E E veryone has heard of trade secrets. Employees are often asked to sign an agreement regarding their protection, whereas employers often worry that employees will move to a competitor and take the company’s trade secrets with them. The Internet appears to contain information on every company now in business (and many no longer in business). Much of the public corporate information now available online would have been viewed as trade secret information just a few years ago. What is a trade secret today? Are trade secrets still important? Are there any left to protect? If yes, how can those secrets be protected in today’s information age? Part one of this article (in BioProcess International’s October issue) discussed legal definitions of trade secrets in the United States and their implications for protection. Part two discusses federal enforcement provisions and specific methods companies can use to protect their trade secrets. THE ECONOMIC ESPIONAGE ACT OF 1996 (EEA) Although the Uniform Trade Secrets Act (UTSA) was a valuable update of the laws designed to protect trade secrets, clearly more was needed, particularly on a federal level, because the states did not uniformly adopt the act. In 1996, Congress passed the EEA to close a federal enforcement gap in this important area of intellectual property law and in recognition of the increasing importance of the value of intellectual property in general (and trade secrets in particular) to the economic well-being and security of the United States. The EEA’s definition of trade secrets is even broader than those of the UTSA (1) and the 1939 Restatement of Torts (2). It defines trade secrets as All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public. (3) In addition to the broad definition of trade secrets, the EEA includes both civil and criminal penalties for violations. It is not intended to criminalize every theft of trade secrets for which civil remedies may exist under state laws (such as under the UTSA). Appropriate discretionary factors that the US Justice Department A Brief History of Trade Secret Law, Part 2 by Ernie Linek Reprinted with permission from BioProcess International 2(10):20-26 (November 2004) ILLUSTRATION BY C.A. SCOTT USING PHOTOGRAPHS FROM PHOTOS.COM NOVEMBER 2004 BioProcess International 1
Transcript
EE veryone has heard of tradesecrets. Employees areoften asked to sign anagreement regarding theirprotection, whereas
employers often worry thatemployees will move to acompetitor and take the company’strade secrets with them. TheInternet appears to containinformation on every companynow in business (and many nolonger in business). Much of thepublic corporate information nowavailable online would have beenviewed as trade secret informationjust a few years ago.
What is a trade secret today? Aretrade secrets still important? Arethere any left to protect? If yes,how can those secrets be protectedin today’s information age? Partone of this article (in BioProcessInternational’s October issue)discussed legal definitions of tradesecrets in the United States andtheir implications for protection.Part two discusses federalenforcement provisions and specificmethods companies can use toprotect their trade secrets.
THE ECONOMIC ESPIONAGE
ACT OF 1996 (EEA)Although the Uniform TradeSecrets Act (UTSA) was a valuableupdate of the laws designed toprotect trade secrets, clearly morewas needed, particularly on a
federal level, because the states didnot uniformly adopt the act.
In 1996, Congress passed theEEA to close a federal enforcementgap in this important area ofintellectual property law and inrecognition of the increasingimportance of the value ofintellectual property in general(and trade secrets in particular) tothe economic well-being andsecurity of the United States. TheEEA’s definition of trade secrets iseven broader than those of theUTSA (1) and the 1939Restatement of Torts (2). It definestrade secrets as
All forms and types of financial,business, scientific, technical,economic, or engineeringinformation, including patterns,plans, compilations, programdevices, formulas, designs,prototypes, methods, techniques,processes, procedures, programs,or codes, whether tangible orintangible, and whether or howstored, compiled, ormemorialized physically,electronically, graphically,photographically, or in writing if —
(A) the owner thereof hastaken reasonable measures tokeep such information secret;and
(B) the information derivesindependent economic value,actual or potential, from notbeing generally known to, andnot being readily ascertainablethrough proper means by, thepublic. (3)
In addition to the broaddefinition of trade secrets, the EEAincludes both civil and criminalpenalties for violations. It is notintended to criminalize every theftof trade secrets for which civilremedies may exist under state laws(such as under the UTSA).Appropriate discretionary factorsthat the US Justice Department
A Brief History of Trade Secret Law, Part 2by Ernie Linek
Reprinted with permission from BioProcess International 2(10):20-26 (November 2004)
ILLUSTRATION BY C.A. SCOTT USING
PHOTOGRAPHS FROM PHOTOS.COM
NOVEMBER 2004 BioProcess International 1
will consider in deciding whether toinitiate a criminal prosecution underthe EEA include the scope ofcriminal activity (including evidenceof involvement by a foreigngovernment, foreign agent, orforeign instrumentality); the degreeof economic injury to the tradesecret owner; the type of tradesecret misappropriated; theeffectiveness of available civilremedies; and the potentialdeterrent value of prosecution.
Some acts prohibited by the EEAinclude unauthorized taking,copying, and receiving of tradesecrets. The EEA also prohibits anyattempt at such activity orconspiracies with others to engagein such activity. Moreover, thestatute broadens this description toinclude any possible means ofcommitting the offending acts,including all forms of electronicactivity. The EEA covers not onlythe activities of corporations, butalso those by and on behalf offoreign governments.
Foreign Activity (EconomicEspionage): The EEA prescribes a fineof up to $500,000 or imprisonmentfor not more than 15 years (or both)to anyone who commits theprohibited acts intending orknowing that such events will benefita foreign government,instrumentality, or agent.
Domestic Activity (Theft of TradeSecrets): The EEA similarly prohibitstaking, copying, or receiving tradesecrets without authorization in thedomestic context for those tradesecrets that are related to orincluded in a product and placed ininterstate or foreign commerce.
The statute adds threerequirements that are not presentwith regard to espionage on behalfof foreign governments orinstrumentalities. The wrongfulconduct must
• be committed with the intentto convert the trade secret
• economically benefit anyoneother than the owner, and
• be committed with the intentor knowledge that the offense willinjure the owner of the trade secret.
A domestic offense also carriescriminal penalties of up to 10 years,making the penalties for USviolations somewhat less severe thanthose related to foreign activity. Forforeign activity, the EEA protectsagainst the conveyance of merely a“benefit,” rather than an “economicbenefit,” as for domestic activity.This recognizes that the benefitbestowed on a foreign governmentor instrumentality need not be aneconomic one.
Violators of the EEA are subjectnot only to the criminal penaltiesdescribed above, but to theforfeiture of any proceeds obtainedby the violator, either directly orindirectly, as a result of suchviolation. Moreover, the violator’sproperty used or intended to beused to commit or facilitate thecommission of the violation can beseized by the US government.
The US Justice Department mayalso use a civil action to seek andmaintain appropriate injunctive reliefagainst violation of the EEA. TheEEA provides no injunctive relief toprivate parties. They must continueto resort to the traditional civilinjunctive remedies of state courts.
The EEA clearly has a globalreach by extending beyond theborders of the United States whenan offender is a citizen or permanentresident alien of the United States oris an organization organized underthe laws of the United States or astate or political subdivision thereof.The EEA also applies to conductoutside the United States if an act tofurther such conduct was committedinside the United States.
The EEA does not expresslyprovide for any defenses. However,the legislative history of the EEAsuggests that defenses traditionallyavailable in a civil action for theft oftrade secrets are equally applicableto defend against criminal charges.Specifically, the legislative historyindicates that acquiring a tradesecret through parallel developmentor reverse engineering is not illegal.
Parallel Development: The ownerof a trade secret, unlike the holder ofa patent, does not have an absolutemonopoly on the information ordata that compose it. Othercompanies and individuals have theright to discover the elements of atrade secret through their ownresearch and hard work. In 1974, theSupreme Court recognized this fact,stating:
If something is to be discovered atall, very likely it will be discoveredby more than one person. . . .Even were an inventor to keep hisdiscovery completely to himself,something that neither the patentnor trade secret laws forbid, thereis a high probability that it will besoon independently developed. Ifthe invention, though still a tradesecret, is put into public use, thecompetition is alerted to theexistence of the inventor’s solutionto the problem and may beencouraged to make an extraeffort to independently find thesolution thus known to bepossible. (4)
Reverse Engineering: Similarly, aperson can legally discover theelements of a trade secret by reverseengineering, the practice of takingsomething apart to determine how itwas made or manufactured. TheSupreme Court recognized thisimportant fact as well, stating thatthe law does not protect the ownerof a trade secret from “discovery byfair and honest means, such asindependent invention, accidentaldisclosure, or by so-called reverseengineering” (4).
The EEA does not expresslyaddress when reverse engineeringwould be a valid defense; however,legislative history suggests that “the
Acquiring a tradesecret throughparalleldevelopment or reverseengineering isNNOOTT illegal.
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important thing is to focus onwhether the accused has committedone of the prohibited acts of thisstatute rather than whether he orshe has reverse engineered. Ifsomeone has lawfully gained accessto a trade secret and can replicate itwithout violating copyright, patent,or this law, then that form of reverseengineering should be fine” (5).
Therefore, to avoid a successfulclaim by a defendant that hediscovered the trade secret byreverse engineering, the means bywhich that defendantmisappropriated the trade secretshould be established. Furthermore,a defendant cannot defeat a criminalprosecution simply by claiming thetrade secret could have beendiscovered by reverse engineering.The proper focus of inquiry is notwhether an alleged trade secret canbe deduced by reverse engineeringbut rather, whether improper meansare required to access it.
A FEW REPORTED EEA CASES
June 2002: Two people were arrestedin California on a federal complaintissued out of federal court in Bostoncharging them with theft of tradesecrets from Harvard MedicalSchool’s Department of CellBiology while they were researchfellows. They were charged in acriminal complaint with conspiracy,theft of trade secrets, and interstatetransportation of stolen property.The charges arose out of the allegedtheft of certain trade secretsbelonging to Harvard MedicalSchool, including reagents madeand used by the school to developnew immunosuppressive drugs forcontrolling organ rejection and alsoto study the genes that regulate animportant signaling enzyme in theheart, brain, and immune systems.
It is alleged that the individualseach signed a participationagreement upon coming toHarvard, in which they agreed thatall rights to any invention ordiscovery conceived or first reducedto practice as part of, or related to,their university activities wereassigned to Harvard, and that theirobligations would continue aftertermination of their Harvardemployment. It is alleged thatdespite their legal and contractualobligations, they took and conspiredto take proprietary and highlymarketable scientific informationbelonging to Harvard with theintention of profiting from it bycollaborating with a Japanesecompany to create and sell relatedand derivative products or otherwisecapitalize on the information.
If convicted, they each face amaximum sentence of five years’imprisonment on the conspiracycharge, 10 years on the theft of tradesecrets charge, and 10 years on theinterstate transportation of stolenproperty charge. Additionally, thedefendants face a maximum fine of$250,000 on each of the charges, andany prison term would be followedby three-years of supervised release.
May 2002: In another case, the USAttorney for the Northern District ofOhio announced that an accusedpled guilty to a one-countInformation (a formal criminalcharge filed by a prosecutingattorney without the aid of a grandjury), charging him with making falsestatements to the government. TheInformation charges that on 2 September 1999, the accusedprovided a materially false, fictitious,and fraudulent statement in aninterview with special agents of theFederal Bureau of Investigation, whowere investigating the theft of
research and materials from theCleveland Clinic Foundation (CCF).The accused falsely understated thenumber of vials of research materialthat had been taken from alaboratory by a second defendant, byinitially indicating that 10 or fewervials had been taken, when in fact,several hundred vials were taken.
An indictment is still pendingagainst the second defendant,charging him with conspiracy,economic espionage act offenses,and transporting stolen property ininterstate and foreign commerce.Defendant 2 is alleged to haveconspired to steal from the CCFDNA and cell line reagents andconstructs developed by researchersat CCF and to have committed twocounts of economic espionage bystealing trade secrets and alteringand destroying them.
In 2004, the Tokyo High Courtturned down a request to extraditeDefendant 2 to the United States tostand trial on industrial espionagecharges, marking Japan’s firstrejection of an extradition requestfrom American authorities.
January 2002: The US Attorneyannounced that two defendantswere sentenced after entering guiltypleas to a two-count indictmentcharging them with conspiracy toconvey trade secrets and thesubstantive offense of conveyingtrade secrets.
Defendant 1 was sentenced to 14months confinement (seven to beserved in a community correctionalcenter), two years supervised release,and a special assessment of $200.Defendant 2 was sentenced to 10months confinement (five in acommunity correctional center),two years supervised release, and aspecial assessment of $200.
These defendants were convictedof conspiring to convey trade secretsand conveying trade secrets.Defendant 1 obtained numerouspieces of proprietary informationowned by RP Scherer, Inc. (RPS)from a friend in Florida. Theinformation included gel formulas,fill formulas, shell weights, andexperimental production order
The proper focus of inquiry is not whether analleged trade secret can be deduced by reverseengineering, but whether IIMMPPRROOPPEERR means arerequired to access it.
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(EPO) data. This information wasknown by the defendant to beproprietary information and tradesecrets of RPS. Defendant 1 andDefendant 2 attempted to sell theinformation to NPB, a competitorof RPS.
NPB actively cooperated withfederal authorities and the victimcorporation. Without the assistanceof this competitor corporation, thesuccessful prosecution of this casewould not have been possible.
TAKE-HOME LESSONS
What does all of this mean to areader of this publication — as anemployee or an employer?
Trade Secrets Still Exist, and TheyAre Protectable Under Both Federaland State Law: Employers andemployees must make adequateefforts to protect secrets for them toremain valid. For example, when anew discovery is made you havethree choices:
• Announce your discovery tothe world — make it public. You
receive instant recognition for thediscovery but no right to preventothers from copying it.
• Patent the discovery so you canhave the right to exclude othersfrom using it for up to 20 years — ifa patent issues.
• Keep the discovery a secret. Itis your property and it gives you acompetitive advantage. Why discloseit to others? Patents, if granted,don’t last forever, so keep it secret— unless the secret is easy to reverseengineer or you fear paralleldevelopment.
A Trade Secret Can Last Forever —As Long As You Keep It a Secret: Thinkof the formula for Coca-Cola®. Asearch of the Internet for the“formula” reveals many, manyguesses — each claiming to be thereal deal. It is likely that the formulafor Coca-Cola® has been modifiedmore than once since the originalversion was first sold in 1886, butonly the owner of the trade secret— The Coca-Cola Company —knows the actual formula.
Keeping a Trade Secret “Secret” CanBe Difficult: Again, the Coca-Cola®
formula is a prime example. As asearch of the Internet shows, manypeople have tried and are likely stilltrying to duplicate the “secret”formula. Some do it to satisfy theirintellectual curiosity. Others do it tomake a competitive product. If yourtrade secret can be determined byreverse engineering, you can be surethat someone will find it.
In addition to reverseengineering, you can lose your tradesecret in other ways. If visitors toyour company can learn your secrets,they may do so. Former employeesmay take your secrets with them.Employment agreements may beneeded to reinforce employeerecognition of the importance ofprotecting your trade secrets. And ifyou enter into a joint developmentagreement with another companyand fail to protect your trade secrets,they may no longer be protectableeven before that developmentagreement ends.
A SAMPLE EMPLOYMENT AGREEMENT
EMPLOYEE AGREEMENT REGARDING CONFIDENTIAL INFORMATION
I, the undersigned employee, in consideration of my employment or continued employment in any capacity with__________________________________________ [hereafter, THE COMPANY], the salary or wages paid for my services inthe course of such employment, and the use of the facilities and experience of THE COMPANY, and of the opportunitygiven by THE COMPANY to me to acquire CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION relating tothe business of THE COMPANY, voluntarily agree as follows:
I agree to keep secret and not to disclose any CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION of THECOMPANY, including information received in confidence by THE COMPANY from others, either during or after myemployment with THE COMPANY, except upon written consent of THE COMPANY.
I understand that the terms CONFIDENTIAL INFORMATION and PROPRIETARY INFORMATION are used by THECOMPANY to identify valuable and protectable business information which may be used in conducting the business of THECOMPANY and which may give THE COMPANY an opportunity to obtain an economic advantage over competitors whodo not know it or use it. This includes information that I conceive or develop as well as information that I learn from otheremployees of THE COMPANY.
I will not, except as THE COMPANY may otherwise consent or direct in writing, reveal, or disclose, sell, use, lecture upon,or publish any CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION of THE COMPANY, or authorize anyoneelse to do these things at any time either during or subsequent to my employment with THE COMPANY.
I understand that this Agreement shall continue in full force and effect after termination of my employment. Providedhowever, that my obligations under this Agreement shall cease when any specific CONFIDENTIAL INFORMATION orPROPRIETARY INFORMATION of THE COMPANY becomes publicly known through the activities of another, without mydirect or indirect aid or assistance.
Can I Use Both Patent Law andTrade Secret Law to Protect the SameDiscovery? Generally — no. Thepatent laws of the United Statesrequire full disclosure of aninvention, including the best mode(the base way to make and use theinvention) known or contemplatedby its inventor when the patentapplication is filed. Any attempt tokeep part of the invention a tradesecret would invalidate the patentbecause the “best mode” would notbe disclosed. On the other hand,improvements of an invention,made after filing a patentapplication, could be preserved astrade secrets — but not if anotherpatent application were to be filed.
What Are Some Advantages toMaintaining a Trade Secret? A tradesecret can give you an edge over thecompetition in manufacturing,particularly if the secret cannot easilybe reverse engineered. A trade secretcan be used by a seller to bind aprospective purchaser orsubcontractor to secrecy regardinghow a product is made.
What Are Disadvantages toMaintaining a Trade Secret? Reverseengineering, parallel development,and inadvertent disclosures —anyone who has lawfully acquired atrade secret may use it withoutliability unless he acquired it subjectto a contractual limitation orrestriction regarding its use. Formany products, trade secretprotection is therefore not feasiblebecause the nature of the productcan be readily determined by anypurchaser, either directly byinspection or by reverse engineering.
When Should We Choose TradeSecret Protection Instead of PatentProtection? Trade secret protectionshould be relied upon if an inventionis not patentable. Furthermore, tradesecret protection also may be reliedon when the process or product isone that can be readily maintained asa secret because it defies reverseengineering (such as the Coca-Cola®
formula) so that the period ofexclusivity can extend beyond the20-year maximum term of a patent.
What Are Some Disadvantages ofTrade Secret Protection Compared with
Patent Protection? During thelifetime of a US utility patent (up to20 years from the filing date), thepatentee has the right to seekinjunctive relief and monetarydamages from a federal court basedon the unauthorized making, using,selling, or offering for sale of theinvention claimed in the patent.There is no defense in patent lawbased on parallel development orreverse engineering.
The owner of a trade secret,depending on the law of his state(or the decision of the Departmentof Justice), may (or may not) havesimilar rights to seek an injunctionor monetary damages — providedthat there is a defined andprotectable trade secret that hasbeen misappropriated by theaccused. Under some state laws(and the common law) the tradesecret owner has almost no rightsexcept against those who havecontracted, expressly or byimplication, not to disclose thesecret or who have obtained itunfairly. Further, if a trade secret isdisclosed to the public by a breachof confidence, the secret dissolves,and the former trade secret holdergenerally has no recourse againstnew users.
What Steps Can a Company Take toDiscourage Subcontractors from GivingIts Trade Secrets to Other Companies?In addition to using confidentialityagreements between you and anyoutsider that does work for you,your company should stamp anotice, such as the following, oneach document sent out (check withyour local attorney for specificrequirements of your state):
Notice to All Persons ReceivingThis DocumentThis document containsproprietary information and is theproperty of ABC, Inc. (“ABC”)and is delivered to you on theexpress condition that it is not tobe disclosed, reproduced in wholeor in part, or used formanufacture for anyone otherthan ABC without ABC’s priorwritten consent; and that no rightis granted to disclose or use any
information contained in thisdocument, other than asauthorized by ABC.
What Steps Can a Company Take toDiscourage Its Employees from Takingor Giving Its Trade Secrets to NewEmployers or Other Companies?Employment agreements can beuseful as an effort to protect yourtrade secrets. Check with your localattorney for specific requirements ofyour state. A sample agreement onthis subject is shown in the boxaccompanying this article.
REFERENCES1 The Uniform Trade Secrets Act
(“UTSA”) is model legislation drafted by theNational Conference of Commissioners onUniform State Laws. A hard copy withcommissioners’ comments on the varioussections can be ordered from the NationalConference of Commissioners on UniformState Laws, 676 North St. Clair Street, Suite1700 Chicago, Il 60611.
2 Restatement of Torts, Section 757,Comment b (1939).
3 Economic Espionage. US Code,Section 1831 et seq., Title 18, 1996:www4.law.cornell.edu/uscode/18/1831.html.
