trade secret, the main factors being commercial value and secrecy.
• Federal Trade Secrets Law – In 2016, Congress passed the federal Defend Trade Secrets Act (“DTSA”), which established a nationwide uniform trade secret law, and allowed trade secret owners to sue in federal court for misappropriation.

The DTSA significantly overlaps with the UTSA, but there are a few key distinctions. For one, the DTSA allows for extraterritorial reach, meaning plaintiffs may bring suit in a United States federal court even if some unlawful conduct occurred abroad. For instance, if a foreign company misappropriates Coca-Cola’s secret formula in the United States to create a knock-off pop for international sale, Coca-Cola could pursue the foreign company in a United States federal court.

Unlike the UTSA, the DTSA also allows trade secret owners to seize defendant’s property ex parte, meaning by Court order before notifying the defendant. This relief is rare and only meant to prevent imminent and significant harm.  If, for example, Google discovered that a competitor stole its highly confidential search algorithm and was at risk of imminently disseminating the code, Google could apply for this extraordinary remedy.

What damages are available for trade secret misappropriation?

Under the UTSA, New York common law, and the DTSA, money damages can include:

• Actual losses suffered by plaintiff, such as lost profits.
• Unjust enrichment or the value of the unjust benefit a defendant obtains from the misappropriation, which can include defendant’s profits or avoided development costs.
• Reasonable royalties, which is often a catchall category used when it is difficult to calculate other types of damages. A reasonable royalty “attempts to measure a hypothetically agreed value of what the defendant wrongfully obtained from the plaintiff” and “the court calculates what the parties would have agreed to as a fair licensing price at the time that the misappropriation occurred.” Vermont Microsystems, Inc. v. Autodesk, Inc., 88 F. 3d 142, 151 (2d Cir. 1996). If, for example, Tesla incorporated a misappropriated piece of trade secret software in its self-driving car computer program and it was impractical to accurately calculate the value unfairly obtained by Tesla, the reasonable royalty remedy would be appropriate.

Any business that wants to keep valuable information confidential should be aware of the steps needed to protect trade secrets (see What is a Trade Secret, Part 1), the laws that provide those protections, and the damages available for misappropriation.

If you have any questions regarding the information covered in this blog, please contact Daniel Hoffman, Michelle Cho, John Baranello, or your primary attorney at Moses Singer.