PROTECTING CORPORATE CONFIDENTIAL INFORMATION: THE …
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PROTECTING CORPORATE CONFIDENTIAL INFORMATION: THE LAW OF TRADE SECRETS by Professor Michael J. Hutter Albany Law School Albany, New York
Transcript of PROTECTING CORPORATE CONFIDENTIAL INFORMATION: THE …
PROTECTING CORPORATE CONFIDENTIAL INFORMATION: THE LAW OF TRADE SECRETS
by
Professor Michael J. Hutter Albany Law School Albany, New York
PROTECTING CORPORATE
CONFIDENTIAL INFORMATION:
THE LAW OF TRADE SECRETS
MICHAEL J. HUTTER
Professor of Law
Albany Law School
80 New Scotland Avenue
Albany, NY 12208
(518) 445-2360
Special Counsel
Powers & Santola, LLP
39 North Pearl Street
Albany, NY 12207
(518) 465-5995
November 2012
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Part One
The Law of Trade Secrets Misappropriation
I. INTRODUCTION
A. What Is Trade Secrets Misappropriation Law?
1. The law of trade secrets misappropriation seeks to protect a
firm’s secrets or an entrepreneur’s interest in information or technology that
the firm or entrepreneur has created and developed which is both
confidential and commercially valuable.
2. This law protects such valuable assets as “trade secrets” under
certain circumstances against unauthorized acquisition, use, or disclosure by
others, i.e., misappropriation, even though such assets are neither patented or
copyrighted nor patentable or copyrightable.
B. Source
1. The law of trade secrets misappropriation is not created by
federal legislation.
2. It is, and has developed as, a creation of state law since its
emergence in the middle of the nineteenth century. (See, Rockelshaus v.
Monsanto Co., 467 U.S. 986, 1001 [1984]).
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3. The early law of trade secrets misappropriation developed
primarily through the judiciary under the common law of the states. In order
to clarify a confusing body of law, the First Restatement of Torts, published
in 1939, defined “trade secret” and its rules of liability. Courts throughout
the United States adopted the Restatement’s view of the law. (See,
Restatement (First) of Torts §757 [1939]; see also, William B. Barton, A
Study in the Law of Trade Secrets, 13 U. Cin. L. Rev. 507, 515-518
[1939][defining trade secrets by today’s concept, scope and limitations]). In
1995, the new Restatement (Third) of Unfair Competition was issued and
Sections 39-45 address trade secrets and their misappropriation. These
sections largely track the Restatement (First) of Torts and the UTSA,
accepting the UTSA’s desirable changes from the common law.
4. Today, the Uniform Trade Secrets Act, as adopted in 47 states,
the District of Columbia and the U.S. Virgin Islands, has supplanted the
common law as the primary source for protecting trade secrets by its
proscription of trade secrets misappropriation.
5. New York has not adopted the UTSA. A legislative proposal to
adopt it with several modifications to accommodate longstanding New York
practices was passed by the Senate in 2004 but was rejected in the
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Assembly, primarily due to opposition from NYSTLA. New York’s
common law of trade secrets has followed the lead of the First Restatement.
C. Uniform Trade Secrets Act (UTSA)
1. In February 1968, the Executive Committee of the National
Conference of Commissioners on Uniform State Laws authorized the
appointment of a Special Committee on Uniform Trade Secrets Protection
Act. In August 1979, the Committee promulgated the Uniform Trade
Secrets Act and recommended its adoption by the states. The American Bar
Association endorsed it in 1980. In 1985, the Act was amended to clarify
ambiguous provisions and to strengthen its remedial framework.
2. The UTSA was promulgated to replace the existing common
law of the states with uniform statutory framework. Three arguments in
support were advanced. One justification is that many states do not possess
an extensive body of decisional law relating to trade secrets. A second
rationale is that even in jurisdictions with numerous precedents, the case law
does not clearly set forth the parameters of trade secrets protection and the
appropriate remedies for misappropriation of a trade secret. Finally, the
omission of Section 757 from the Restatement (Second) of Torts is cited as
evidence of a need for codification.
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3. Like common law, the UTSA provides in essence that liability
for trade secrets misappropriation requires proof of the existence of a trade
secret and the acquisition of the trade secret by a party by improper conduct
or wrongful means. However, the UTSA makes several desirable changes
from the common law.
D. Criminal Statutes
1. On the federal side, the Economic Espionage Act of 1996 (18
U.S.C.A. §§1831-1839) makes the misappropriation of trade secrets a
federal crime. The statute’s substantive treatment of trade secrets is
consistent with the Restatements and the UTSA.
2. Many states have enacted statutes criminalizing the theft of
trade secrets, or include trade secrets within the scope of general larceny
crimes.
II. CHOICE OF LAW
A. Generally
1. The applicable state law in light of the variations in the UTSA
as adopted and non-UTSA states is an important concern.
2. The vast majority of jurisdictions apply the conflict rules for
tort actions to determine the trade secrets misappropriation law to be applied
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to a pending action. (See, Jager, Trade Secrets Law [2007 rev.] §4:8
[collecting cases]).
(a) Some states follow the traditional lex loci delicti rule -
the law of the locus of the injury. (See, e.g., J.E. Rhoads & Sons, Inc. v.
Ammeraal, Inc., 1988 WL 32012 [Del. Super. Ct.]; Fireworks Spectacular,
Inc. v. Premier Pyrotechnics, Inc., 147 F.Supp.2d 1057 [D. Kan. 2001]).
(b) Other states have abandoned the traditional rule in favor
of an “interest analysis” approach, e.g., apply the law of the state which has
the most significant relationship with the parties. (See, e.g., Softel, Inc. v.
Dragon Medical and Scientific Communications, Inc., 118 F.3d 955 [2d Cir.
1997][applying New York law]; Texas Tanks, Inc. v. Owens-Corning
Fiberglass Corp., 99 F.3d 734 [5th
Cir. 1997][applying Texas law]).
B. Federal Courts
1. Pursuant to Klaxon Co. v. Stentor Elec. Mfg. Co. (313 U.S. 487
[1997]), federal courts sitting in diversity cases must follow the conflict of
laws rules of the state in which they sit.
2. When the action has been transferred to a federal court from
another federal court where venue was proper, that court must apply the
conflict of laws rules of the transferring court. (See, e.g., VanDusen v.
Barrack, 376 U.S. 612 [1964]).
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C. Federal Circuit Court of Appeals
1. When an appeal in a patent infringement action with a pendent
trade secret misappropriation claim is taken to the Federal Circuit Court of
Appeals, that court has held that it will defer to the law of the regional
circuit in which the district sits with respect to non-patent claims. (See, e.g.,
Oddzon Prods., Inc. v. Just Toys, Inc., 122 F.3d 1396 [Fed. Cir. 1997]).
III. PREEMPTION
A. Federal
1. In Kewannee Oil Co. v. Bicron Corp. (416 U.S. 470 [1974]),
the Supreme Court considered the issue of preemption of state trade secret
laws by either the patent and copyright clause of the federal constitution or
the patent statutory scheme and held that: “Neither complete nor partial
preemption of state trade secret law is justified.”
2. Trade secrets misappropriation law is not preempted by the
federal copyright act as trade secret rights are not “equivalent” to copyright
protection and have an “extra element” proof requirement. (See, e.g.,
Computer Assoc. Intl., Inc. v. Altai, Inc., 982 F.2d 693 [2d Cir. 1992];
Boeing Co. v. Sierracin Corp., 108 Wash.2d 38, 738 P.2d 665 [1987]; see
generally, Jager, Trade Secrets Law [2007 rev.] §10.6 [collecting cases]).
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B. UTSA
1. §7(a), consistent with a purpose in enacting the act to “make
uniform the law with respect to” trade secrets and to preclude inconsistent
theories of relief for the same wrong, eliminates other causes of action where
the underlying wrong is the misappropriation of a trade secret, as defined in
§1. Thus, a cause of action claimed to be based only on a the common law
or unjust enrichment or unfair competition or breach of fiduciary duty, or
seeking an accounting where the underlying wrong was the misappropriation
of trade secrets, is preempted. (See, e.g., Composite Marine Propellers, Inc.
v. Van Der Woude, 962 F.2d 1263 [7th
Cir. 1992][applying Illinois law];
Allegiance Healthcare Corp. v. Coleman, 232 F.Supp.2d 1329 [S.D. Fla.
2002][applying Florida law]; Nora Beverages, Inc. v. Perrier Group of
America, 164 F.3d 736 [2d Cir. 1998][applying Connecticut law]).
2. However, under §2(b) to the extent that a cause of action exists
which is not dependent on a trade secret that cause of action continues to
exist, even thought it may involve a trade secret. In other words, where
more than a mere misappropriation of a trade secret is involved, that claim is
not preempted. Such claims would include breach of a fiduciary duty in
recruiting other employees of the former employee to work for a new
company, not dependent upon the misappropriation of a trade secret (see,
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e.g., Labor Ready, Inc. v. Williams Staffing, LLC, 149 F.Supp.2d 398 [N.D.
Ill. 2001]); inducing the breach of a nondisclosure covenant (see, e.g., IDX
Systems Corp. v. Epic Systems Corp., 285 F.3d 581 [7th
Cir. 2002][applying
Wisconsin law]); and diversion of corporate opportunities. (see, e.g., Hecny
Trans., Inc. v. Chu, 430 F.3d 402 [7th
Cir. 2005][applying Illinois law]).
3. One distinct split has occurred. One line of cases holds that §7
does not preempt civil claims based on information that fails to qualify as a
trade secret, stating that until it is determined whether the allegedly
misappropriate information constitutes a trade secret, the question of
preemption cannot be addressed. (See, e.g., Burbank Grease Services, Inc.
v. Sokoloswki, 294 Wisc.2d 274, 717 N.W.2d 781 [2006]; Cenveo Corp. v.
Slater, 2007 W.L. 527720 at *3 [E.D. Pa.]). Another line of cases holds that
determining whether the allegedly misappropriated information constitutes a
trade secret is irrelevant for preemption purposes because the UTSA
preempts all claims based upon the unauthorized use of information, even if
the information does not meet the statutory definition of a trade secret. (See,
e.g., Ethypharm S.A. France v. Bentley Pharmaceuticals, Inc., 388
F.Supp.2d 426, 433 [D. Del. 2005]; Mortgage Specialists, Inc. v. Davey, IV,
904 A.2d 652, 664 [N.H. 2006]; Chatterbox, LLC v. Pulsar Elec., LLC, 2007
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W.L. 1388183 [D. Idaho]; Patriot Homes, Inc. v. Forest River Housing, Inc.,
489 F.Supp.2d 865 [N.D. Ind. 2007]).
Part Two
Definition of Trade Secret
I. INTRODUCTION
A. Elements of a Trade Secret Under UTSA
1. §1(4) sets forth three elements as the basis of the trade secret
definition. They are: first, a trade secret must be information: second, it
must have actual or potential independent economic value based on its
secrecy; and third, reasonable efforts have been maintained to protect its
secrecy.
2. The existence of a trade secret ordinarily is a question of fact.
(See Nilssen v. Motorola, Inc., 963 F.Supp. 664, 675 [N.D.Ill.1997]
[applying Illinois law]; see also Penalty Kick Mgm’t Ltd. V. Coca Cola Co.,
318 F.3d 1284, 1291 [11th
Cir.2003] [applying Georgia law]; Pate v. Nat’l
Fund Raisinf Consultants, Inc., 20 F.3d 341, 344 [8th Cir. 1994] [applying
Colorado law]; Chevron U.S.A. Inc. v. Roxen Serv., Inc., 813 F2d 26, 29 [2d
Cir. 1987] [applying New York law].
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B. Restatement of Torts Approach
1. The Restatement of Torts (1939) suggests that in deciding
whether a trade secret exists in accordance with its definition several factors
should be considered: “(a) the extent to which the information is known
outside of [the] business; (b) the extent to which it is known by employees
and others involved in [the] business; (c) the extent of measures taken by [the
business] to guard the secrecy of the information; (d) the value of the
information to [the business] and its competitors; (e) the amount of effort or
money expended by [the business] in developing the information; (f) the
ease or difficulty with which the information could be properly acquired or
duplicated by others.”
2. These factors are sometimes useful in UTSA jurisdictions in
determining whether a trade secret exists. (See, Learning Curve Toys, Inc. v.
Playwood Toys, Inc., 342 F.3d 714, 722-730 [7th
Cir. 2003]).
3. The courts do not construe the foregoing factors as a six-part
test in which the absence of evidence on any single factor necessarily
precludes a finding of trade secret protection. Instead they interpret the
common law factors as instructive guidelines for ascertaining whether a
trade secret exists under the UTSA.
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II. PROTECTIBLE SUBJECT MATTER
A. Generally
1. §1(4) closely follows the common law and the Restatement of
Torts definition with notable changes. The Restatement of Torts definition
tacitly recognized that a trade secret is information. Although the
Restatement provides examples of categories of information that are
protectible, the addition of the words “including but not limited to” indicates
the examples are not intended to be exclusive. Additionally, while the
Restatement of Torts lists “formula, pattern, device or compilation of
information”, subdivision 4 adds “data, program, method and technique” to
the list. This is done to accommodate modern technology, (e.g., “data” and
“program”) as recognized by the courts. “Methods” and “techniques” are
added to insure that the concept of “know-how,” recognized in several cases
as knowledge gained by an employee during employment, is protectible
information. “Technical and non-technical” is added as a preface to ensure
that the common law treatment of non-technical information as protectible
subject matter continues.
2. Under this definition almost any information used in the
conduct of one’s business may be protected as a trade secret. This
information may be technical or non-technical in nature. Thus, formulas,
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manufacturing techniques and product specifications, customer lists and
information, and information relating to merchandising, costs and pricing,
are all protectible subject matter. Computer technology, whether it relates to
hardware or software, and whether copyrightable or patentable, may also be
protectible as a trade secret.
3. Although a wide variety of business information can qualify as
protectible subject matter, the skills and efficiency which an employee
develops through his or her work or general knowledge are not considered
protectible subject matter which belongs to his or her employer. (See, SI
Handling Systems Inc. v. Heisley, 753 F.2d 1244 [3d Cir. 1985]; L.M.
Rabinowitz & Co. v. Dasher, 82 N.Y.S.2d 431, 439 [N.Y. Sup. Ct. 1948]).
Merrill Lynch v. E.F. Hutton & Co. (403 F.Supp. 336 [E.D. Mich. 1975])
illustrates the difficulty that will sometimes be present in distinguishing
between knowledge which belongs to a firm and that which belongs to its
employees.
4. Abstract ideas or general principles which are not embodied in
a specific form are also not protectible subject matter. (See, Matalese v.
Moore-McCormack Lines, Inc., 158 F.2d 631 [2d Cir. 1946]; Daktronics,
Inc. v. McAfee, 599 S.W.2d 358 [S.D. 1999]).
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B. Use
1. Unlike the common law and the Restatement of Torts, the
UTSA recognizes that information does not need to be in continuous use to
be protectible. (See, Portfolio-Scope, Inc. v. I-Flex Solutions, 473 F.Supp.
252 [D. Mass. 2007][applying common law rule]). Thus, information
concerning a single event which has passed, or short-lived information or
information that has not yet been put to use, can be protectible. Such
information can certainly be valuable, and there is no reason to exclude it
categorically from protection simply because it is not in “continuous use.”
2. Similarly, “negative know-how,” (i.e., knowing what not to do)
is potentially protectible. Cases that hold that such types of information do
not constitute protectible trade secret subject matter have been rejected by
the UTSA.
C. Examples
1. Technology Related Information (See, e.g., Kewanee Oil Co. v.
Bicron Corp., 416 U.S. 470 [1974][manufacturing process]; Syntex
Ophthalmics, Inc. v. Novicky, 214 U.S.P.Q. 272 [N.D. Ill. 1982], affd., 701
F.2d 677 [7th
Cir. 1983][same]; Coca-Cola Bottling Co. v. Coca Cola Co.,
107 F.R.D. 288 [D. Del. 1985][formula]; Hickory Specialties, Inc. v. B & L
Labs, Inc., 592 S.W.2d 583 [Tenn. 1979][temperature, moisture and air
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parameters]; Boeing Co. v. Sierracin Corp., 108 Wash.2d 38, 738 P.2d 665
[1987][manufacturing plans and specifications]; S.I. Handling Systems, Inc.
v. Heisley, 753 F.2d 1244 [3d Cir. 1985][production/manufacturing
“tolerances”]).
2. Design Drawings (See, e.g., Mike’s Train House, Inc. v. Lionel,
LLC, 472 F.2d 398 [6th
Cir. 2006]; Fosso Precision, Inc. v. I.B.M., 673 F.2d
1045 [9th
Cir. 1982]).
3. Production Machinery (See, e.g., Anaconda Co. v. Metric Tool
& Die Co., 485 F.Supp. 410 [E.D. Pa. 1980]; Uncle B’s Bakery, Inc. v.
O’Rourke, 920 F.Supp. 1405 [N.D. Iowa 1996][bagels]).
4. Customer Identity (See, generally, Anno., 28 A.L.R.3d 7
[thorough collection of cases]).
5. Customer Information (Contact Person, Needs, Preferences,
Financial, Renewal Dates, Pricing, etc.) (See, e.g., Panther Sys. II Ltd. V.
Panther Computer Sys., Inc., 783 F.Supp. 53 [E.D. N.Y. 1991]; Ecolab, Inc,
v. Paolo, 753 F.Supp. 1100 [E.D. N.Y. 1991]; Kovarik v. Am. Family Ins.
Group, 108 F.3d 962 [8th
Cir. 1996]).
6. Company Product and Financial Information (See, e.g., Amer.
Bldg. Maintenance Co. v. Acme Prop. Services, Inc., 515 F.Supp.2d 298
[N.D. N.Y. 2007][negotiable profit margin; pricing and billing practices;
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strengths and weaknesses of product; customization methodology; sales
support services]; Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112 [Fed.
Cir. 1996][Rich, J.][financial information relating to manufacturing
process]; LeJeune v. Coin Acceptors, Inc., 381 Md. 288, 849 A.2d 451
[2004][budgeting software, strategic marketing plan for special markets,
pricing and cost information, service pricing information]; Western
Electroplating Co. v. Hennes, 180 Cal. App.2d 442, 4 Cal. Rptr. 434
[1960][marketing studies]).
7. Miscellaneous (See, e.g., Learning Curve Toys, Inc. v.
Playwood Toys, Inc., 342 F.3d 714 [7th
Cir. 2003][concept for noise-
producing toy railroad truck]).
III. ECONOMIC VALUE
A. Generally
1. The second definitional element is that to be protectible the
information must have “economic value, actual or potential.” Such value is
derived from the information “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. By focusing on this element, UTSA does not require any
showing of novelty to establish value.
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3. It should also be noted that potential value will suffice. This is
consistent with the information element, which does not impose any use
requirement.
B. Secrecy
1. Under this definition, the information must derive its value
from being secret. Information generally known in the industry cannot be
protected as a trade secret.
2. Only relative secrecy, not absolute secrecy, is required. Thus,
confidential disclosures to employees, licensees, etc., do not destroy the
element of secrecy.
3. Claims of secrecy will be defeated by a showing that a
competitor of the alleged trade secret’s owner had previously used the
matter in question in its business, that the alleged misappropriator had
already been using the information, that the information had been widely
circulated before the alleged misappropriation, or that the information can be
readily obtained from public sources.
4. Information which is “readily ascertainable” through reverse
engineering or inspection cannot meet the secrecy element. (See, e.g.,
Roboserve, Ltd. V. Tom’s Foods, Inc., 940 F.2d 1441 [11th
Cir. 1991];
Permagrain Prods. V. U.S. Mat & Rubber, 489 F.Supp. 108 [E.D. Pa. 1980];
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Flotec Inc. v. Southern Reseearch, Inc., 16 F.Supp.2d 992 [S.D. Ind. 1998]).
Whether the information is “readily ascertainable” depends on the extent of
the effort required. (See, e.g., Gates Rubber co. v. Bando Chem. Indus., Ltd.,
9 F.3d 823 [10th
Cir. 1993]; Hollingsworth Solderless Terminal Co. v.
Turley, 622 F.2d 1324 [9th
Cir. 1980]; Dicks v. Jenson, 768 A.2d 1279 [Vt.
2001][customer information]; Am. Printing Converters, Inc. v. JES Label
and Tape, Inc. 477 N.Y.S.2d 660 [App. Div. 1984][customer information]).
(a) Expert testimony on this issue would be admissible. (See,
Learning Curve Toys, Inc. v. Playwood Toys, Inc., 342 F.3d 714 [7th
Cir.
2003]).
5. The case law consistently holds that the fact that part, or even
eventually all, of the separate or individual components of a trade secret are
matters in the public domain or of public knowledge does not prohibit a
claim of trade secret. (See, BBA Nonwovens Simpsonville, Inc. v.
Superiorware Nonwovens, LLC, 303 F.3d 1332, 1339 [Fed. Cir.
2002][applying South Carolina law]; Capital Asset Research Corp. v.
Finnegan, 160 F.3d 683 [11th
Cir. 1998][applying Georgia law]). Thus, as
stated by the Second Circuit: “A trade secret can exist in a combination of
characteristics and components, each of which, by itself, is in the public
domain, but the unified process, design and operation of which, in unique
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combination, affords a competitive advantage and is a protectable secret.”
(Imperial Chem. Indus. v. Natl. Distillers, 342 F.2d 737, 742 [2d cir. 1965]).
(a) Expert testimony on this issue is admissible. (See, BBA
Nonwovens, supra).
IV. REASONABLE PRECAUTIONS
A. Generally
1. The third definitional element requires the trade secret owner to
take reasonable precaution to prevent disclosure in order to have a
protectible trade secret.
2. The case law does not provide any bright line rule as to what
efforts must be taken to show “reasonableness.” The owner does not have to
take every conceivable precaution. (See, E.I. duPont deNemours & Co., Inc.
v. Christopher, 431 F.2d 1012 [5th
Cir. 1970]). Although there is no
mandated checklist of minimally acceptable precautions, the courts will look
askance upon measures that are obviously insufficient. Thus, the owner must
at a minimum make satisfactory efforts to identify the subject matter, notify
others that it regards the subject matter as proprietary and protect against
reasonably foreseeable means of obtaining the trade secret.
3. Ultimately, courts determine the issue of reasonableness on a
case-by-case basis, considering the efforts taken and the costs, benefits, and
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practicalities of the circumstances. (See, e.g., Rockwell Graphic Sys., Inc. v.
DEV Indus., Inc., 925 F.2d 174 [7th
Cir. 1991]; Tax Track Systems Corp. v.
New Investor World, Inc., 478 F.3d 783 [7th
Cir. 2007]).
(a) Expert testimony on the issue of reasonableness is
admissible. (See, Wyeth v. Natural Biologics, Inc., 2003 WL 22282371 *5
[D. Minn.], affd., 395 F.3d 897 [8th
Cir. 2005]).
4. In Rockwell (925 F.2d 174, supra), the court rejected a “trade
secret misuse” rule whereby a firm would forfeit trade secret protection if it
marked as “secret” documents that do not in fact contain trade secrets.
B. Case Law Examples
1. Rockwell (925 F.2d 174, supra [fact issue as to whether printing
press manufacturer took reasonable precautions to protect its trade secrets in
its piece part drawings used to manufacture replacement parts precluded
summary judgment in action against competitor for misappropriation of
trade secrets; manufacturer kept drawings in vault, employed security guards
and contracted with vendors who used drawings to manufacture replacement
parts to maintain confidentiality of drawings]).
2. Wyeth (395 F.3d 897, supra [based on the lack of repeated
losses of confidential information regarding the “Brandon Process” and
Wyeth’s use of physical security, limited access to confidential information,
20
employee training, document control, and oral and written understandings of
confidentiality, the court concluded that Wyeth subjected the “Brandon
Process” to efforts that are reasonable under the circumstances to maintain
its secrecy]).
3. Storage Technology v. Cisco Sys., Inc. (2003 WL 22231544 [D.
Minn][firm did not use reasonable efforts to protect alleged trade secret
because plaintiff “used general employee- confidentiality agreements” that
are insufficient to satisfy the statutory requirement” of reasonable efforts,”
did not mark documents as confidential, stored documents on unsecured
“back up discs left behind by departing employees and did not inform
departing employee of confidentially requirements]).
4. Hildreth Mfg., Inc. v. Semco, Inc. (151 Ohio App.3d 693, 785
N.E.2d 774 [2003][firm did not exercise reasonable efforts when employees
were not required to sign non-disclosure agreements, there were no
instructions given to shred confidential information, documents were not
marked as confidential when they left the facility, there were public tours of
the building, one of which included one of the firm’s competitors]).
5. In Re Bass (113 S.W.2d 735 [Tex. Sup. Ct. 2003][firm
exercised reasonable efforts to protect secrecy of seismic data when, among
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other things, data “were kept in a secured, climate regulated vault that was
accessible only to those who knew the combination”]).
Part Three
Misappropriation
I. INTRODUCTION
A. Generally
1. Under §1, misappropriation of a trade secret must be
established before liability is imposed.
2. §1(2) specifies the instances in which misappropriation will be
present. §1(1) defines “improper means” which definition is integral to
§1(2)’s specified instances.
B. Presence of Misappropriation
1. To prove a misappropriation, the trade secret owner must show
that the alleged misappropriator (a) acquired the trade secret knowing or
having reason to know it was acquired by “improper means”; or (b) used or
disclosed the trade secret without consent and used “improper means” to
acquire the “trade secret”; or (c) acquired the trade secret from a third person
rather than from the owner of the trade secret and knew of or should have
known that the trade secret was either obtained by the third person by
“improper means” or the third person was under a duty to keep it secret.
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2. As to “improper means”, the specification of “theft,” “bribery,”
“misrepresentation,” “espionage” or “inducement of a breach of a duty to
maintain secrecy” follows the cases that recognized such independently
tortuous or criminal conduct as “improper.” The “breach of duty to maintain
secrecy” follows the cases that predicate an “improper” finding on such
conduct. The term “other means” following espionage through electronics,
give the courts the flexibility to condemn devious forms of obtaining trade
secrets, which fall sort of proper means such as independent development or
reverse engineering.
3. In essence, §1 provides that misappropriation will be present,
e.g., improper means present, when one who stands in neither a fiduciary nor
confidential relationship to the trade secret owner acquires a secret by means
that are “improper,” e.g., wrongful taking; and one uses for his or her own
purposes a trade secret revealed under an obligation not to use it, e.g.,
unauthorized use. (See, generally, Pooley, Trade Secrets [2008 ed.] §§6:01-
6:03).
4. The UTSA closely tracks the common law.
C. Acquisition by “Accident or Mistake”
1. Under §1, misappropriation may be present with respect to a
person who uses or discloses a trade secret acquired through accident or
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mistake. In such a situation, misappropriation will be established only if the
person knows or has reason to know that the information was a trade secret
and that such actual or constructive knowledge of the trade secret was
acquired by accident or mistake; that the alleged misappropriator’s actual or
constructive knowledge occurred before there is any material change in the
alleged misappropriator’s position.
2. Misappropriation will be defeated if the accident or mistake
was due to a failure by the trade secret owner to employ reasonable efforts to
maintain secrecy.
D. Acquisition by “Memory”
1. It is important to note that the employer does not lose his
protection when the former employee reconstructs secret technical
information from memory. Thus, in A.H. Emry Co. v. Marcan Products
Corp. (268 F.Supp. 289 [S.D. N.Y. 1967], affd. 389 F.2d 11 [2d Cir. 1968]),
plaintiff charged that a former employee, Mills, had memorized its trade
secrets regarding the design, construction, and manufacture of a hydraulic
load cell, and then disclosed them to the defendant company. The trial court
ruled that “it is as much a breach of confidence of an employee to reproduce
his employer’s drawings from memory as to copy them directly.” (268
F.Supp. at 300). On appeal, the Second Circuit affirmed, holding “that the
24
information contained in its parts drawings, which had been reproduced
from memory by [the draftsmen] for the use of the defendants, constituted
protectable [sic] secrets.” (389 F.2d at 15). Similarly, in Sperry Rand Corp.
v. Rothlein (241 F.Supp. 549 [D. Conn. 1964]), the defendants were charged
with trade secret misappropriation. Their defense was that the trade secrets
had been copied from memory. To this defense the court responded: “It
may be and if so, it was a remarkable display of memory, for numerous
measurements were in thousandths of an inch. But it does not matter
whether a copy of a Sperry drawing came out in a defendant’s hand or in his
head. His duty of fidelity to his employer remains the same.” (Id. at 563).
Finally, in Jet Spray Cooler, Inc. v. Crampton (361 Mass. 835, 282 N.E.2d
921 [1972]), the Supreme Judicial Court of Massachusetts held that even
though no list or paper was taken, the former employee would be enjoined
from disclosure if the information which he gained through his employment
and retained in his memory is confidential in nature.
2. In Manuel v. Convergys Corp. (430 F.3d 1132 [11th
Cir. 2005]),
the Eleventh Circuit, applying Georgia law, held that the Georgia Trade
Secret Act did not prohibit former employees from using or disclosing
knowledge of trade secrets that they retained in their minds in the absence of
any allegation that the employee had actual possession of tangible trade
25
secrets, i.e., documents or computer files. (See, Sausser and Payne, “When
Are Otherwise Protectable Trade Secrets Not Shielded?”, Business Torts
Journal [ABA Section of Litigation, Business Torts Litigation Committee],
Vol. 13, Spring 2006, p. 13 [discussing implications of decision]).
3. Pre-UTSA cases reached conflicting results when the
memorized trade secret was a customer list. (Compare, Blake, “Employees
Agreements Not to Compete”, 73 Harv. L. Rev. 625, 655-657 [1960] with
“Developments in the Laws Competitive ‘Torts,” 77 Harv. L. Rev. 888, 955-
957 [1964]).
II. IMPROPER MEANS
A. Wrongful Taking
1. §1’s definition of improper means leaves much room for
labeling a challenged acquisition as “improper.” As stated by the Fifth
Circuit: “Improper will always be a word of many nuances, determined by
time, place and circumstances.” (E.I. duPont deNemours & Co. v.
Christopher, 431 F.2d 1012, 1017 [5th
Cir. 1970]).
2. The fact or claim that the alleged misappropriator had only
followed generally accepted standards of commercial morality is not
necessarily determinative of a conclusion that “proper” means were used.
As stated by the Fifth Circuit in rejecting such a claim: “In taking this
26
position we realize that industrial espionage of the sort here perpetrated has
become a popular sport in some segments of our industrial community.
However, our devotion to free wheeling industrial competition must not
force us into accepting the law of the jungle as the standard of morality
expected in our commercial relations.” (E.I. duPont, 431 F.2d at 1016).
Expressed differently, “The market must not deviate from our mores.” (Id. at
1017 [emphasis added]).
3. A working rule of thumb is that the UTSA definition embraces
acquisition by any method other than independent development, reverse
engineering, or disclosure by the owner, whether or not that method violates
specific legal prohibitions. Judge Posner would go even further arguing that
improper encompasses any means that cannot be shown to be inventive or
independently productive. (See, Rockwell Graphic Sys., Inc. v. DEV Indus.,
Inc., 925 F.2d 174, 178 [7th
Cir. 1991]).
4. Notable examples include:
(a) Theft (See, Solo Cup Co. v. Paper Machinery Corp., 240
F.Supp. 126 [E.D. Wisc. 1965], rev’d in part on other grounds, 359 F.2d
754 [7th
Cir. 1966]; LeJeune v. Coin Acceptors, Inc., 849 A.2d 451 [Md.
2004][copying of files to a CD]; AGES Corp., L.P. v. Raytheon Aircraft Co.,
22 F.Supp.2d 1310 [M.D. Ala. 1998]).
27
(b) Breaking and Entering (See, Morton v. Rogers, 20 Ariz.
App. 581, 514 P.2d 752 [1973]; Otis Elevator Co. v. Intelligent Systems,
Inc., 1990 WL 269219 [Conn. Super. Ct.]; Advanced Powers Sys., Inc. v. Hi-
Tech Sys., Inc., 1992 WL 97826 [E.D. Pa.]).
(c) Computer Hacking (See, e.g., Physicians Interactive v.
Lathian Sys., Inc., 2003 WL 230182 [E.D. Pa.]; Four Seasons Hotels &
Resorts B. v. Consorcio Barr, S.A., 267 F.Supp.2d 1268 [S.D. Fla. 2003];
Technicon Data Sys. Corp. v. Curtis 1000, Inc., 224 U.S.P.Q. 286 [Del. Ch.
1984]).
(d) Bribery (See, University Computing Co. v. Lykes-
Youngstown Corp., 504 F.2d 518 [5th
Cir. 1974]).
(e) False Identity or Representations (See, College
Watercolor Group, Inc. v. William H. Newbeuer, Inc., 468 Pa. 103, 360 A.2d
200 [1976]; Continental Data Systems, Inc. v. Exxon Corp., 638 F.Supp. 432
[E.D. Pa. 1986]; Alcatel USA, Inc. v. DGI Technologies, Inc., 166 F.3d 772
[5th
Cir. 1999]; Bloom v. Hennepin County, 783 F.Supp. 418, 439 [D. Minn.
1992]).
(f) Removed from Trash (See, Tennant Co. v. Advance
Machine Co., 355 N.W.2d 720 [Minn. App. 1984]; Drill Parts & Serv. Co.
v. Joy Manu. Co., 439 So.2d 43 [Ala. 1983]).
28
(g) Cultivation of Personal Relationship (See, e.g., Chanay v.
Chittenden, 115 Ariz. 32, 563 P.2d 287 [1977]).
B. Unauthorized Use
1. Under this prong of misappropriation, the breach of the
obligation not to use the trade secret can arise from an express agreement or
implied agreement not to use or disclose the trade secret.
2. As to the latter, it will arise from the existence of a confidential
relationship, arising prior to or concurrent with disclosure of a trade secret,
which imposes an absolute (as opposed to relative) duty not to use or
disclose the secret. Whether or not such a confidential relationship exists
will, in turn, depend upon an analysis of the facts and circumstances of each
individual case. When the facts show that a disclosure was made in order to
further particular relationship, confidentiality will be implied.
3. A confidential relationship can be found:
(a) Employer-Employee
(b) Licensor-Licensee and Prospective (See, e.g., Hyde Corp
v. Huffines, 158 Tex. 566, 314 S.W.2d 763 [1958]; Schreyer v. Caseo Prods.
Corp., 190 F.2d 971 [2d Cir. 1951]).
29
(c) Owner of Business-Potential Buyer (See, e.g., Phillips v.
Frey, 20 F.3d 623 [5th Cir. 1994]; H.E. Bott Grocery Co. v. Moody’s Quality
Meats, Inc., 951 S.W.2d 33 [Tex. Ct. App. 1997]).
(d) Manufacturer-Independent Contractor (See, e.g., Kamin
v. Kuhnau, 232 Or. 139, 374 P.2d 912 [1962]).
(e) Submission of Bid (See, e.g., Nucor Corp. v. Tennessee
Forging Steel Serv., Inc., 476 F.2d 386 [8th Cir. 1973]).
III. PROOF OF ACQUISITION AND USE
A. Generally
1. Proof of acquisition and use of the trade secret by the alleged
misappropriator can be a “difficult task.” (Greenberg v. Croydon Plastics
Co., 378 F.Supp. 806, 814 [E.D. Pa. 1974]).
2. Direct and/or circumstantial evidence can be utilized.
B. Direct Evidence
1. E-mails or voice-mails can be a source of direct evidence. (See,
WSJ, 8/10/05, p. 3, col. 4 [reporting trade secret misappropriation action
brought against its former employee, proof showed that his assistants who
stayed downloaded many of his client files and an e-mail was discovered
which read in part “We ARE in business!!!” “David, you sent this to me at
my KF e-mail. PLEASE be careful.”]; Jasmine Networks, Inc. v. Marvell
30
Semiconductor, Inc., 117 Ca. App. 4th
794, 12 Cal. Rptr.3d
[2004][conversation “inadvertently” left on plaintiff’s voice-mail system
among defendant’s employees discussing plans to misappropriate plaintiff’s
trade secrets when they called plaintiff and left a message to have him call
them, but then failed to hang-up the speakerphone]).
C. Circumstantial Evidence
1. In the absence of direct evidence, plaintiff may rely upon
circumstantial evidence. Such evidence must be more than just mere
exposure to the allegedly misappropriated trade secret or rest upon surmise.
(See, Penalty Kick Management Ltd. v. Coca Cola Co., 318 F.3d 1284,
1293-1294 [11th
Cir. 2003]; United Rentals (North America), Inc. v. Keizer,
355 F.3d 399, 412-413 [6th
Cir. 2004]; Stratienko v. Cordis Corp., 429 F.3d
592, 594-601 [6th
Cir. 2005][“Sufficient circumstantial evidence of use in
trade secret cases must demonstrate that (1) the misappropriating party had
access to the secret and (2) the secret and the defendant’s design share
similar features.”]).
2. It has been observed that “circumstantial evidence is not
trumped by direct evidence, when the direct evidence consists of denials by
E*Trade personnel and Everypath personnel that anyone from E*Trade
disclosed any protected Ajaxo information to Everypath.” (Ajaxo Inc. v.
31
E*Trade Group, Inc., 135 Ca. App. 4th
21, 50, 37 Cal. Rptr. 4th
221, 243
[2005]).
3. Probative circumstantial evidence includes:
(a) “Similarity” of defendant’s product to plaintiff’s product
embodying the allegedly misappropriated trade secret can establish
misappropriation, especially in conjunction with other facts. (See, e.g.,
Wyeth v. Natural Biologics, Inc., 395 F.3d 897, 900 [7th
Cir. 2005][“Natural
Biologics financial motives for copying the “Brandon Process”, Saveraid’s
[defendant employee] questionable ability to develop an extraction process
identical to the Brandon Process, the similarity between the Brandon Process
and Natural Biologic’s process, and the absence of a credible record of how
Natural Biologics developed its extraction process, support the district
court’s conclusion that Natural Biologics acquired Wyeth’s trade secret
through improper means.”]; Smith v. Dravo Corp, 203 F.2d 369, 377 [7th
Cir. 1953]).
(b) Employee with access to trade secrets joins competing
firm and shortly afterwards that firm begins manufacture of a product that
resembles the trade secret can establish misappropriation. (See, e.g., B.F.
Goodrich Co. v. Wohlgemuth, 117 Ohio App. 493, 192 N.E.2d 99 [1963]).
32
(c) Alleged misappropriator’s denial of capability to
manufacture item and no interest in developing such item on its own made
during license negotiations which gave it access to trade secret support
finding of misappropriation when misappropriator developed the item can
establish misappropriation. (See, e.g., Roton Bassier, Inc. v. Stanley Works,
79 F.3d 1112, 1119 [Fed. Cir. 1996]).
(d) Marked shift in business strategy to use a new ingredient
in its product, the subject of trade secret information conveyed in
discussions supports finding of misappropriation. (See, e.g., Cargill, Inc. v.
Sears Petroleum, 388 F.Supp.2d 37, 54 [N.D. N.Y. 2005]).
(e) Spoliation of evidence can support finding of
misappropriation. (See, e.g., Liebert Corp. v. Mazur, 357 Ill. App.3d 265,
285-286, 827 N.E.2d 909, 928-929 [2005] [“Whether Mazur successfully
made CD copies of the price books is a key issue in this case, and, for some
unexplained reason, he deleted the application log which would have
decisively answered the question. Because Mazur destroyed this crucial
piece of evidence, we presume it would have showed he successfully copied
the price books onto a CD.”]).
33
(f) IT expert review of log files, downloading of files,
number and type of documents accessed and/or deleted by employee before
departure can be used to establish misappropriation.
IV. PERMISSIBLE ACQUISITION
A. Generally
1. The comment to §1 specifically identified the following means
as legally permissible ways in which a firm can learn or otherwise acquire
another firm’s trade secret: independent invention; reverse engineering;
discovery under a license from the owner of the trade secret; “observation of
the item in public use or on public display”; “obtaining the trade secret from
published literature.”
2. In essence, a claim by a defendant that it properly learned or
acquired the trade secret plaintiff contends was misappropriated by
defendant is a denial of misappropriation and is not an affirmative defense.
(Perritt, Trade Secrets [2004 rev.], § pp. 238-239).
3. Thus, plaintiff bears the burden initially of showing
misappropriation of its trade secret; and when that burden is met, the burden
of production is shifted to defendant to establish that he learned of or
acquired the trade secret through permissible means. However, the ultimate
burden of persuasion remains on the plaintiff to prove that the defendant did
34
not arrive at the trade secret through permissible means. (See, Moore v.
Kulicke & Soffa Indus., Inc., 318 F.3d 561 [3d Cir. 2003]).
(a) In Moore, the Court approved the following jury charge:
“If you find that the plaintiff has proven by a fair preponderance of the
evidence that the defendant used the plaintiff’s trade secret, and that the
defendant did not arrive at the relevant wire bonding technique through
independent invention, then you should find in favor of the plaintiff. On the
other hand, if you determine that the wire bonding technique used by the
defendant was developed through defendant’s own independent efforts and
invention, then you must find in favor of the defendant.”
B. Independent Development
1. Independent development of the trade secret in issue by the
defendant means there is no misappropriation. (See, e.g., Glaxo v.
Novopharm Ltd., 931 F.Supp. 1280, 1304-1305 [E.D. N.C. 1996];
Minnesota Mining & Mfg. Co. v. Tech Tape Corp., 23 Misc.2d 671, 679
[N.Y. Sup. Ct. 1959]).
2. In addition to proof showing in fact the independent
development (Penalty Kick Management Ltd. v. Coca Cola Co., 318 F.3d
1284, 1293 [11th
Cir. 2003]), other proof may be sufficient, or at least
constitute compelling corroborative evidence. Thus, proof that defendant’s
35
employees who developed the trade secret never had access to the allegedly
misappropriated trade secret may suffice. (See, Downy v. General Foods
Corp., 31 N.Y.2d 56, 334 N.Y.S.2d 874 [1972]). Also helpful would be
proof that experimentation prior to the time the alleged misappropriation
occurred led to the development of the trade secret. (Greenberg v. Croydon
Plastics Co., 378 F.Supp. 806 [E.D. Pa. 1974]).
C. Reverse Engineering
1. A party may “reverse engineer” a product in order to learn the
trade secret involved with it. This refers to the process by which one
analyses another’s product in order to determine its nature or specific
content. For example, in a situation where Y purchases X’s product and by
working with and analyzing the product ascertains the process by which the
product was manufactured, X cannot preclude Y from using this process
even though this process otherwise meets the prerequisites of a trade secret.
(See generally, Pooley, Trade Secrets [2008 rev.] §5:02). While treating
reverse engineering as a lawful means has been questioned (Perritt, Trade
Secrets [2d ed.] 7-48), it is well established as permissible. As noted: “[T]he
legitimacy of reverse engineering should be viewed not as an undesirable
aspect of trade secret law, but as an indispensable element of that law
without which it would be wholly displaced.” (Pooley, supra, at §5:02[1]).
36
2. It is also important to note that reverse engineering is
permissible “so long as the means used to get the information necessary to
reverse engineer is in the public domain, and not through [a] confidential
relationship with the maker or owner of the product.” (Kadan Inc. v. Seeley
Machine, Inc., 244 F.Supp.2d 19, 38 [N.D. N.Y. 2003]). But the mere fact
that the employee may know where to get that information because of their
former employment does not lead to the conclusion that the reverse
engineering was improper as to hold otherwise “would effectively eviscerate
any benefit reverse engineering would provide . . ., forestall healthy notions
of commercial competitiveness, and heavily contribute to an inert
marketplace where products can only be developed and sold under an
impenetrable cloak of originality.” (Id.; see also, DSC Commc’ns Corp. v.
Pulse Commc’ns, Inc., 976 F.Supp. 359, 365 [E.D. Va. 1997][downloading
program from telephone switching card to determine memory locations to
implement “lock-out” against competing cards so that product could be
reverse engineered was not “improper means”]).
D. Publicly Available Literature
1. The trade secret may also be ascertained through publicly
available literature. (See, Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 407
37
[1993][stating that the alleged secret information could be reproduced based
on plaintiff’s public disclosures]).
Part Four
Remedies
I. INTRODUCTION
A. Available Remedies
1. Under the UTSA the remedies available for the
misappropriation of a trade secret include equitable and monetary relief.
2. From the standpoint of the trade secret owner, injunctive relief
restraining future use and disclosure of a misappropriated trade secret is
especially desirable. Such relief protects against additional harm to the
owner of the trade secret from further unauthorized use or disclosure of the
trade secret, and permits the court to fashion the relief so as to deprive the
misappropriator of any further benefit from its misappropriation.
3. In appropriate cases, a court may authorize and permit both.
B. Attorney’s Fees
1. The UTSA also authorizes an award of attorney’s fees to the
prevailing party in a trade secret misappropriation action.
38
2. Permitting an award of attorney’s fees to the prevailing party is
contrary to the so-called “American Rule” that parties in a lawsuit are
responsible for their own attorney’s fees, regardless of whether they prevail.
II. EQUITABLE RELIEF
A. Injunctive Relief
1. Under §2, actual or threatened misappropriation may be
enjoined as long as the trade secret exists. While issuance of injunctive
relief is discretionary, it is ordinarily granted once misappropriation is
shown. (See, Richardson v. Suzuki Motor Co., 868 F.2d 1266, 1247 [Fed.
Cir. 1989][“[A] misappropriation has no authorization of right to continue to
reap the benefits of its wrongful acts.”]).
2. A permanent injunction against the use or disclosure of the
misappropriated trade secret may be issued as apart of the final judgment.
As in other actions, the prerequisites are a showing of irreparable harm in
the absence of such relief and the inadequacy of a remedy at law.
3. The issuance of an injunction to prevent the misappropriation of
a trade secret does not hinge on the plaintiff proving that the defendants used
a trade secret. The threat of misappropriation of a trade secret is sufficient to
allow the trial court to enjoin future use. (See, Dexxon Digital Storage, Inc.
39
v. Haenszel, 161 Ohio App.3d 747, 832 N.E.2d 62 [2005]); LeJeune v. Coin
Acceptors, Inc., 849 A.2d 451 [Md. 2004]).
4. A maxim of equity is that relief will not be given to a plaintiff
who does not have clean hands. In Merrill Lynch v. Callahan (265
F.Supp.2d 440 [D. Vt. 2003]), this maxim was invoked to bar relief to the
plaintiff who sought preliminary injunctive relief enjoining client solicitation
against former employees who resigned from employment and began
employment with a competitor, alleging the employees retained a client list
in violation of the UTSA. The court refused to issue injunctive relief citing
plaintiff’s unclean hands. It noted: “By seeking to halt such solicitation,
Merrill Lynch seeks to enjoin the same behavior in which it engages as a
matter of company policy.” (Id. at 444). The “same behavior” was
solicitation of former clients from memory.
5. The trade secret owner may obtain preliminary injunctive relief
to enjoin either actual or threatened misappropriation during the pendency of
its trade secret misappropriation action. As in other actions, such relief may
be granted upon a showing of a likelihood of success on the merits;
irreparable harm absent the injunction; and that a balancing of the equities
favors the issuance of the injunction.
40
6. The injunction must be drafted with sufficient specificity to
provide the misappropriator fair notice of what conduct is prohibited.
B. Duration of Injunction
1. §2 also provides a standard for the duration of injunctions.
Under its provisions, the injunction shall be vacated once the trade secret
ceases to exist, except where continuation is necessary to eliminate any
commercial advantage that a misappropriator might obtain through its
misappropriation. This provision works to deprive the misappropriator of
any head start gained over other competitors due to the misappropriation.
Thus, under this subdivision, a court which permanently enjoined use and
disclosure would have to terminate such injunction upon proof that the
misappropriated trade secret is no longer secret, except where continuation
was needed to eliminate an improper lead time advantage.
(a) The mere possibility of successful reverse engineering
shall not provide a basis for termination of the injunction. (See, Pooley,
Trade Secrets [2008 rev.] §2.03, n. 36).
(b) The misappropriator cannot base its request for
termination of the injunction on its own improper publication of the trade
secret. (See, Syuntex Opthalmics, Inc. v. Novicky, 214 U.S.P.Q. 272, 279
[N.D. Ill. 1982], affd., 701 F.2d 677 [7th
Cir. 1983]).
41
2. Recent cases include: MicroStrategy, Inc. v. Business Objects,
S.A., 369 F.Supp.2d 725 [E.D. Va. 2005][competitor found to have
misappropriated trade secrets failed to make showing that secrets no longer
had economic value, or were no longer subject of efforts to preserve their
secrecy, as required to vacate under Virginia law permanent injunction
barring their use by competitor]; Fireworks Spectacular, Inc. v. Premier
Pyrotechnics, Inc., 107 F.Supp.2d 1307 [D. Kan. 2000][under Kansas law,
fireworks seller’s customer lists were still trade secrets, which competitor
could be enjoined from misappropriating, even though seller had mistakenly
included lists in notice of injunction it sent to customers; customers knew
that disclosure was mistake which they were not entitled to make use of, and
thus lists continued to provide seller with some commercial advantage as
they did prior to disclosure]).
C. Payment of Royalty
1. Where an injunction would be unreasonable or inequitable, i.e.,
“exceptional circumstances”, §2(b) authorizes a court to condition further
use on the payment of a reasonable royalty during the time an injunction
would otherwise have been appropriate.
2. The comment to §2(b) states that such exceptional
circumstances include situations where an overriding public interest exists
42
and situations where a person relies upon a trade secret, which is obtained in
good faith, without reason to know it was misappropriated. As with an
injunction prohibiting future use, a royalty order injunction is generally
allowed when the defendant has obtained a competitive advantage and the
injunction will last for the duration of that competitive advantage.
D. Other Equitable Relief
1. Under §2(c), a court may order additional measures as part of
its equitable relief. Such relief can include the surrendering of physical
embodiments of the trade secret; assignment of a patent or patent application
on the trade secret; and perhaps the destruction of products made through
use of the trade secret.
III. INEVITABLE DISCLOSURE
A. Generally
1. In PepsiCo, Inc. v. Redmond (54 F.3d 1262 [7th
Cir. 1995]), an
injunction was issued which prohibited a former employee for a period of
six months from working with his former employer’s competitor
notwithstanding the absence of proof that the employee intended to use or
disclose his former employer’s trade secrets and the absence of a covenant
not to compete. This ruling has come to be known as the “inevitable
43
disclosure” rule. (See generally, Shilling, The Inevitable Disclosure
Doctrine - A Necessary and Precise Tool for Trade Secret Law, 11 Bus.
Torts Journal [ABA Litigation Section, Business Torts Litigation
Committee], Vol. 11, No. 2, p. 1 [2004]; Katchmark, Remedies Under The
Inevitable Disclosure Doctrine, Bus. Torts Journal [ABA Litigation Section,
Business Torts Litigation Committee], Vol. 14, No. 2 [2006]).
2. The rule is rooted in the fact that once employees have
knowledge of their employer’s trade secrets, it is almost impossible to
compartmentalize that knowledge and avoid using it when they go to work
with a new employer on a similar job in the same industry.
3. While the rule has been followed in several jurisdictions, many
other jurisdictions have rejected it. (See, Shilling, supra; Kathmark, supra;
Jager, Trade Secrets Law [2007 rev.] §3.43; Pooley, Trade Secrets [2008
rev.] §7.02[2][b][ii]).
(a) The rule is disfavored in New York based primarily on
New York’s strong public policy against restrictive non-competition
agreements. (See, Colonize.com, Inc. v. Perlow, 2003 WL 24256576 at *6
[N.D. N.Y. 2003]). Federal courts in New York also have exemplified a
reluctance to use the doctrine to grant injunctive relief (see, Earthweb, Inc.
44
v. Schlack 71 F.Supp.2d 299, 310 [S.D. N.Y. 1999], affd, 2000 WL 1093320
[2d Cir. May 18, 2000][“[I]n its purest form, the inevitable disclosure
doctrine treads an exceedingly narrow path through judicially disfavored
territory.”]), and have applied the doctrine only where other evidence of
actual misappropriation of trade secrets exists. (see also, Colonize.com,
supra; Earthweb, at 310, supra).
(b) The existence of the rule in California is unclear. (See,
Bourns, Inc. v. Raychem Corp., 331 F.3d 704, 708 [9th Cir. 2003]; Bayer
Corp. v. Roche Molecular Sys. Inc., 72 F.Supp.2d 1111, 1119-1120 [N.D.
Cal. 1999][predicting that the California Supreme Court would not adopt the
rule because of California’s long-standing statutory scheme invalidating
covenants not to compete]).
4. Where the rule has been applied, the courts have considered the
following factors: (1) whether the former and new employers are direct
competitors; (2) whether the employee’s new job is identical to the old one;
(3) whether the trade secret it clearly established; and (4) whether the trade
secret is highly valuable to both employers. (See, Shilling, at p. 17, supra).
45
5. Recent decisions include:
(a) Aero Fulfillment Services, Inc. v. Tartar (2007 WL 120695
[Ohio App.]) where the rule was not invoked. The former employee was in
possession of a marketing study prepared by plaintiff, his former employer
who went to work for a competitor, Wilde, Inc.. The court refused to enjoin
the new employment. It noted, inter alia, that plaintiff filed for injunctive
relief three months after the action was filed and ten months after the
employee left his employment, and that the alleged trade secret was a
general marketing study about customer preferences in the industry as a
whole and not product based.
(b) In Proctor & Gamble v. Stoneham (140 Ohio App.3d
260, 747 N.E.2d 268 [2000]), the court upheld an injunction enjoining the
employee from working for his new employer. In so holding, it noted that
the employee worked at P & G’s haircare division; he was familiar with
product-specific market research results, financial data related to the costs
and profits of the products, and the technological developments in existing
new products; he left P & G to work for Alberto-Culver, a direct competitor;
Alberto-Culver competed in the same markets, and it products competed
directly with P & G’s haircare products; and he was in charge of that exact
46
product line at his new employer. As the Aero court observed: “The
Stoneham decision was product-driven. Therein we noted that through the
years Stoneham had acquired extensive product-specific knowledge. He
knew, among other things, the product areas in which P & G would expand
or reduce its business; product-sensitive information concerning which types
of advertising were most successful; which line of products would optimize
profit; the products that sold best in the foreign markets; information
concerning development of new haircare products; which products were
closest to market and when and where they would be launched; the strengths
and weaknesses of the products; the strengths and weaknesses of the
company’s scientific backup for its claims about the products; the price for
the new products, and the targeted profits; which products would be
relaunched; the perceived weaknesses of the relaunched products; the
changes made or to be made in the products, and the anticipated costs of
relaunch. We note that this information was tangible, highly technical, and
specific. In Stoneham, the likelihood of irreparable harm was immediately
apparent and concrete.”
(c) In LeJeune v. Coin Acceptor, Inc. (381 Md. 288, 849
A.2d 451 [2004]), the Maryland Court of Appeals refused to adopt the
inevitable disclosure rule. After an exhaustive review of the conflicting
47
decisions, the Court was of the view that the rule operated to impermissibly
to create and after-the-fact covenant not to compete. Notably, the Court
made this ruling upon a record that showed the employer, after announcing
he was resigning and joining employer’s principal competitor in currency
acceptance machine industry, told his supervisor he would be in a “unique”
position with competitor, thereby suggesting he might use employer’s
confidential information in his new employment; the employee, after
copying employer’s confidential information onto compact disk (CD), made
a backup copy on a second CD; and competitor, during job interview, twice
reminded employee not to disclose employer’s confidential information
suggested employee had displayed some propensity to disclose trade secrets.
IV. MONETARY RELIEF
A. Generally
1. §3(a) provides for the recovery of compensatory damages by
the trade secret owner. As with injunctive relief, such damages are available
for the period during which the trade secret was entitled to protection and
not in the public domain, plus the period during which the misappropriator
retained a competitive advantage form its misappropriation.
48
2. Under §3(a), damages may be measured by the trade secret
owner’s actual losses and the misappropriator’s unjust enrichment, to the
extent these two measures do not overlap. Both measures of damages may
incorporate a “reasonable royalty” standard, e.g., the amount the owner
would have reasonably charged as a royalty for the use of the trade secret.
3. The trial court is charged with permitting recovery on
whichever method affords the owner the greatest recovery, provided an
adequate foundation for use of that method is established.
4. A review of the case law leads “to the conclusion that every
case requires a flexible and imaginative approach to the problem of
damages.” (Jager, Trade Secrets Law [2007 rev.] §7:20).
B. Loss to Owner
1. Ordinarily, the principal element of the owner’s loss will be the
amount of profits lost as a result of loss of business attributable to the
misappropriation. The normal principles of causation certainly apply. Like
injunctive relief, the time period is only for the period in which the matter
misappropriated is entitled to trade secret protection, plus the additional
period, if any, in which a misappropriation retains an advantage because of
the misappropriation.
49
(a) Loss of revenue can be shown by a general decline in
sales or a disruption of business “growth” after the misappropriation
occurred and the misappropriator entered the market. (See, Restatement
(Third) of Unfair Competition, §45, 219 F.3d 734, 741-742 [8th Cir. 2000]).
(b) Price erosion, i.e., reduction of price of owner’s
product/service in response to misappropriator’s entry into mark, is
recoverable. (Raton Barrier, Inc. v. Stanley Works, 79 F.3d 1112, 1120-1121
[Fed. Cir. 1996 [Rich, J.]; Mangren Research & Development Corp. v. Nat.
Chem. Co., 87 F.3d 937, 945 [7th Cir. 1996]).
(c) In determining profits the “direct costing” or “differential
accounting” method is used under which method the deductible costs of
production of the product/service using the misappropriated trade secret
relate only to items which directly increase the cost of production or sale.
(See, Carter Products, Inc. v. Colgate Palmolive, Co., 214 F.Supp. 383, 400-
401 [D. Md. 1963], citing Restatement (First) of Torts, §748, com. (i)
[1939]).
2. Lost profits on sales or products/services that the purchaser
would make in conjunction with the purchase of the product/service
50
incorporating the misappropriated trade secret. (See, Sperry Rand Corp. v.
A-T-O, Inc., 447 F.2d 1387, 1394 [4th
Cir. 1971]).
3. Recoverable losses include the cost of efforts to minimize the
consequences of the misappropriation. (See, Dozor Agency v. Rosenberg,
218 A.2d 583, 585-586 [Pa. 1966]).
(a) Recent decisions include: World Wide Prosthetic Supply,
Inc. v. Mitulsky (251 Wis.2d 45, 640 N.W.2d 764 [2002][recovery of lost
business attributable to the misappropriator’s distribution of a defective
product incorporating the trade secret which resulted in lost confidence by
potential customers of owner’s product upheld]); Eagle Group, Inc. v. Pullen
(114 Wash. App. 409, 58 P.3d 292 [2002][jury instruction allowing award
for damages attributable to the “reasonable value of business opportunities
with reasonable probability to be lost in the future” proper]); Home Pride
Foods, Inc. v. Johnson (634 N.W.2d 774 [Neb. 2001][award based on
evidence of plaintiff’s gross profit margin and assumption of 25% net profit
held to be “clearly erroneous” as no evidence was provided that would allow
a calculation of the net profit]); Ed Nowogroski Inc. v. Rucker (944 P.2d
1093, 1098 [1997][trial court calculated damages award as five times
commissions based on expert testimony that some customers would have
51
stopped doing business with plaintiff because of personal relationships with
defendants, thereby reducing the economic effect of the misappropriation]).
C. Unjust Enrichment
1. The measure of damages allows the owner to recover the
misappropriator’s profits or the sums or expenditures saved as a
consequence of the misappropriation or other benefits the misappropriator
ahs obtained by way of the misappropriation.
2. While the owner has the burden of establishing the
misappropriator’s sales, the defendant has the burden of establishing any
portion of the sales not attributable to the trade secret and any expenses to be
deducted in determining net profits.
3. Where defendant’s primary benefit derived from the
misappropriation is the saving of costs and time in getting its product into
the marker, courts have used a “standard of comparison” measure whereby
the defendant’s gain is measured by comparing defendant’s actual costs with
the cots that the defendant would have incurred to achieve the same result
without the use of the misappropriated trade secret. (See, Restatement
(Third) of Unfair Competition, §45, com. f).
52
(a) Under this approach, consideration must be given to the
cost and likelihood of defendant acquiring the trade secret by lawful means.
(Id.).
(b) Relevant would be the cost incurred by plaintiff in
developing the trade secret. (Id.).
4. Recent decisions include: Children’s Broadcasting Corp. v.
The Walt Disney Corp. (357 F.3d 860, 864-867 [8th
Cir.
2004][misappropriation permitted and defendant’s accelerated entry into
children’s radio as established by expert testimony and defendant’s own
documents]; Bourn, Inc. v. Raychem Corp. (331 F.3d 704 [9th
Cir.
2003][upholding award of $9 million upon evidence that misappropriator
saved three years of development by its misappropriation]); Salisbury
Laboratories, Inc. v. Merieux Laboratories, Inc. (908 F.2d 706 [11th
Cir.
1990][damages award included the savings, $1 million, in research,
developing and marketing its product that misappropriator enjoyed as a
result of the misappropriation]).
D. Reasonable Royalty
1. A reasonable royalty is the amount which the trier of fact
estimates that a party would be willing to pay and the owner would be
53
willing to accept for use of the trade secret. In calculating what a fair
licensing price would have been had the parties agreed, the courts approving
this method have stated that the factfinder should consider such variables as
“foreseeable changes in the parties’ competitive [positions]; the price [] past
purchasers or licensees may have paid; the total value of the secret to the
[owner], including the [owner’s] development costs and the importance of
the secret to the [owner’s] business; the nature and extent of the use the
[misappropriator] intended for the secret; and … whatever other unique
factors [present] in the particular case…, such as the ready availability of
alternative processes”, that may have affected the parties’ agreement.
(University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 539
[5th
Cir 1974]; see also Evans v. General Motors Corp., 34 Conn.L.Rptr.
425, 2003 WL 21040255 [Conn.Supr.Ct. 2003]).
2. “As in patent cases, the analysis posits a “hypothetical
negotiation” in which the trade secret owner is willing, albeit reluctantly, to
grant an interest in the secret.” (Pooley, Trade Secrets [2008 rev.] ¶7.03).
3. The reasonable royalty alternative measure of damages should
be distinguished from a royalty order injunction that is permissible under
§2(b). As stated in the Comment to UTSA a “royalty order injunction is
appropriate only in exceptional circumstances; … a reasonable royalty
54
measure of damages is a general option. Because damages are awarded for a
misappropriator’s past conduct and a royalty order injunction regulates a
misappropriator’s future conduct, both remedies cannot be awarded for the
same conduct. If a royalty order injunction is appropriate because of a
person’s material and prejudicial change of position prior to having reason to
know that a trade secret has been acquired from a misappropriator, damages
… should not also be awarded for past conduct that occurred prior to notice
[or reason to know] that a misappropriated trade secret has been acquired.”
4. Recent decisions include: Mid-Michigan Computer Sys. v.
Marc Glassman, Inc. (416 F.3d 505 [6th
Cir. 2005][court upheld reasonable
royalty award of $2 million given provision for liquidated damages of $2
million in parties’ agreement governing unauthorized use of plaintiff-
licensor’s source code]); Linkco., Inc. v. Fujitsu Ltd. (232 F.Supp.2d 182
[S.D. N.Y. 2002] [thorough and thoughtful decision discussing the evidence
relevant to a reasonable royalty]); Alcatel USA, Inc. v. Cisco Systems, Inc.
(239 F.Supp.2d 660 [ED Tex. 2002][upon review of record, court found no
evidence from which a trier of facts could make a “reasonable royalty”
award]); O2 Micro Intl. Ltd. v. Monolithic Power Sys., Inc. (399 F.Supp.2d
1064, 1077-1078 [ND Cal. 2005][“reasonable royalty’ was found to be a
one-time payment of $900,000 and under the facts such payment did not
55
face misappropriation to pay for use of the trade secret after it became
public]); Learning Curve Toys, Inc. v. Playwood Toys, Inc. (342 F.3d 714
[7th
Cir. 2003][jury award of 80% reasonable royalty was appropriate
compensation for plaintiff’s idea of a “clickety-clack” sound for toy train on
a wooden track, even though the idea required only a dollar’s worth of
materials and took less than 30 minutes to develop]).
E. Punitive Damages
1. §3(b) authorizes the court - not a jury - to award “exemplary”
damages where “willful and malicious misappropriation exists”, but caps the
amount of such damages at twice the amount of compensatory damages
awarded under §3(a).
2. Since the UTSA makes no distinction between a tort-based or
contract-based for trade secret misappropriation, punitive or exemplary
damages should always be considered.
3. In essence, the court will award punitive or exemplary damages
when they are satisfied the misappropriation was made intentionally and in
bad faith. (Jager, Trade Secrets Law [2007 rev] §7.24 [collecting cases]).
4. Recent decisions include: Mangren Research & Dev. Corp. v.
National Chem. Co. (87 F.3d 937 [7th
Cir. 1996][“last laugh belongs to
plaintiff” as court found award was supported by the evidence]); Learning
56
Curve Corp. v. Playwood Toys, Inc. (342 F.3d 714 [7th
Cir. 2003][award
upheld with court noting that evidence could be found to support intentional
misappropriation because, inter alia, misappropriator attempted to conceal
the misappropriation by creating false evidence of prior independent
development]); Injection Research Specialists, Inc. v. Polaris Indus. (168
F.3d 1320 [Fed.Cir. 1998][$10 million award upheld]); McFarland v. Brier
(760 A.2d 605 [R.I. 2002][court held trial court erred in applying standard of
“willfulness, recklessness or wickedness…as amounts to criminality” and
under “less demanding” UTSA standard punitive damages should have been
awarded]); Children’s Broadcasting Corp. v. The Walt Disney Co. (357 F.3d
860 [8th
Cir. 2004][trial court did not abuse its discretion in denying an
award of punitive damages]).
F. Attorneys’ Fees
1. §4 authorizes an award of reasonable attorney’s fees to the
prevailing party in three situations: (1) a claim of misappropriation is made
in bad faith; (2) a motion to terminate an injunction is made or resisted in
bad faith; or (3) willful or malicious misappropriation is established. No cap
on the amount recoverable is set forth. The section further states alternative
grounds for “bad faith” to be present: (1) the claim or defense or motion
was made or continued or resisted solely to harass or maliciously injure
57
another or to prolong the litigation; or (2) the claim or defense or motion
was made or continued or resisted with no reasonable basis in fact or law
and could not be supported by a good faith argument for extension,
modification or reversal of existing law. “Willful or malicious”
misappropriation is present in the same circumstances that punitive damages
may be awarded.
2. In Tax Track Systems Corp. v. New Investor World, Inc. (478
F.3d 783 [7th
Cir. 2007]), the court in a breach of confidentiality agreement
action construed a provision in the agreement allowing attorneys’ fees to the
“prevailing party” to permit an award to the defendant where defendant
defeated all of plaintiff’s claims, which predominated in the litigation, and
received judgment in its favor dismissing entire action against it. Although
defendant lost on its counterclaims that were worth over one million dollars,
counterclaims were “defensive” in that defendant brought its counterclaims
only because they were compulsory.
3. Cases addressing claims for attorneys’ fees are collected in
Pooley, Trade Secrets (2008 rev.) §7.03[4]; Jager, Trade Secrets Law (2007
rev.) §7.27.
58
G. Expert Testimony
1. The effective presentation of damages evidence will generally
involve the presentation of expert testimony. Such testimony is governed by
the applicable expert opinion evidence rules.
2. Attorneys must be careful in advancing expert testimony. (See,
e.g., O2 Micro Intl Ltd. v. Monolithic Power Systems, Inc., 399 F.Supp.2d
1064, 1076-1077 [N.D.Cal. 2005][expert testified to value of trade secrets as
a whole; as jury found misappropriation of some but not all of the claimed
trade secrets, jury award of damages must be set aside]; Children’s
Broadcasting Corp. v. The Walt Disney Co., 245 F.3d 1008 [8th Cir.
2001][expert testimony should have been excluded as it did not take into
account lawful competition], 357 F.3d 860 [8th
Cir. 2004][upon appeal from
retrial][expert testimony regarding defendant’s accidental entry was found to
be relevant and reliable]; Micro Strategy, Inc. v. Business Objects, 429 F.3d
1344 [Fed.Cir. 2005][expert testimony properly excluded as it failed to take
into consideration the market forces that affected the owner’s losses]).
59
Part Five
Miscellaneous Covenant Matters
I. CONVENANT NOT TO COMPETE
A. Generally
1. A covenant-not-to-compete is a contractual provision which
prohibits an employee from working for a competing company upon the
employee’s termination of employment.
2. Unless a court accepts the “inevitable disclosure” doctrine, merely
working for a competitor under a prohibition not to disclose a trade secret of
the ex-employer does not require the enjoining of the competitive
employment.
3. It generally makes sense to require all employees who have access
to and knowledge of trade secrets to enter into a covenant-not-to-compete.
4. The enforceability of a covenant-not-to-compete turns upon a
consideration of several factors, with the overriding concern being that of
reasonableness.
5. While the common law governs the enforceability of covenants-
not-to-compete in most states, several states have enacted legislation which
codifies the common law, revises the common law or rejects the common
60
law and makes enforceability difficult. (See, Malsberger, Covenants-Not-
To-Compete: State By State Comparison [ABA] [collecting statutes]).
B. Protectible Interest
1. The first aspect of reasonableness requires an examination into the
issue of whether there is a real need for the covenant.
2. As a general proposition, courts will find a protectible interest
present only in the following situations: (1) employer has trade secrets to
which the employee had access; (2) employee developed close relations with
customers or clients; or (3) where the employee’s services are deemed
special, unique or extraordinary. (See, generally, Malsberger, supra).
3. Drafting Suggestion
(a) The covenant should specify the general nature of the
interest sought to be protected.
C. Scope Of The Competitive Restriction
1. Territorial
(a) Reasonableness of the territorial restriction depends not so
much on the geographical size of the territory as on the reasonableness of the
restriction in view of the facts and circumstances of the case.
(b) If a business is statewide or worldwide, a statewide or
worldwide or no geographic restriction at all may be appropriate. (See,
61
Business Intelligence Services, Inc. v. Hudson, 580 F. Supp. 1068 [SD NY
1984][worldwide]; Jay’s Custom Stringing v. Yu, 2001 WL 761067 [SD NY
2001] [“anywhere on earth”]!).
(c) Where the clientele is drawn from a narrow area, a
territorial restriction reflecting that area will be enforced. (See, Borne Chem.
Co. v. Dictrow, 85 AD2d 646 [2d Dep’t 1981] [150 mile radius of New York
City]).
(d) Drafting Suggestion
(i) The covenant should be drafted to cover an area
which is supportable in light of the employer’s need for protection.
2. Time
(a) The permissible length of time of the covenant will
depend upon the interest that the employer is seeking to protect.
(b) A good rule of thumb is that the time restriction should
correspond to the useful life of the trade secret, or, in the case of
customer/client relationships and unique services, the amount of time it
would take to develop and train a new employee to perform the job. (See,
Malsberger, supra).
62
(c) Drafting Suggestion
(i) The drafter must always have a factual foundation to
support the time restriction.
3. Activity
(a) The activity restriction must be similar to the nature of the
activities that the employee was engaged in during the course of the
employment. (See, Malsberger, supra).
(b) Drafting Suggestion
(i) The drafter should ensure that the convenant
encompass activities in which there is a reasonable or realistic probability
that competition from the employee will be harmful to the ex-employer’s
legitimate interests.
4. Overall
(a) Each restriction should be drafted with the other
restrictions in mind. Many times one may reduce the need or temper the
extent of another one.
(b) While some courts, but not all, will utilize a “blue pencil”
rule in judicially limiting an overbroad restriction (See, BDO Seidman v.
Hirschberg, 93 NY2d 382 [1998] [discussing the rule and cases]), the drafter
should not draft an obviously overbroad restriction for an in terrorem effect.
63
D. Suggested Provisions For Inclusion
1. Choice of Law
(a) Include a provision specifying the state law that will
govern the enforceability of the covenant when litigation is commenced.
(b) Most courts will uphold a choice of law clause so long as
there is some connection between the chosen state and the parties. (See,
IBM v. Bajork, 191 F3d 1033 [9th
Cir. 1999]; Elizabeth Grady Face First v.
Escavish, 321 F. Supp. 420 [D. Conn. 2004]).
(c) Where the covenant sought to be enforced offends the
public policy of the forum state, however, courts will not apply the specified
law under which the covenant would be enforceable. (See, Scott v. Snelling
& Snelling, 732 F. Supp. 1034 [ND Cal. 1990]; Enron Capital v. Pokalsky,
490 SE2d 136 [Ga. 1997]).
2. Arbitration
(a) Where public policy would not be violated, inclusion of
an arbitration clause may be advisable.
3. Cause Of Termination
(a) Inclusion of a clause specifying that the covenant is
applicable whenever the employee stops working for the employer,
irrespective of the reason for the cessation of employment is advisable.
64
(b) Some courts will not enforce covenants where the
employer terminated the employee, e.g., R-I-F, but will when the
termination was for cause. (See, Gallo, Comment, 1 U. Pa. J. Lab. & Emp.
L. 719 [1998] [collecting cases]). The drafter may wish to consider a clause
specifying that termination for cause will occur upon specified grounds.
4. Commencement Of Time Period
(a) A clause specifying that the time restriction will commence
in the event of a violation of the covenant when a court upholds the
covenant’s enforceability should be considered.
5. Liquidated Damages
(a) A liquidated damages clause may be enforced by the courts
when damages are difficult to assess and the specified amount seems
reasonable.
II. CONTRACTUAL: BENEFIT FORFEITURE
A. Employee Choice Doctrine
1. In Morris v. Schroder Capital Management Intl. (7 N.Y.3d 616,
825 N.Y.S.2d 697 [2006]), the New York Court of Appeals revisited, and
upheld, the “employee choice” doctrine. Under this doctrine an employee
will be bound by a contractual provision which requires forfeiture of rights
to benefits accrued under various employer deferred compensation plans if
65
the employee violates the terms of a covenant not to compete without regard
to its reasonableness, provided the leaving of the employment was
voluntary.
2. The “employee choice” doctrine rests on the premise that if the
employee is given the choice of preserving his rights under his contract by
refraining from competition or risking forfeiture of such rights by exercising
his right to compete, there is no unreasonable restraint upon employee’s
liberty to earn a living. It assumes that the employee who leaves his
employer makes an informed choice between forfeiting his benefit or
retaining the benefit by avoiding competitive employment.
3. In Morris, plaintiff claimed he was constructively discharged
because his employment duties had been reduced - from investment control
over $7.5 billion to $1.5 billion. The Court held that the constructive
discharge from federal employment law - the actions of the employer in
creating the intolerable workplace condition must be deliberate and
intentional and the atmosphere in the workplace must be so intolerable as to
compel a reasonable person to leave - applies to the “employee choice”
doctrine. In so ruling, the Court noted that mere dissatisfaction with a job
responsibility does not render a resignation “involuntary.”
66
4. The Court in dicta stated that “if an employee left his employer
voluntarily, a court must determine whether forfeiture is ‘reasonable’ if the
employee was terminated involuntarily and without cause (see, Post v.
Merrill, Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84, 89, 421 N.Y.S.2d
847 [1979][holding that a private pension plan provision permitting the
employer to forfeit pension benefits earned by an employee who competes
with an employer in violation of a covenant not to compete after being
discharged “is unreasonable as a matter of law and cannot stand”]).
QUAERE: Is the Court suggesting that a covenant not to compete is not
enforceable as a matter of law where the employee has been terminated
without cause? (See, Altieri, After Termination Without Cause: Restrictive
Covenants, N.Y.L.J. 2/16/07, p. 4, col. 4, concluding, without stating a basis
for doing so, that one would be “mistaken” to conclude that covenants not to
compete are not enforceable after Morris if the employee were discharged
without cause). QUAERE: Would the covenant be enforceable if the
employment agreement provided that it could be even if the employee who
discharged without cause? (See, Hartman, Non-competes With No
Reasonableness Hurdles, N.Y.L.J., 12/15/06, p. 4, col. 4).
67
III. ANTI-SOLICITATION/NO-HIRE COVENANT
A. Enforcement
1. In UL Systems, Inc. v. Unisen, Inc. (152 App. 4th
708, 61 Cal.
Rptr. 3d 818 [2007]), a California Court of Appeals invalidated a broad no-
hire contract provision but left open the possibility of enforcing a more
narrowly drawn no-hire provision. In this case a former client of the
plaintiff consulting company hired the consultant’s employee.
(a) The opinion suggests that such a covenant will be
enforced where the employee sought to be bound by the covenant has
knowledge of and consents to the no-hire covenant; the covenant applies to
soliciting employees who had actually performed work for the client; there is
consideration to the employees to be bound by the no-hire covenant; and the
absence of a liquidated damages clause. (See, Communications Tech. Sys. v.
Densmore, 583 N.W.2d 125 [S.D. 1998]; Heyde Companies, Inc. v. Dove
Healthcare, LLC, 258 Wisc.2d 28, 654 N.W.2d 830 [2002]).
(b) In MicroStrategy Inc. v. Business Objects, S.A. (429 F.3d
1344 [Fed. Cir. 2006]) the non-solicitation clause in the employee contract
provided: “I agree that, for the period of one (1) year after termination of my
employment with MicroStrategy for any reason, I will not, directly or
indirectly, seek to influence any employees, agents, contractors or customers
68
of MicroStrategy to terminate or modify their relationship with
MicroStrategy.” The court held the clause was not ambiguous and
enforceable.
IV. TORTIOUS INTERFERENCE WITH COVENANT NOT TO COMPETE
A. Generally
1. In Chicago Title Ins. Corp. v. Magnuson (487 F.3d 985 [7th
Cir.
2007]), the court held that the evidence on plaintiff’s summary judgment
motion showed that former employee’s new employer intended to induce the
employee to breach his covenant not to compete through proof that his job
responsibilities involved the geographical area he was precluded to work in
under his covenant. While malice was present, the court set aside a large
punitive verdict as not sufficient reprehensible.
2. In CRST Van Expedited, Inc. v. Werner Enterprises, Inc. (479
F.3d 1099 [9th
Cir. 2007]), the court held that if the employees are not “at-
will”, the recruiting employer could incur liability for inducing a breach of
contract. The contract here was for one-year employment with plaintiff, a
trucking company that trained employees to become certified truck drivers
and the employee/student driver agreed to be employed for one year. If the
employee left before that year expired, the employee was required to make
reimbursements for training.
ARTICLES
THE CASE FOR ADOPTION OF A UNIFORM TRADE SECRETS ACT IN NEW YORK
Michael J. Hutter*
TABLE OF CONTENTS
1. Innovation, Advanced Technologies and Law of Trade Secrets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
II. The Law of Trade Secrets in New york............. 6 III. The Need for a Uniform Trade Secrets Act in New
york................................................. 7 IV. Proposed Uniform Trade Secrets Act for New York.. 9 V. Commmentary To The Proposed Sections Of The
Uniform Trade Secrets Act For New York. . . .. . . . . . . 13 A. Commentary To Proposed § 279-m. . . . . . . . . . . . . . . 13 B. Commentary To Proposed § 279-n . . . . . . . . . . . . . . . 14 C. Commentary To Proposed § 279-0 ............... 27 D. Commentary To Proposed § 279-p ............... 33 E. Commentary To Proposed § 279-q ............... 41 F. Commentary To Proposed § 279-r. . . . . . . . . . . . . . . . 45 G. Commentary To Proposed § 279-s................ 47 H. Commentary To Proposed § 279-t. . . . . . . . . . . . . . . . 51 1. Commentary To Proposed § 279-u ... . . . . . . . . . . . . 51 J. Commentary To Proposed § 279-v ............... 52 K. Commentary To Proposed § 2 of The Chapter ... 53
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Exhibit "A:" Uniform Trade Secrets Act................ 54 Exhibit "B:" The Law of Trade Secrets in the United
States..................................... 58
• Professor of Law. Albany Law School of Union University
1
KFRANCIS
Text Box
This article is reprinted with the permission of the Albany Tech Journal.
2 ALB. L.J. SCI. & TECH. [Vol. 10
Exhibit "C:" Unifonn Trade Secrets Act and Proposed Unifonn Trade Secrets Act for New York. 60
19991 UNIFORM TRADE SECRETS ACT
1. INNOVATION, ADVANCED TECHNOLOGIES AND LAw OF
'I'RADE SECRETS
3
Innovation is key to a dynamic economy. Innovation is also crucial to the economic well being of New'York State and to the United States as a whole.' Sound public policy seeks to encourage invention of new products, processes and technologies. Society as a whole benefits from the creation of new technologies because they provide the public with new and improved products and services. New technology increases operating efficiency, promotes growth and rejuvenates the economy.
Today, gathering and processing information through advanced technologies of all kinds is more important than ever." Whether a firm or an entrepreneur is involved in computer-related businesses and services, industrial development, communications, financial services, or the life sciences, technology and information are vital to continuing the development and success of the business.3
There is a concomitant need to protect and exploit the fruits of intellectual labor and thus ensure their continued creation. 4 Traditionally, intellectual property was protected primarily by the federal patent and copyright systems.5 However, it has been observed that much of the information and cutting-edge technolo-
1 See generally JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM AND
DEMOCRACY (3d ed. 1950). 2 See Stan Davis & Jim Botkin, The Coming of Knowledge-Based Business,
HARv. Bus. REV., Sept.-Oct. 1994, 165, 167 (assertion that the United States is on the verge of a knowledge-based economy); see also Michael J. Mandel, The Digital Juggernaut, Bus. WK., June 6, 1994, at 22 (discussing how this decade is driven by the "computer, software, and telecommunications industries")j see generally Marina Lao, Federalizing Trade Secrets Law in an Information Economy, 59 Omo ST. L.J. 1633 (1998) (addressing the need for a federal trade secrets law).
3 See 1 MELVIN F. JAGER, TRADE SECRETS LAw §§ 1.01, 1.02 (1992) (describing the importance of trade secrets and how to protect modern technology).
4 See Rockwell Graphic Sys. v. DEV Indus. Inc., 925 F.2d 174, 180 (7th Cir. 1991) ("The future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property."); see also Kenneth W. Dam, The Economic Underpinnings of Patent Law, 23 J. LEGAL STUD. 247 (1994) (stating that patent law "prevents others from reaping where they have not sown and thereby promotes research and development [ ) investment in innovation").
5 See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 430 (1984) (observing that protections given to copyrights have historically been statutory and through acts of Congress); Goldstein v. California, 412 U.S. 546, 555 (1973) (comparing the Copyright Clause of the Federal Constitution and the laws under the state of California).
4 ALB. L.J. SCI. & TECH. [Vol. 10
gies that are driving the economy today (and will do so in the future), fall outside the patent and copyright systems. At the very least, protecting them under these systems can be problematic.s
As a result, firms and. entrepreneurs are increasingly turning to "trade secrets law" for protection.7 This movement is especially evident in the computer software iridustry.s To many commentators, practicing attorneys, and those working with these innovative firms and entrepreneurs, trade secrets law has become crucial to the protection and exploitation of emerging new technologies and information.9 In a recent study of 530 firms in Massachusetts, the developed empirical data indicated that although trade secrets law is important to all firms, it is indispensable for the small firms that drive innovation in many developing fields. 10
What is "trade secrets law"? The law of trade secrets seeks to protect a firm's secrets or an entrepreneur's interest in information or technology that the firm or entrepreneur has created and developed which is both confidential and commercially valuable.ll
Trade secrets law protects such valuable assets as "trade secrets" under certain circumstances against unauthorized acquisition, use, or disclosure by others, even though such assets are neither patented or copyrighted nor patentable or copyrightable. Moreover, even if technology is covered by a patent, the actual way in which the patent owner practices the technology may well be protected as a trade secret. '2 The law of trade secrets is not created by federal legislation. Rather, it is, and has developed as a crea-
6 See JAGER, supra note 3, § 1.01 at 1-2; J. H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 COLU1I. L. REV. 2432, 2444--45 (1994); Pamela Samuelson et al., A Manifesto Concerning the Legal Protection of Computer Programs, 94 COLUM. L. REV. 2308, 2343-48 (1994).
7 See generally JAGER, supra note 3, § 1.01. 8 See Victoria A. Cundiff, Protecting Computer Software as a Trade Secret, 507
PLIIPat 761, 764 (1998) (suggesting that "every owner or developer of computer software should at least consider using trade secret safeguards ... ").
9 See Michael A. Epstein & Stuart D. Levi, Protecting Trade Secret Information: A Plan for Proactive Strategy, 43 Bus. LAw. 887, 887 (1988) (noting the economic importance of protecting trade secrets); David Friedman et aI., Some Economics of Trade Secret Law, 5 J. ECON. PERSP. 61, 62 (1991) (arguing the efficiency of trade secret law); Gale R. Peterson, Trade Secrets in an Information Age, 32 Hous. L. REV. 385, 386-87 (1995) (noting the importance of trade secret law to the computer industry).
10 See Josh Lerner, The Importance of Trade Secrecy: Evidence From Civil Litigation, Harv. Bus. School working paper #95-043 (Nov. 1994).
11 RESTATEMENT OF TORTS §757 cmt.h (1939). 12 See generally 1 ROGER M. MILGRlM, MILGRlM ON TRADE SECRETS (1999)
(explaining the law of trade secrets and what it seeks to protect); see also JAGER, supra note 3, § 1.02 at I-I, 1-2.
1999] UNIFORM TRADE SECRETS ACT 5
ture of state law since its emergence in the middle of the nineteenth century.13 The early law of trade secrets developed primarily through the judiciary under the common law of the states. In order to clarify a confusing body of law, the First Restatement of Torts, published in 1939, defined "trade secret" and its rules of liability.14 Courts throughout the United States adopted the Restatement's view of the law.15
In February 1968, the Executive Committee of the National Conference of Commissioners on Uniform State Laws authorized the appointment of a Special Committee on Uniform Trade Secrets Protection Act.16 In August 1979, the Committee promulgated the Uniform Trade Secrets Act and recommended its adoption by the states.17 The American Bar Association endorsed it in 1980.18 In 1985, the Act was amended to clarifY ambiguous provisions and to strengthen its remedial framework. 19 A copy of the Act, as amended, is appended to this Report as Exhibit "A." The Uniform Trade Secrets Act was promulgated to replace the existing common law of the states with a uniform statutory framework. Three arguments in support were advanced. One justification is that many states do not possess an extensive body of decisional law relating to trade secrets. A second rationale is that even in jurisdictions with numerous precedents, the case law does
13 See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001; 104 S.Ct. 2862, 2872 (1984); see also JAOER, supra note 3, § 2.02 at 2-6, 2-11 (discussing Vickery v. Welch, 36 Mass. 523 (1837), which was "the first reported case involving trade secrets", and Hammer v. Barnes, 26 How. 174,176 (N.Y. Sup. Ct. 1863) where the New York courts considered trade secrets law and approved injunctive relief).
14 See RESTATEMENT (FIRST) OF TORTS § 757 (1939) (defining the general principal for liabilities of misuse of another's trade secrets); see also William B. Barton, A Study in the Law of Trade Secrets, 13 U. CIN. L. REV. 507, 515-18 (1939) (defining trade secrets by today's concept, scope and limitations).
15 See JAOER, supra note 3, § 3.02 at 3-16.4-3-24. (explaining the modern U.S. common law, particularly cases in which § 757 was heavily relied upon).
16 See UNlF. TaAnE SECRETS ACT with 1985 Amendments, Prefatory Note, 14 U.L.A. 433, 435 (1990) [hereinafter Prefatory Note) (noting that the Executive Committee "voted to authorize the appoinment of a Special Commitee on Uniform Trade Secrets Protection Act to investigate the question of drafting an act").
17 See id. at 436 (explaining that on August 9, 1979, "following discussions with members of the bar and bench, the Special Committee proposed amendments to Sections 2(b), 3(a), 7, and 11 that clarified the intent of the 1979 Official Text." Thereafter, on "August 8, 1985, these four clarifYing amendments were approved and recommended for enactment in all the states.").
16 See Summary of Action of the House of Delegates, A.B.A. (1980 Mid Year Meeting, Chicago, m.) Feb. 4-S, 1980, at 44.
19 See Prefatory Note, supra note 16, at 436 (amending the act on August 8, 1985).
6 ALB. L.J. SCI. & TECH. [Vol. 10
not clearly set forth the parameters of trade secrets protection and the appropriate remedies for misappropriation of a trade secret. Finally, the omission of Section 757 from the Restatement (Second) of Torts is cited as evidence of a need for codHication.20
Today, almost every state and the District of Columbia protects trade secrets in some fashion. The Uniform Trade Secrets Act has actually been enacted by 42 states and the District ofColumbia?l Two states have statutes governing trade secrets law which are not modeled after the Uniform Trade Secrets Act.2 ' The remaining states rely on their common law to protect trade secrets, supplemented by statutes of general application?a
II. THE LAw OF TRADE SECRETS IN NEW YORK
New York is one ofthe seven states that has not enacted a comprehensive trade secrets statute?· Rather, New York relies on common law principles derived from the First Restatement of Torts published 60 years ago to determine the existence of a trade secret; the circumstances under which liability will be imposed for the unauthorized acquisition, use or disclosure of another's trade secret; general common law remedial rules to govern relief for the trade secret owner upon the establishment of liability; general statutes of limitation to determine the timeliness of an initiated trade secret misappropriation action; general statutes and common law rules to protect trade secrets in litigation; and general statutes and court rules to determine if the prevailing party in a trade secret action can recover its attorney's fees?5
As commentators have pointed out, the law of trade secrets in New York is in an outdated condition and in need of a comprehensive statutory treatment?6 There are several concerns.
20 Id. at 434 (explaining the three reasons why the Uniform Trade Secrets Act should replace existing common law).
21 A chart listing the statutes of trade secreta law among the states and the District of Columbia is appended to this report as Exhibit "Eo"
22 North Carolina and Massachusetts, see Exhibit "E". 23 See Exhibit "B". 24 Id. 26 See Commentary on present New York law, infra. 26 See Robert T. Neufeld, Note, Mission Impossible: New York Cannot Face the
Future Without a Trade Secret Act, 7 FORDHAM INTELL. PRoP. MEDIA & ENT. L.J. 883, 889, 916 (1997) (advocating for a comprehensive trade secrets act to be adopted by New York); see generally Ramon A. Klitzke, The Uniform Trade Secrets Act, 64 MARQ. L. REv. 277, 282-284 (1980) (stating that "while the Restatement greatly contributed to the evolution of trade secrets law ... [there
1999] UNIFORM TRADE SECRETS ACT 7
Although New York law is in the mainstream of trade secrets law, as to the definition of a trade secret and the imposition of liability for its unauthorized acquisition, use, or disclosure, there are uncertainties in its application, as well as serious shortcomings and limitations.27 In that regard, the Uniform Trade Secrets Act makes several desirable changes from the common law. These changes have been accepted in the trade secrets provision of the new Restatement (Third) of Unfair Competition (1995)."8 However, there is no assurance that the New York courts will rely on the Restatement (Third) of Unfair Competition, or that the courts will adopt this Restatement in a timely and cohesive manner."·
Additionally, the common law rules regarding the available remedies upon the establishment of a successful trade secret misappropriation action are not entirely clear. Thus, there is no definitive acceptance of a "reasonable royalty" as a basis for an award of compensatory damages, nor is there any uniform ruIe as to the availability of "lead time" injunctive relief against a trade secret misappropriator upon public disclosure of the trade secret. The availability of an award of attorney's fees has likewise been open to argument.
The present statute of limitations scheme is fraught with concerns. It is unclear which statute of limitations (tort or contract) applies. The fairness of the cause of action accruing upon the use of a misappropriated trade secret, notwithstanding the user's lack of knowledge that the trade secret has been misappropriated, and the viability of the "continuing misappropriation" doctrine is open to serious question.
III. THE NEED FOR A UNIFORM TRADE SECRETS ACT IN
NEW YORK
Without clear, comprehensive, and uniform rules regarding the protection of trade secrets, firms and entrepreneurs in New York whose economic viability rests in large part upon their possession, development and exploitation of technology and information, will
are] factors ... [that] work[ ] to prevent it from providing the uniformity ... n of the Trade Secrets Act).
27 See Commentary infra Part III. 28 See JAGER, supra note 3, § 3.03. 29 See Christopher Rebel J. Pace, The Case for a Federal Trade Secrets Act, 8
HARv. J.L. & TECH. 427, 430 & n.12 (1995); Merckle GmbH v. Johnson & Johnson, 961 F. Supp. 721, 730-31 & n.11 (D.N.J. 1997) (stating "that the Restatement (Third) of Unfair Competition is, at least, relevant, if not instructive").
8 ALB. L.J. SCI. & TECH. [Vol. 10
find themselves at risk. The reasoning behind the ·risk is that there are great incentives for theft of such technologies and information. They can be very valuable, thus vulnerable to theft. so
It cannot be doubted that a state's clear and workable law of t,rade secrets creates an environment for firms and entrepreneurs that is conducive to innovation.s1 Many other states have recognized this effect in their recent enactment of a trade secrets act. S2
The recent Lerner study, of firms in Massachusetts, fully supports this commentary and legislative authority.ss
As New York strives to retain existing firms and to attract new ones, it inust offer them a way of obtaining and maintaining an advantage over the firms against whom they compete. Greater certainty in the rules governing their right to protect and exploit their intellectual property is central to the success of New York's economic development effort. An important, if not critical, means of achieving that certainty and conferring that advantage is to have comprehensive trade secrets legislation. Otherwise, New York will be at a distinct disadvantage relative to the 45 other jurisdictions when providing a hospitable economic climate for firms and entrepreneurs.
In view of the importance of trade secrets to firms and entrepreneurs, the uncertainties and antiquity of New York's present law governing trade secrets, and the widespread adoption of uniform trade secrets acts throughout the United States, now is the time for the enactment of a comprehensive trade secrets act in New
30 See Economic Espionage Act of 1996, H.R. REP. No. 104-788, at 4·6, (1996); JAGER, supra note 3, § 1.03; Michael J. Hutter, Protecting Trade Secrets: Legal Theories, in PROTECTING TRADE SECRETS 1989 at 9, 18-19 & 22-24 (Patents, Copyrights, Trademarks & Literary Property Practice Course Handbook Series No. 269, 1989).
31 See Allison Coleman, THE LEGAL PROTECTION OF TRADE SECRETS (1999); Michael J. Mandel, The Digital Juggernaut, Bus. WK., June 6, 1999, at 22.
32 See Melvin F. Jager, Illinois Returns to the Mainstream of Trade·Secrets Protection, CHI. B. Ass'N. REC., Oct. 1988, at 18 (noting the importance of the minois Trade Secrets Act to the state's economy); Paul Thiel, Va. Law Puts High· Tech Emphasis on the Protection of Trade Secrets, WASH. POST, June 30,1986, at 3; Susan C. Miller, Florida's Uniform Trade Secrets Act, 16 FLA. ST. U. L. REV. 863, 863 & n.5 (1988) (summarizing legislative history that stressed the need to give effective protection to trade secrets from economic espionage); Gerald B. Buechler, Jr., Revealing Nebraska's Trade Secrets Act, 23 CREIGHTON L. REV.
323, 323-24 (1990) (citing legislative history that showed concern for protection of trade secrets of firms that are "the new emerging hope for our state's economy"); R. Sosebee, Selling and Other Trade Practices: Expand Trade Secrets Statute, 7 GA. ST. U. L. REV. 213, 220 (1990) (expressing the opinion that the uniform act will "encourage greater industrial growth within [Georgia]").
33 See Lerner, supra note 10.
1999] UNIFORM TRADE SECRETS ACT 9
York.S4 Such an act should provide a single cause of action for the misappropriation of trade secrets, supplemented by uniform rules regarding remedies, recovery of attorney's fees, a statute oflimitations, and the protection of trade secrets in litigation. Such a comprehensive act would eliminate uncertainties in present law and provide a pragmatic and workable framework for the protection of trade secrets in New York.
It is recommended that the act be modeled after the Uniform Trade Secrets Act. Forty-two states and the District of Columbia have enacted acts based on the Uniform Trade Secrets Act. There is no compelling reason why New York should not do likewise.
Within the following pages of this report is a proposed Trade Secrets Act for New York. It follows in large part the Uniform Trade Secrets Act. As the Commentary to this proposed statute demonstrates, the differences between the acts are minor and were made to conform to longstanding New York practice without substantial harm to the goal of national uniformity. In Exhibit "C," a marked-up Uniform Trade Secrets Act shows the differences between that act and the proposed act for New York.a5
In conclusion, the purpose of the proposed act is to provide a comprehensive, uniform law of trade secrets. With its enactment, the act will provide a solid foundation for the protection of trade secrets, and. will make a substantial contribution to the ongoing creation of a business climate in New York that is hospitable to industrial innovation and creativity. It is obvious that such a climate is essential if New York is to regain its rightful place as the Empire State in the Nation's economic firmament.
IV. PROPOSED UNIFORM TRADE SECRETS ACT FOR NEW YORK
AN ACT to amend the general business law, in relation to enacting the uniform trade secrets act.
The People of the State of New York, represented in Senate and Assembly, do enact as follows:
SECTION 1. The general business law is amended by adding a new article 17-B to read as follows:
34 See Neufeld, supra note 26 at 916-18 (1997). 35 For a discussion of the acts adopted in other states, see JAGER, supra note 3,
§ 3.04; ARNOLD H. l'EDowrrz & ROBERT W. SrKKEL, TRADE SECRETS: A STATE·BYSTATE SURVEY (1997); Linda B. Samuels and Bryan K. Johnson, The Uniform Trade Secrets Act: The States' Response, 24 CREtoHTON L. REV. 49 (1998) (describing that "trade secrets law developed through court de~isions, primarily at the state level").
10 ALB. L.J. SCI. & TECH.
UNIFORM TRADE SECRETS ACT Section: 279-m. 279-n. 279-0. 279-p. 279-q. 279-r. 279-s. 279-t.
Short title. Definitions. Injunctive relief. Damages. Attorney's fees. Preservation of secrecy. Statute of limitations. Effect on other law.
[Vol. 10
279-u. Uniformity of application and construction. 279-v. Severability.
§ 279-M. SHORT TITLE. This article shall be known as and may be cited as Uniform
Trade Secrets Act. § 279-N. DEFINITIONS. As used in this article, unless the context requires otherwise: 1. "Improper means" includes theft, bribery, misrepresentation,
breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means;
2. "Misappropriation" means: (a) 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
(b) disclosure or use of a trade secret of another without express or implied consent by a person who (i) used improper means to acquire knowledge of the trade secret; or (ti) at the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was (aa) derived from or thorough a person who had utilized improper means to acquire it, (bb) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, or (cc) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (iii) before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
3. "Person" means a natural person, corporation, limited liability company, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.
1999) UNIFORM TRADE SECRETS ACT 11
4. "Trade secret" means information, technical and non-technical, including but not limited to a formula, pattern, compilation, program, device, method, technique, or process, that:
(a) 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, and
(b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
§ 279-0. INJUNCTIVE RELIEF.
1. Actual or threatened misappropriation may be temporarily, preliminarily, or permanently enjoined. Upon application to the court, an injunction shall be vacated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.
2. In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
3. In appropriate circumstances, the court may order affirmative acts to protect a trade secret.
§ 279-p. DAMAGES.
1. Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, the complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.
2. If willful or malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subdivision one of this section.
§ 279-Q. ATTORNEy'S FEES.
12 ALB. L.J. SCI. & TECH. [Vol. 10
If (i) a claim of misappropriation is made or continued in bad faith; or (ii) a motion to terminate an injunction is made or resisted or continued in bad faith; or (iii) willful or malicious misappropriation is established, the court may award reasonable attorney's fees to the prevailing party. For purposes of this section, a claim of misappropriation is made or continued in bad faith or a motion to terminate an injunction is made or resisted or continued in bad faith ifit is undertaken or continued solely to harass or maliciously injure another or to delay or prolong the resolution of the litigation; or it is undertaken or continued without any reasonable basis in fact or law and could not be supported by a good faith argument for an extension, modification or reversal of existing law.
§ 279-R. PRESERVATION OF SECRECY.
In an action under this article, a court shall preserve the secrecy of an alleged trade secret by reasonable means, including but not limited to, granting protective orders in connection with discovery devices pursuant to the provisions of § 3103 of the Civil Practice Laws and Rules, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.
§ 279-s. STATUTE OF LIMITATIONS.
Notwithstanding any inconsistent provision oflaw, an action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.
§ 279-T. EFFECT ON OTHER LAw.
1. Except as provided in subdivision two of this section, this article displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.
2. This article does not affect: (a) contractual remedies, whether or not based upon misappro
priation of a trade secret; (b) other civil remedies that are not based upon misappropria
tion of a trade secret; or (c) criminal remedies whether or not based upon misappropria
tion of a trade secret. § 279-u. UNIFORMITY OF APPLICATION AND CONSTRUCTION.
1999] UNIFORM TRADE SECRETS ACT 13
This article shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this article among states enacting it.
§ 279-v. SEVERABILITY. If any provision of this article or its application to any person or
circumstances is held invalid, the invalidity does not affect other provisions or applications of this article which can be given effect without the invalid provision or application, and to this end the provisions of this article are severable.
SECTION 2. Section 8303-a of the civil practice law and rules, as amended by chapter 620 of the laws of 1997, is amended by adding a new subdivision (d) to read as follows:
(d). The provisions of this section shall not apply to actions governed by article 17-B of the general business law.
SECTION 3. This act shall take effect on the first day of January next succeeding the date on which it shall have become a law, except that the provisions of article 17-B of the general business law, as added by section one of this act, shall not apply to a misappropriation occurring prior to such effective date. With respect to a continuing misappropriation that began prior to such effective date, this act shall not apply to the continuing misappropriation that occurs after such effective date.
V. COMMENTARY TO THE PROPOSED SECTIONS OF THE UNIFORM TRADE SECRETS ACT FOR NEW YORK
A. Com17U!ntary To Proposed § 279-m
Proposed § 279-m: Proposed § 279-m sets forth the name of the article enacting
this new law and the manner in which it is to be cited: Uniform Trade Secrets Act. It is drafted consistent with other acts which contain similar provisions.a6 Placement of this section as the initial section, is also consistent with other acts.a7
Variations from Uniform Trade Secrets Act: UTSA § 9 sets forth the Uniform Trade Secret Act's "Short
Title," but does not state its citation form. Proposed § 279-m, as to its content and placement, is consistent with New York legislative drafting form.as
3. See, e.g., N.Y. C.P.L.R. § 101; SURR. CT. FRoe. ACT § 101; U.C.C. § 1-1O!. 37 See id. 38 See id.
14 ALB. L.J. SCI. & TECH.
B. Commentary To Proposed § 279-n
Present Law:
[Vol. 10
The law of trade secrets protects (under certain circumstances) a firm's confidential information. Such information may not be patented or copyrighted, or patentable or copyrightable. In New York, there is no comprehensive statutory treatment of trade secrets law. Rather, the New York courts rely upon common law rules. These rules have been based extensively upon the Restatement of Torts, published in 1939, and general statutory enactments, in order to give protection against one's unauthorized acquisition, use or disclosure of another's confidential information.
As developed in New York under the common law, a firm will be given protection for its confidential information upon a showing that (1) the information is protectible as a "trade secret"; and (2) the misappropriation of the trade secret (i.e., its acquisition, use or disclosure of the information) is a breach of confidence or fiduciary duty or it involves other improper means. Upon these two elements, a successful trade secrets misappropriation action is established. It should be noted that this general framework is substantially similar in all jurisdictions.39
Trade Secret: Recognizing that there is no generally accepted definition of a
trade secret, New York courts look to section 757 of the Restatement of Torts (1939) for the definition.40 Under this definition, a "trade secret" is "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."4!
Preliminarily, it must be noted that, consistent with the Restatement's definition, New York courts recognize that almost any information used in the conduct of one's business may be pro-
39 See Michael J. Hutter, Trade Secret Misappropriation: A Lawyer's Practical Approach to the Case Law, 1 W. NEW ENG. L. REV. 1 (1978).
40 See Ashland Management Inc. v. Janien, 82 N.Y.2d 395, 407 (1993); Delta Filter Corp. v. Morin, 108 A.D.2d 991, 992 (3d Dep't 1985) (affirming that the New York judicial system has "substantially adopted the approach of the original Restatement of Torts (1939) [to define] the law of trade secrets") (citation omitted); Eagle Comtronics, Inc. v. Pico Inc., 89 A.D.2d 803, 803 (4th Dep't 1982) (defining a trade secret as "any device 'which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it'") (citation omitted); Lehman v. Dow Jones & Co., 783 F.2d 285, 297 (2d Cir. 1986).
41 See RESTATEMENT OF TORTS § 757, cmt. b, at 5 (1939).
1999] UNIFORM TRADE SECRETS ACT 15
tected as a trade secret.42 This information may be technical or non-technical in nature.43 Thus, formulas, manufacturing techniques and product specifications, customer lists and information, and information relating to merchandising, costs and pricing, are all protectible subject matter.44 Computer technology, whether it relates to hardware or software, and whether copyrightable or patentable, may also be protectible as a trade secret.4•
Although a wide variety of business information can qualify as protectible subject matter, the skills and efficiency which an employee develops through his or her work or general knowledge, are not considered protectible subject matter which belongs to his or her employer.46 In addition, the United States Court of Appeals for the Second Circuit has stated that New York law will not protect information which is characterized as a "single or ephemeral" event in the company's business.47 This conclusion was based on the Restatement's comment that a trade secret must be "used in one's business."48
The Restatement of Torts (1939) suggests that in deciding whether a trade secret exists in accordance with that definition, several factors should be considered:
(1) the extent to which the information is known outside of [thel business; (2) the extent to which it is known by employees and others involved in [thel business; (3) the extent of measures taken by [the businessl to guard the secrecy of the information; (4) the value of the information to [the businessl and {itsJ competitors; (5) the amount of effort or money expended by [the businessl in developing
42 See Victoria Cundiff, The New York Law of Trade Secrets: A Practical Guide, 67 N.Y. ST. B.J. 32, 34--.'l5 (May/June 1995) (iisting New York cases which discuss the various categories of information which may qualify as protectible trade secrets).
43 See id. at 35 (stating that "[t]he list of possibilities [for trade secret protection] is virtually inexhaustible").
44 See id. at 34--.'l5. 45 See Computer Assoc. Int'l v. Altai, Inc., 982 F.2d 693, 717 (2nd Cir. 1992)
(explaining tbat "protection [is] extended to computer programs."); see also Integrated Case Management Services, Inc. v. Digital Transactions, Inc., 920 F.2d In, 173-74 (2d Cir. 1990) (stating that software programs are a protectible trade secret).
46 See L.M. Rabinowitz & Co. v. Dasher, 82 N.Y.S.2d 431, 439 (N.Y. Sup. Ct. 1948) (finding that employee is entitled to take his general knowledge and skill to future employment, thus it is not protected under trade secrets).
47 Lehman v. Dow Jones & Co., 783 F.2d 285, 297 (2d Cir. 1986) (stating that secret information is not "simply information as to a single or ephemeral events in the conduct of the business .. .") .
. 48 1d.
16 ALB. L.J. SCI. & TECH. IVol.10
the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.49
The New York courts employ these factors. 5o
Although the New York courts, cite the Restatement and mention these factors in determining whether particular information is a trade secret, the most important consideration is whether the information is secret.51 Information which is generally known in the trade (or business) or to the public cannot form the basis of a trade secret and its acquisition, use or disclosure by others can cause little or no damage.52
Under this factor, however, absolute secrecy is not required; relative secrecy will be sufficient. 53 Thus, the attribute of secrecy is not lost if the owner of the information revealed it to another for legitimate business purposes, (e.g., disclosure to employees, prospective Iicensees).54
When the claimed trade secret relates to a publicly marketed product and is embodied in that product, (i.e., the product's constituent elements, the process by which the product was made, engineering benefits derived from particular features of the product) the secrecy element is not lost for such trade secrets, provided the information is not readily discernible from the product or easily extracted from the product, (i.e., reverse engineering).55 Simi-
49 49 Restatement of Torts § 757, cmt. b. 60 See generally Ashland Management v. Janien, 82 N.Y.2d 395, 407 (1993). 51 See Ashland Management, 82 N.Y.2d at 407 ("a trade secret must first of all
be secret"); Lehman, 783 F.2d at 298 ("Secrecy is a question of fact.") (citation omitted).
52 See National Starch Prods. v. Polymer Indus., 273 A.D. 732, 735 (lst Dep't 1948) ("if the facts pertaining to the matter are a subject of general knowledge in the trade, then any property right has evaporated.").
63 See generally Fairchild Engine & Airplane Corp. v. Cox, 50 N.Y.S.2d 643, 653 (N.Y. Sup. Ct. N.Y. Co., 1944); Q-Co Indus. v. Hoffman, 625 F. Supp. 608, 616 (S.D.N.Y. 1985) (enunciating the rule that to constitute "secret information" only a "'substantial element of secrecy must exist' .. . ") (citation omitted); 1 MILGRIM, supra note 12, § 1.07(2) (1999) .
54 See Riteoff, Inc. v. Contact Indus., 43 A.D.2d 731, 732 (2d Dep't 1973) (stating that plaintiff had a protectible trade secret even though he divulged it to defendant in confidence); Heyman v. AR. Winarick, Inc., 325 F.2d 584, 586-87 (2d Cir. 1963) (explaining that absent an express agreement establishing a confidential relationship between plaintiff and defendant, the circumstances surrounding their dealing could be determinative as to whether a relationship of confidence and trust naturally resulted between the two parties).
65 See Tabor v. Hoffman, 118 N.Y. 30, 37 (1889) (holding that even though it may be legal to copy a publicly marketed product, it is unlawful to copy the pattern of the product); Eagle Comtronics, Inc. v. Pico, Inc., 89 A.D.2d 803, 804 (4 th Dep't 1982) (stating that information in this case is readily accessible, rendering product not a secret); 1 MILGRIM, supra note 12, §§ 1.05(2) & 1.07(1).
1999] UNIFORM TRADE SECRETS ACT 17
larly, where customer lists and customer information are readily ascertainable from directories or other publicly available information, such information is not protectible, even if the information was amassed with substantial effort.56 Additionally, in situations where the claimed trade secret consists of a combination of several compon'ents, each of which by itself is in the public domain, the combined result can still be protectible, provided it is not generally known or readily discoverable. 57
In addition to the secrecy requirement, New York courts emphasize the need for the trade secret owner to take reasonable precautions to prevent disclosure, in order to have a protectible trade secret. 58 It is important to note that only reasonable precautions under the circumstances are required; the owner of the information does not have to establish that every conceivable precaution was taken.59 Although there is no mandated checklist of minimally acceptable precautions, the court will look askance upon measures that are obviously insufficient.60
As to the value factor, New York courts have required only a showing that the trade secret confers a competitive advantage
56 See Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 392 (1972) (stating that where "customers are readily ascertainable outside the employer's business ... trade secret protection will not attach ... "); see also Ruesch Infl, Inc. v. MacCormack, 222 A.D.2d 343 (1st Dep't 1995) (holding that plaintiffs information Was easily ascertainable and therefore an unprotected trade secret); Williams Press, Inc. v. Flavin, 44 A.D.2d 634, 637 (3d Dep't 1974) (denying petitioners any compensation because information was readily and easily accessible).
67 See generally Integrated Cash Mgmt. Servs. v. Digital Transaction, 920 F.2d 171, 173-74 (2d Cir. 1990); Imperial Chern. Indust. v. Nat'l Distillers and Chem. Corp., 342 F.2d 737, 742·43 (2d Cir. 1965).
68 See Downtown Women's Ctr., Inc. v. Carron, 237 A.D.2d 209 (1st Dep't 1997) (finding that an unprotected patient list which' was left. on a centralized computer and accessible to everyone does not qualify as a trade secret); Precision Concepts, Inc. v. Bonsanti, 172 A.D.2d 737, 738 (2d Dep't 1991) (finding no cause of action for misappropriation of trade secreta because the plaintiff did not assert precautionary measures in protecting its alleged exclusive knowledge); Delta Filter Corp. v. Morin, 108 A.D.2d 991, 993 (3d Dep't 1985) (explaining that plaintiffs failure to "take rudimentary precautions to prevent employees from acquiring familiarity with the machines" preventa them from claiming protectable trade secrets); Defiance Button Mach. Co. v. C & C Metal Prod. Corp., 759 F.2d 1053 (2d Cir. 1985) (failing to separate source books and failing to erase the lists from computer did not give rise to protectable trade secrets because plaintiff did not take adequate measures to ensure the secrecy of the lists).
69 See 1 MILGRIM, supra note 12, § 1.04. 60 See Delta Filter Corp., 108 A.D.2d at 993-94; Michael J. Hutter, Trade
Secret Protection: The Requirement of Reasonable Efforts to Maintain Secrecy in Trade Secret Protection and Litigation, 340 PLl 97 (June, 1992).
18 ALB. L.J. SCI. & TECH. [Vol. 10
over others who do not have it.61 Such showing can generally be met by proof establishing the secrecy and reasonable precautions factors.62 In that regard, "novelty" or "non-obviousness," as these terms are used in patent law, are not required.63 However, some element of invention or discovery is necessary to assure that the information is not publicly known or cannot be readily ascertained, lest the information fail to meet the secrecy element.64
Generally, the value factor is not one that causes problems or raises concern.
In sum, although New York courts profess to determine whether particular information is protectible as a trade secret by using the six Restatement factors, they generally emphasize the secrecy and reasonable precaution factors. Indeed, the presence, or absence, of these factors is usually dispositive of a trade secrets claim. Nonetheless, some courts will consider all six factors66, and still others will emphasize the use factor.66 As a result, some commentators have observed that exactly what "constitutes a trade secret [in New York] is still unclear."67
Misappropriation: Having established the existence of a trade secret, there must
then be proof that the trade secret was misappropriated, (i.e., the alleged misappropriator acquired, used or disclosed the informa-
61 See generally Franke v. Wiltschek, 209 F.2d 493 (2d Cir. 1953); Sheridan v. Mallinckrodt, Inc., 568 F. Supp. 1347, 1352 n.7 (N.D.N.Y. 1983) (indicating that in order to constitute a trade secret, the information must provide a competitive advantage to the owner).
62 See Spiselman v. Rabinowtiz, 61 N.Y.S. 2d 138, 141 (1" Dept 1946) (finding that plaintiff showed he had a property right in the secret formula and defendant did not obtain this formula innocently); Minnesota Mining & Mfg. Co. v. Technical Tape Corp., 23 Misc.2d 671, 679-82 (Sup. Ct. Westchester County 1959).
63 See Softel, Inc. v. Dragon Med. and Scientific Communications, Inc., 118 F.3d 955, 968 (2d Cir. 1997) (cautioning the district court on its use of the word "novelty").
64 See 1 MILGRIM, supra note 12, § 1.08(2). 65 See United States v. Int'I Bus. Mach., 67 F.R.D. 40, 46-47 (S.D.N.Y. 1975)
(describing the six factors of secrecy to be considered when determining if given information ought to be treated as a trade secret).
66 See Lehman v. Dow Jones & Co., 783 F.2d 285, 298 (2d Cir. 1986) (explaining that even if confidential information doesn't qualify as a trade secret, a cause of action may arise if the information is later used in a manner that breaches the confidence).
67 See Neufeld, supra note 6 at 912-13; see also Steven R. Kramer, Protecting Dissemination of Business Secrets During Discovery, N.Y. B.J., Jan. 1997, at 24.
1999] UNIFORM TRADE SECRETS ACT 19
tion improperly or wrongfully).68 Unlike patent law, establishment of a trade secret does not give one the right to exclude all others from acquiring, using or disclosing the trade secret, regardless of how they came upon it. Rather, the trade secret owner is only given protection against one who uses improper or wrongful means to obtain the trade secret.69
There are two legally permissible ways in which a firm can learn or otherwise acquire another firm's trade secret. First, one may discover another's trade secret independently!O For example, in a situation where Y's information is identical to X's information and was developed after X's information was created, X cannot enjoin Y's use of the information so long as Y developed it through its own independent efforts. The trade secret may also be ascertained through publicly available literature.7l Secondly, a party may "reverse engineer" a product in order to learn the trade secret involved with it. This refers to the process by which one analyzes another's product in order to determine its nature or specific content!2 For example, in a situation where Y purchases X's product and by working with and analyzing the product ascertains the process by which the product was manufactured, X cannot preclude Y from using this process even though this process otherwise meets the prerequisites of a trade secret.
68 See Kaumagraph Co. v. Stampagraph Co., 235 N.Y. 1, 6-7 (l923) (ruling that the determinative question in the case was whether the defendant acquired its knowledge of the secret through two of its employees who had previously worked for the plaintift); see generally Tabor v. Hoffman, 118 N.Y. 30 (1889); see also Spiselman v. Rabinowitz, 270 A.D.2d 548, 550-51 (lst Dep't 1946)(holding that anyone who learns of an unprotected secret in his or her capacity as an employee is under a duty not to disclose that secret, even if there is no nondisclosure contract); Ferranti Elec. Inc. v. Harwood, 43 Misc. 2d 533, 539-40 (Sup. Ct. Nassau Co. 1964) (holding that when determining whether or not a trade secret deserves protection, the court must first look at how it was acquired); Integrated Cash Management Serv., Inc. v. Digital Transactions Inc., 920 F.2d 171, 173 (2d Cir. 1990) (ruling that in order to prove trade secret misappropriation, a plaintiff must show it had a secret, and that the defendant obtained it through a breach of an agreement, duty or confidence).
69 See Integrated Cash Mgmt. Servo V. Digital Transactions, 920 F.2d. 171, 173 (2"' Cir. 1990) (noting that the individual defendant had misappropriated trade secrets).
70 See Minnesota Mining & Mfg. Co. v. Technical Tape Corp., 23 Misc.2d 671, 679 (Sup. Ct. Westchester Co. 1959).
71 See Ashland Mgmt. Inc. V. Janien, 82 N.Y.2d 395, 407 (1993) (stating that the alleged secret information could be reproduced based on plaintiffs public disclosures).
72 See Tabor, 118 N.Y. at 36 (noting if one finds out a secret through lawful analysis, he may use it without interference from the courts).
20 ALB. L.J. SCI. & TECH. [Vol. lO
It is clear that no catalogue of what constitutes improper or wrongful means can be compiled." The following statement by the United States Court of Appeals for the Fifth Circuit is equally applicable in New York: '''Improper' will always be a word of many nuances, determined by time, place, and circumstances. We therefore need not proclaim a catalogue of commercial improprieties."74 However, the New York decisions identify three categories of improper or wrongful means.
It is well established that the test of improper conduct is satisfied when one who stands in neither a fiduciary nor a confidential relationship acquires a trade secret by means that are "independently unlawful."75 Such means include: "theft, trespass, bribing or otherwise inducing employees or others to reveal the information in breach of duty, fraudulent misrepresentations, threats of harm by unlawful conduct, wiretapping, procuring one's own employees or agents to become employees of the other for purposes of espionage .... "76
New York courts also recognize that improper means have been employed when one uses for his or her own purposes a trade secret revealed under an obligation, express or implied, not to use it.77 Such a duty will be found to exist between employer and
73 RESTATEMENT OF TORTS, § 757, cmt. f (1939); cf. Guard·Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 189-190 (1980) (looking to the Restatement of Torts as a guideline, but determining that these types of cases have to be decided based on the facts of each case individually. There is no set formula for determining what constitutes improper means); Electrolux Corp. v. Val·Worth, Inc., 6 N.Y.2d 556, 568 (1959) (stating that the court has not found any "cases where the issue of definition of wrongful means has been squarely presented and decided").
7. E.!. duPont deNemours & Co. v. Christopher, 431 F.2d 1012, 1017 (5th Cir. 1970), (concluding that espionage ... is an improper method of discovering a trade secret).
76 See Eastern Extracting Co. v. Greater New York Extracting Co., 110 N.Y.S. 738 (2d Dep't 1908) (ruling that it is improper to seek employment with a company for the sole means oflearning and stealing its trade secrets); Franke v. Wiltschek, 209 F.2d 493, 495 (2d Cir. 1953) (ruling that even if discovery of a secret may be possible by fair means, it does not justifY misappropriation by unfair, unlawful means); Telerate Sys. v. Caro, 689 F. Supp. 221 (S.D.N.Y. 1988) (holding that acquiring a secret by tapping into a computer with an unauthorized line monitor is improper).
76 RESTATEMENT OF TORTS § 759, cmt. c (1939). 77 See L.M. Rabinowitz Co. v. Dasher, 82 N.y.s.2d 431, 435 (Sup. Ct. N.Y. Co.
1948) (stating that an employee will be held liable for divulging trade secrets even ifthe obligation to hold such secrets in confidence was not expressly written in their employment contract. Such an obligation will be implied).
1999] UNIFORM TRADE SECRETS ACT 21
employee, prospective licensor and licensee and prospective merger partners!S
Finally, it would appear that the New York courts would also find that improper means are employed when the acquisition of the trade secret occurred in a way that offends standards of commercial ethics, even if no specific independent wrongful conduct was involved!· The Restatement of Torts likewise recognizes this category of improper means.so
Third parties not in privity with a trade secret owner who obtain the trade secret may be liable for trade secret misappropriation if they know or had reason to know that they obtained the trade secret from someone who had acquired or disclosed it unlawfully.s1 Absent such actual or constructive knowledge, the third party would not be liable for the use or disclosure of another's trade secret.S2
Proposed § 279-n: Proposed § 279-n, which is the definitional section of the pro
posed Act, is the cornerstone of the Act. The section actually does more than merely provide definition. It is substantive in nature; it sets forth in conjunction with proposed §§ 279-0 and 279-p the two basic elements of establishing liability for trade secrets misappropriation through its definitions of "improper means" (subdivision 1), "misappropriation" (subdivision 2), "person" (subdivision 3), and "trade secret" (subdivision 4). Like the common law, the section provides in essence that liability for trade secrets misap-
78 See generally Byrne v. Barrett, 268 N.Y. 199 (1935) (ruling that it is an absolute duty of an employee to keep trade secrets in confidence, even after employment is terminated); see Heyman v. Winarick, Inc., 325 F.2d 584 (2d Cir. 1963); see Speedry Chern. Prods., Inc. v. Carter's Ink Co., 306 F.2d 328 (2d Cir. 1962) (holding that during the negotiations for a license agreement, a confidential relationship existed between the parties).
79 See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481 (1974) (explaining that "commercial ethics and the encouragement of inventions are the broadly stated policies behind trade secret law"); see also E.!. duPont de Nemours & Co. v. Christopher, 431 F.2d 1012, 1013 (5 th Cir. 1970).
80 See RESTATEMENT OF TORTS § 757, cmt. f (1939). 81 See Tabor v. Hoffman, 118 N.Y. 30 (1889); see also Lamont, Corliss & Co. v.
Bonnie Blend Chocolate Corp., 135 Misc. 537, 539 (Sup. Ct. N.Y. Co. 1929) (ruling that "one who learns a trade secret from another who is pledged to secrecy may be enjoined from using it"); see also Computer Assoc. Int'l v. Altai, Inc., 982 F.2d 693, 718 (2d Cir. 1992) (holding that the third party does not need to have actual notice that the information they received was acquired unlawfully. Constructive notice is sufficient).
82 See Conmar Prods. Corp. v. Universal Slide Fastener Co., 172 F.2d 150 (2d Cir. 1949) (noting that one cannot be held liable for consequences they were not aware of).
22 ALB. L.J. SCI. & TECH. [Vol. 10
propriation requires proof of (1) the existence of a trade secret and (2) the acquisition of the trade secret by a party by improper conduct or wrongful means. However, as described below, proposed § 279-n makes several desirable changes from the common law.
Trade Secret (Subdivision 4): Subdivision 4 sets forth three elements as the basis of the trade
secret definition. First, a trade secret must be information; second, it must have actual or potential independent economic value based on its secrecy; and third, reasonable efforts have been maintained to protect its secrecy. This definition closely follows the common law, with the following changes:
(1) The Restatement of Torts definition tacitly recognized that a trade secret is information.83 Although the Restatement provides examples of categories of information that are protectible84, the addition of the words "including but not limited to" into proposed § 279-n indicates the examples are not intended to be exclusive. The Restatement of Torts lists "formula, pattern, device or compilation of information"85; subdivision 4 adds "data, program, method and technique" to the list. This is done to accommodate modern technology, (e.g., "data" and "program") as recognized by the courts. "Methods" and "techniques" are added to insure that the concept of "know-how," recognized in several cases as knowledge gained by an employee during employment, is protectible information.86 "Technical and non-technical" is added as a preface to ensure that the common law treatment of non-technical information as protectible subject matter continues.
Under present law, "methods" and "techniques," (e.g., knowhow) do not include general knowledge or skill gained in the nor-
83 See Ramon A. Klitzke, The Uniform Trade Secrets Act, 64 MARQ. L. REV.
277, 285--86 (1980) (explaining that while the Restatement of Torts did not "provide a black letter definition of a trade secret" ... "it did tacitly recognize, by its choice of example, that a trade secret is information."),
84 See RESTATEMENT OF TORTS § 757 cmt.b at 5 (1939) ("A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."),
86 Id. 86 UNIF. TRADE SECRETS ACT § 1 cmt. (1985), 14 U.L.A. 433, 439 (1990).
1999] UNIFORM TRADE SECRETS ACT 23
mal course ofemployment.87 Consequently, the need to draw distinctions between the two categories will continue.88
Unlike the Restatement of Torts, the information does not need to be in continuous use to be protectible.89 Thus, information concerning a single event which has passed, or short-lived information or information that has not yet been put to use, can be protectible.90 Such information can certainly be valuable, and there is no reason to exclude it categorically from protection simply because it is not in "continuous use." Similarly, "negative know-how," (i.e., knowing what not to do) is potentially protectible.91 Cases that hold that such types of information do not constitute protectible trade secret subject matter are overruled.
(2) The second definitional element is that to be protectible the information must have "economic value, actual or potential." Such value is derived from the information "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." In other words, the information must derive its value from being secret.
This definitional element is consistent with present law, and present case law will continue to have precedential value. Thus, there is only a requirement of relative secrecy, not absolute secrecy. Information which is generally known within the industry cannot be protected as a trade secret,92 nor can information which is readily ascertainable through reverse engineering or inspection.93 Like present law, by focusing on the element of
87 RESTATEMENT (THrnD) OF UNFAIR COMPETITION § 42 cmt. d (1995) ("Information that forms the general skill, knowledge, training, and experience of an employee cannot be claimed as a trade secret by a former employer even when the information is directly attributable to an investment of resources by the employer in the employee.").
88 See id. ("Whether partiCUlar information is properly regarded as a trade secret of the former employer or as part of the general skill, knowledge, training, and experience of the former employee depends on the facts and circumstances of the particular case.").
89 See RESTATEMENT OF TORTS § 757, cmt. b. 90 See Klitze, supra note 83, at 2!J8. 91 See Cundiff, supra note 8, at 35 (explaining that a "deadend" could be
categorized as a protected trade secret as "[k)nowing what does not work can tell a competitor what not to waste money on").
92 See Klitze, supra note 83, at 289. 93 See E.I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012, 1015
(1970) ("One may use his competitor's secret if he discovered the process by reverse engineering applied to the finished product; one may use a competitor's process if he discovers it by his own independent research.").
24 ALB. L.J. SCI. & TECH. [Vol. 10
secrecy, the Act does not require any showing of novelty to establish value.
It should also be noted that potential value will suffice. This is consistent with the information element, which does not impose any use requirement.
(3) The third definitional element carries over the common law requirement that there be reasonable efforts undertaken to protect and maintain the information's secrecy.
In sum, the definition sets forth three distinct elements of a trade secret. Although the definition does not sharply delineate the boundaries of what constitutes a trade secret, the definition does overcome the objection that present law, with its emphasis on considering generally several factors, leads to uncertainty. Moreover, its specification of the three elements is consistent with the better-reasoned New York decisions and overcomes several objectionable features of present law discussed above.
Misappropriation (Subdivision 2): Under the proposed Act, misappropriation of a trade secret
must be established before liability is imposed. Subdivision 2 specifies the instances in which misappropriation will occur. Because misappropriation as defined turns in part upon "improper means," which is defined in subdivision 1, these two subdivisions must be considered together.
To prove a misappropriation, the trade secret owner must show that the alleged misappropriator (l)acquired trade secret knowing or having reason to know it was acquired by "improper means"; or (2) used or disclosed the trade secret without consent and used "improper means" to acquire the "trade secret"; or (3) acquired the trade secret from a third person rather than from the owner of the trade secret and knew of or should have known that the trade secret was either obtained by the third person by "improper means" or the third person was under a duty to keep it secret.
Additionally, misappropriation may be present with respect to a person who uses or discloses a trade secret acquired through accident or mistake. In such a situation, misappropriation will be established only if the person knows or has reason to know that the information was a trade secret and that such actual or constructive knowledge of the trade secret was acquired by accident or mistake; that the alleged misappropriator's actual or constructive knowledge occurred before there is any material change in the alleged misappropriator's position. Misappropriation will be
1999] UNIFORM TRADE SECRETS ACT 25
defeated if the accident or mistake was due to a failure by the trade secret owner to employ reasonable efforts to maintain secrecy.94
Subdivision 1, "Improper means," continues present law, as based on the Restatement of Torts, with two exceptions. The exceptions are desirable changes from present law.
First, under this subdivision, but not under the Restatement of Torts, a person's improper acquisition of a trade secret, absent subsequent use or disclosure, is actionable as a misappropriation.9' In such a situation, there is no reason why the acquirer of a trade secret should be able to avoid liability.
Second, under this subdivision, a person who continues to use or disclose a trade secret after hearing of its initial improper acquisition is subject to liability, even if the person had paid value for the trade secret or had substantially changed his or her position before receiving the notice. However, the Restatement of Torts provides that a person who innocently acquires a trade secret and subsequently learns that the original acquisition was improper (or a mistake) is not liable, even for subsequent use or disclosure, if the person had in good faith paid value for the information or otherwise substantially changed their position prior to receipt of notice.96 This subdivision gives more protection to the owner and is thus desirable. Any unfairness to the acquiring person is ameliorated by § 279-0 (2). Under this subdivision, which recognizes the fact that an innocent person has paid value or has substantially changed his or her position before learning of the improper acquisition is relevant to whether an injunction is granted.97
9. See generally UNIF. TRADE SECRE'I'S ACT § 7, cmt. (1985), 14 U.L.A. 433, 463 (1990).
95 Compare RESTATEMENT OF ToRTS § 757 (1939) ("One who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if . ... ") with 279·n(2) § 2 ("Misappropriation means: (a) acquisition of a trade secret .. . by improper means; or (b) disclosure or use of a trade secret of another without express or implied consent by a person who ... .") (emphasis added). See also RESTATEMENT (TruRD) OF UNFAIR COMPETITION § 40 cmt. b (1995) (explaining that the first Restatement of Torts imposed liability only for wrongful use or disclosure of another's trade secret but not for its independent improper acquisition, and stating that § 40 of the new Restatement, consistent with the UTSA, changes that rule).
96 See RESTATEMENT OF TORTS § 758(b) (1939). 97 See UNIF. TRADE SECRE'I'S ACT § 2(b) (1985), 14 U.L.A 433, 449 (1990)
(stating that "[iJn exceptional cicumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer that the period of time for which use could have been prohibited . . . includ[ing) . . . a material and
26 ALB. L.J. SCI. & TECH. [Vol. 10
In sum, the provisions of subdivision 2, defining misappropriation, continue present law, with two desirable changes.
"Improper Means" (Subdivision 1): As noted above, the definition of misappropriation relies heavily
upon the definition of "improper means." Subdivision 1 provides the definition for "improper means."98 It is fully consistent with present law.
Thus, the specification of "theft," "bribery," "misrepresentation," "espionage" or "inducement of a breach of a duty to maintain secrecy" follows the cases that recognize such independently tortious or criminal conduct as "improper." The "breach of a duty to maintain secrecy" follows the cases that predicate an "improper" finding on such conduct. The term "other means" following espionage through electronics, as in present law, gives the courts the flexibility to condemn devious forms of obtaining trade secrets, which fall short of proper means such as independent development or reverse engineering.99
"Person" (Subdivision 3): As for the "person" who owns a trade secret or is accused of mis
appropriation, subdivision 3 provides a definition.lOo As can be seen, the definition is expansive. There is no reason to limit the persons who could own a trade secret or be misappropriators.
Variations From Uniform Trade Secrets Act: UTSA § 1 sets forth the definitions for the Uniform Trade
Secrets Act. Subdivisions (1) and (2) are identical to UTSA § l(a)(b). Subdivision (3) is identical to UTSA § l(c), except that it adds "limited liability company," a recent statutory creation. WI
Subdivision (4) is identical to UTSA § l(d), except that it adds "technical or non-technical," which is done to ensure that non-
prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.").
98 See UNIF. TRADE SECRE'fS ACT § 1(1) (1985) (defining improper means as "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means").
99 See E.!. duPont deNemours & Co. v. Christopher, 431 F.2d 1012, 1015·1016 (5th Cir. 1970).
100 See UNIF. TRADE SECRETS ACT § 1(3) (1985) (defining "person" as a "natural perSOll, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity").
101 See N.Y. LTD. LIAB. Co. LAw § 102 (m) (Consol. Supp. 1999) (defining "limited liability company" as "an unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business").
1999] UNIFORM TRADE SECRETS ACT 27
technical information will be deemed protectible subject matter. 102
C. Commentary To Proposed § 279·0
Present Law: It is well established in New York that the remedies available
for the misappropriation of a trade secret include injunctive relief and monetary damages. ,o3 In appropriate cases, a court may order both.,00
From the standpoint ofthe trade secret owner, injunctive relief restraining future use and disclosure of a misappropriated trade secret is especially desirable. Such relief protects against additional harm to the owner of the trade secret from further unauthorized use or disclosure of the trade secret, and permits the court to fashion the relief so as to deprive the misappropriator of any further benefit from its misappropriation.
The trade secret owner may obtain preliminary injunctive relief to enjoin either actual or threatened misappropriation during the pendency of its trade secret misappropriation action. Pursuant to Article 63 of the Civil Practice Law and Rules (CPLR), such relief may be granted upon a showing of a likelihood of success on the merits; irreparable harm absent the injunction; and that a balancing of the equities favors the issuance of the injunction.105 These
102 UNlF. 'l'RAnE SECRETS Acr § 1 (1985), 14 U.L.A. 433, 438 (1990); see also UNIF. 'l'RAnE SECRETS Acr § 4 (noting that formulas, patterns, complications, programs, devices, methods, techniques, and processes as what may be regarded as trade secrets).
103 See Spiselman v. Rabinowitz, 270 A.D. 548, 551 (ist Dep't 1946) (stating that "[wlhere ... one's property rights are infringed, .. .if he so elects, [hel may bring an action at law to recover money damages for the injury.).
104 See id. (noting that a plaintiff has a property right in their trade secret and is entitled to full protection from injury when it wrongfully falls into the hands of a defendant).
105 See U.S. Reinsurance Corp. v. Humphreys, 205 A.D.2d 187, 191 (1st Dep't 1994) (noting that injunctive relief was granted to a plaintiff against a defendant, a former corporate director of the plaintiff corporation, when the defendant resigned and inlmediately sought out the plaintiffs' clients for his own business); see also Nassau Soda Fountain Equip. Corp. v. Mason, 118 A.D.2d 764, 765 (2d Dep't 1986) (finding that plaintiffs would most likely prevail on the merits based on the fact that the defendants breached a fiduciary duty by starting their own soda company while still employed with the plaintiff); see also McLaughlin v. Nolan & Co., 114 A.D.2d 165, 172-75 (2d Dep't 1986) (granting injunctive relief when defendants started their own securities brokerage firm while still working for plaintiff corporation).
28 ALB. L.J. SCI. & TECH. IVol.10
are the traditional elements for obtaining injunctive relief. 106
Additionally, if it is shown that "immediate and irreparable injury, loss or damage will result unless the defendant is restrained before the hearing [on the preliminary injunction] can be had," a temporary restraining order may be issued. lo7
A permanent injunction against the use or disclosure ofthe misappropriated trade secret may be issued as part of the final judgment.10S As in other actions, the prerequisites are a showing of irreparable harm in the absence of such relief and the inadequacy of a remedy at law. lOS
There is authority that permanent injunctive relief should be vacated once the trade secret becomes public knowledge.Ho How-
106 See W.T. Grant Co. v. Srogi, 52 N.Y.2d 496, 517 (1981); seegernlrally DAVID D. SIEGEL, NEW YORK PRACTICE § 327 (3d ed. 1999) (stating that CPLR § 6301 authorizes a preliminary injunction when it appears that the defendant threatens or is about to do an act in violation of the plaintiffs rights respecting the subject of the action, which would render a judgment ineffectual; or where the defendant continues an act which would produce injury to the plaintiff if committed during a pending action).
107 See N.Y. C.P.L.R. §§ 6301, 6313(a) (McKinney 1980); see also Siegel, supra note 106, § 330.
108 See gernlrally Allan Dampf, P.C. v. Bloom, 127 A.D.2d 719 (2d Dep't 1987) (affirming an injunction against the defendant dentist who took the names of the patients from his former employer while stin working at this office and solicited their business after being fired for this wrongful conduct); see also Reforce Steel & Wire Corp. v. Sigona, 23 A.D.2d 882 (2d Dep't 1965) (affirming an injunction against defendant for using certain machinery which plaintiff specially made for their own uee at a considerable expense); Bee alBa Eastern Extracting Co. v. Greater New York Extracting Co., 126 A.D. 928 (2d Dep't 1908) (restraining defendants from using the plaintift's alcohol-extracting processes); see also Minnesota Mining & Mfg. Co. v. Technical Tape Corp., 23 Misc.2d 671, 689 (Sup. Ct. Westchester Co. 1959) (granting injunction to plaintiff when defendant gained plaintiffs trade secrets and manufacturing processes and used them under a different name of a similar product).
109 See McCall Co. v. Wright, 198 N.Y. 143, 155 (1910) (placing emphasis on these two factors including whether the defendant may possess any extraordinary trait that would unduly hurt the moving party); see also Spiselman v. Rabinowitz, 270 AD.2d 548 (noting that when one's property rights are infringed, they are not bound to seek an equitable remedy, but may do so if a legal remedy is inadequate); see gernlrally 67 NY JUR. 2d, Injunctions §§ 42, 43 (1988) (defining "irreparable injury" as one which cannot adequately be compensated in damages, and stating that an injunction will not be granted if there is an adequate remedy of law.)
110 See Timely Prods. Corp. v. Arron, 523 F.2d 288, 304 (2d Cir. 1975) (measuring the amount of damages as whatever the plaintiff sustained until the time the information became public); see also Conmar Product Corp. v. Universal Slide Fastener Co., 172 F.2d 150 (2d Cir. 1949); cf" Ferber v. Stemdent Corp., 51 N.Y.2d 782 (1980) (denying injunction because plaintiffs idea and device "were not novel [and] ... became part of the public domain by ... subsequent patents and publications'); see gernlrolly Laurie Visual Etudes, Inc. v. Chesebrough-
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ever, based on out-of-state cases, there is some support in New York for the proposition that even if the trade secret has become public, an injunction may continue up to the length of time in which the misappropriator could have duplicated the trade secret independently.ll1 In addition, there is authority for the proposition that the injunction will remain in effect even though the trade secret has entered the public domain in order to punish the misappropriator because of its unethical behavior.H2 These cases are fully discussed elsewhere!,a Thus the question of whether an injunction must be vacated once the trade secret becomes public is not subject to a clear-cut answer in New York.
There is limited authority for the proposition that injunctions should not be issued when an important public interest is at stake, or it would be unreasonable or inequitable to enjoin the use of a trade secret. 114 In such a situation, royalty payments can be compelled to be made for any future use of the trade secret.u5
A court may order additional measures as part of its equitable relief. Such relief can include the surrendering of physical embodiments of the trade secretj116 assignment of a patent or patent application on the trade secret j117 and perhaps, the destruction of products made through use of the trade secret.llS
Pond's, Inc., 83 A.D.2d 505 (1st Dep't 1981) (finding that a defendant could have obtained the trade secreta through the patent of a device and by use of ita own resources).
111 See Web Graphics, Inc. v. Jos. Hunkeler, Ltd., 682 F.2d 59 (2d Cir. 1982) 112 See Franke v. Wiltachek, 209 F.2d 493, 496 (2d Cir. 1953) (stating that
relief should be limited to either damages or injunction for "the period until the trade by legitimate means haa caught up with the plaintiff and their secret haa become general"); but see Laurie Visual Etudes, Inc. v. Chesebrough-Pond's, Inc., 83 A.D.2d 505, rev'd, 105 Misc.2d 413, 420-21 (Sup. Ct. N.Y. Co. 1980) (remanding in order to allow lower court to decide whether defendant did in fact breach a fiduciary duty during the course of negotiations with plaintiff).
113 See 4 RODER M. Mn.oRIM, Mn.oRIM ON TRADE SECRETS, § 15.02 (3) (1999); see gem rally Ruth E. Leistensnider, Trade Secret Misappropriation: What Is The Proper Length of an Injunction ~er Public Disclosure?, 51 ALB. L. REv. 271 (1987).
114 See Republic Aviation Corp. v. Schenk, 152 U.S.P.Q. 830, 835 (N.Y. Sup. Ct. Special Term, Suffolk Co. 1967).
116 See id. 116 See General Aniline & Film Corp. v. Frantz, 50 Misc.2d 994, 1003 (N.Y.
Sup. Ct. Broome Co. 1966). 117 Id. 118 See 4 Mn.oRIM, supra note 113, § 15.02(4) at 15-226.
30 ALB. L.J. SCI. & TECH. [Vol. 10
Finally, it is worth remembering that disobedience of any part of the injunction can lead to a finding of contempt.119
In sum, New York is especially responsive to the needs of the trade secret owner in fashioning the most appropriate equitable relief. It recognizes that injunctive relief can be tailored to meet the needs of the particular case. There is, however, some uncertainty as to how long an injunction may continue upon public disclosure of the trade secret.
Proposed § 279-0: Proposed § 279-0 provides for the issuance of injunctive relief in
a trade secret misappropriation case to enjoin actual or threatened misappropriation. Such relief is available in lieu of, or in addition to, compensatory damages pursuant to proposed § 279-p. The proposed section also provides standards for the length of injunctions, the alternative of royalty payments, and affirmative acts.
Subdivision (1):
Subdivision (1) furthers present New York law by providing for enjoining actual or threatened trade secret misappropriation. Such relief, whether it be temporary, preliminary or permanent, will be available when appropriate, as determined by Article 63 of the CPLR and basic principles of equity. The injunction must be drafted with sufficient specificity to provide the misappropriator fair notice of what conduct is prohibited.'20
Subdivision (1) also provides a standard for the duration of injunctions. Under its provisions, the injunction shall be vacated once the trade secret ceases to exist, except where continuation is necessary to elinlinate any commercial advantage that a misappropriator might obtain through its misappropriation. This provision works to deprive the misappropriator of any head start gained over other competitors due to the misappropriation. Thus, under this subdivision, a court which permanently enjoined use and disclosure would have to terminate such injunction upon proof that the misappropriated trade secret is no longer secret, except where continuation was needed to eliminate an improper lead time advantage.
119 See Dampf, P.C. v. Bloom, 127 A.D.2d 719 (2d Dep't 1987) (stating that contempt may be based on violation of temporary restraining order).
120 See 67 N.Y. JUR. 2D, 11\iunctions § 165 (noting that for an injunction order or decree to be enforceable, "it must define specifically what the enjoined person must or must not do").
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Although present law recognizes that an injunction should not continue once the trade secret becomes public, in the absence of any direct precedent, it is not clear whether present New York law would sanction the limited "lead time" exception. This exception is preferable to an unconditional termination, as it properly balances the competing interests of the trade secret owner, the misappropriator, and the public's interest in competition. 121
Subdivision (2): Where an injunction would be unreasonable or inequitable, i.e., "exceptional circumstances," Subdivision (2) authorizes a court to condition further use on the payment of a reasonable royalty during the time an injunction would otherwise have been appropriate. As more fully described in UTSA § 2, Comment:
Exceptional circumstances include the existence of an overriding public interest which requires the denial of a prohibitory injunction against future damaging use and a person's reasonable reliance upon acquisition of a misappropriated trade secret in good faith and without reason to know of its prior tnisappropriation that would be prejudiced by a prohibitory injunction against future damaging use. Republic Aviation Corp. v. Schenk, 152 USPQ 830 (N.Y. Sup. Ct. Special Term, Suffolk Co. 1967) illustrates the public interest justification for withholding prohibitory injunctive relief. The court considered that enjoining a misappropriator from supplying the U.S. with an aircraft weapons control system would have endangered military personnel in Viet N am. The prejudice to a good faith third party justification for withholding prohibitory injunctive relief can arise upon a trade secret owner's notification to a good faith third party that the third party has knowledge of a trade secret as a result of misappropriation by another. This notice suffices to make the third party a misappropriator thereafter under Section 1. In weighing an aggrieved person's interests and the interests of a third party who has relied in good faith upon his or her ability to utilize information, a court may conclude that restraining future use of the information by the third party is unwarranted. With respect to innocent acquirers of misappropriated trade secrets, [proposed § 279·0] is consistent with the principle of 4 Restatement Torts (First) § 758(b) (1939), but rejects the Restatement's literal conferral of absolute immunity upon all third parties who have paid value in good faith for a trade secret misappropriated by another. The position taken by the Uniform Act is supported by Forest Lab· oratories, Inc. v. Pillsbury Co., 452 F.2d 621 (7th Cir. 1971) in which a defendant's purchase of assets of a corporation to which a
121 See RESTATEMENT (THIRD) OF UNFAIR COMPETITION, § 44, cmt. f.
32 ALB. L.J. SCI. & TECH. [Vol. 10
trade secret had been disclosed in confidence was not considered to confer immunity upon the defendant.
When [proposed § 279-01 applies, a court has discretion to substitute an injunction conditioning future use upon payment of a reasonable royalty for an injunction prohibiting future use. Like all injunctive relief for misappropriation, a royalty order injunction is appropriate only if a misappropriator has obtained a competitive advantage through misappropriation and only for the duration of that competitive advantage. In some situations, typically those involving good faith acquirers of trade secrets misappropriated by others, a court may conclude that the same considerations that render a prohibitory injunction against future use inappropriate also render a royalty order injunction inappropriate. See, generally, Prince Manufacturing, Inc. u. Automatic Partner, Inc., 198 USPQ 618 (N.J. Super. Ct. 1976) (purchaser of misappropriator's assets from receiver after trade secret disclosed to public through sale of product not subject to liability for misappropriation).122
This subdivision is consistent with and clarifies present New York law.
Subdivision (3):
The provisions of this subdivision (3) authorize the court to order additional, affirmative steps, which in the circumstances presented, are deemed necessary to give as complete as possible relief to the trade secret owner. It is consistent with New York law.
Variations From Uniform Trade Secrets Act: UTSA § 2 sets forth the Uniform Trade Secret Act's injunctive
relief provisions.12a Proposed § 279-0 is identical to UTSA § 2, with three exceptions, none of which effects any substantive change.
First, "temporarily, preliminarily, or permanently" is added to the proposed section to reflect fully current practice. Although such relief is clearly implicit in UTSA § 2, it is preferable to state so expressly. Second, instead of "terminated," "vacated" is used. The use of "vacated" is consistent with New York terminology.124 Third, the language of subdivision (3) is changed to reflect New York terminology and practice.
122 See Prefatory Note, supra note 16. 123 UNlF. 'l'RAnE SECRETS ACT § 2. 124 See N.Y. C.P.L.R. § 6314 (McKinney 1980)
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D. Commentary To Proposed § 279·p
Present Law: Compensatory Damages:
33
It is well established that compensatory damages may be awarded in trade secret misappropriation cases. "5 They are available in addition to, or in lieu of, an injunction."B AP. with injunctive relief, monetary recovery for misappropriation is appropriate only for that limited period during which a trade secret is entitled to protection. '27
The two basic measures of recovery are the losses sustained by the trade secret owner, and the profits or other benefits gained by the misappropriation through the use of the misappropriated trade secret. "B The trade secret owner may recover under either theory, but not both; otherwise there would be a double recovery."9 Although double recovery is not pennitted, the two measures of damages may be applicable, in turn, to different elements of damages in the same case. lao Thus, the owner may recover its consequential damages (e.g. expenses incurred), and the misappropriator's profits, the former under a loss to owner theory, and the latter under a benefit to misappropriator theory.,a, Courts
125 See Town & Country House & Home Servo v. Newbery, 3 N.Y.2d 554, 561 (1958); see SpiseJman V. Rabinowitz, 270 A.D.2d 548 (lst Dep't 1946); see also Support Sys. Assocs., Inc. v. Tavolacci, 135 A.D.2d 704 (2d Dep't 1987) (stating that trial court was correct in awarding the plaintiff damages in the amount that the plaintiff would have made except for the defendant's wrong); see generally 4 MILGRIM, supra note 113, § 15.02(3).
126 See Duramark Inc. v. Stenholm, 30 N.Y.2d 911 (1972); see Spiselman V.
Rabinowitz, 270 A.D.2d 548 (1st Dep't 1946). 127 See Ferber V. Stemdent Corp., 51 N.Y.2d 782 (1980); see Construction
Tech. v. Lockformer Co., 704 F. Supp. 1212, 1225 (S.D.N.Y. 1989) (expressing that "once the information is no longer secret or confidential J there is no property to protect").
128 See A.F.A. Tours V. Whitchurch, 937 F.2d. 82, 87 (2d Cir. 1991) ("The amount of damages recoverable in an action for misappropriation of trade secrets may be measured either by the plaintiff's losses, .... or by the profits unjustly received by the defendant").
lZ9 See Computer Assocs., 982 F.2d at 720 (explaining that plaintiff "may not obtain a double recovery where the damages for copyright infringement and trade secret misappropriation are coextensive"),
130 See Santa's Workshop V. Sterling, 2 A.D.2d 262, 264 (3d Dep't 1956) (noting that each measure of recovery "one based on plaintiff's loss of profits and the other based on defendant's increased profits" was treated by the appellate court, for the purpose of review, as having been put forth by the plaintiff as alternatives for recovery).
131 See id. at 267 (notwithstanding these theories, the court notes that the general rule is to compensate plaintiff for the amount they would have made, but for the defendant's wrongful act in an unfair business competition case).
34 ALB. L.J. SCI. & TECH. [Vol. 10
will permit the trade secret owner to proceed in the alternative to determine whether the misappropriator's profits exceeds the owner's losses caused by the misappropriation.'32
Ordinarily, the principal element of the trade secret owner's loss will be the amount of profits lost as a result ofloss of business, not the total reduction of revenue. ,aa Determining this sum involves, in turn, inquiry into other areas such as determination of the sales or revenue lost as a result of the misappropriation and of the margin of profit on those revenues, and the degree of precision necessary in arriving at the final award!34 Although it is not entirely clear, the trade secret owner may also be able to recover costs incurred as a result of the misappropriation, such as increased manufacturing costs or added training expenses. '3•
The other measure of damages allows the trade secret owner to recover the misappropriator's profits, or the sums or expenditures saved as a consequence of the misappropriation or other benefits the misappropriator has obtained by way of the misappropriation. '3B In order to properly measure these damages,
132 See id. at 264-265. 133 See David Fox & Sons v. King Poultry Co., 23 N.Y.2d 914 (1969) (finding
that the plaintiff, a wholesale poultry corporation, was entitled to receive damages based upon net profit per pound of poultry sold as opposed to damages based upon gross profit).
134 See American Elecs. Inc. v. Neptune Meter Co., 290 N.Y.S. 2d 333, 335 (1st Dep't 1968) (explaining that "plaintiffs' damages are measured by the contract price less what would have been plaintiffs' cost of performance").
135 See 104 N.Y. JUR. 2d § 284, Trade Regulation (1992) (stating that the "plaintiff may recover damages sustained as a result of the defendant's unfair competition that the defendant made no profit" from the wrongful act).
136 See Fisher Org. v. Ryan, 470 N.Y.S. 2d 968 (Civ; Ct. N.Y. Co. 1983) (stating that the plaintiff was entitled to recover defendants' profits. The defendants, former employers of the plaintiff, had misappropriated confidential infonnation which enabled them to place a candidate for an open employment position and learn a commision of $9,000); see Electro-Miniatures Corp. V. Wendon Co., 771 F.2d 23, 27 (2d Cir. 1985) (noting that an award to the plaintiff was proper. The Court determined that defendant's profits should be based on defendant's "sales of all equipment involving printed circuit slip rings, not ... just on its salea of the slip rings themselves"); see Softel, Inc. V. Dragon Med. and Scientific Communications, Ltd., 891 F. Supp. 935, 942-43 (S.D.N.Y. 1995), affd, 118 F.3d 955 (2d Cir. 1997) (explaining that plaintiffs damages should be based on the defendant's profits; furthennore, "[i]n measuring defendant's profits, it is also appropriate to apportion damages based on the role plaintiffs trade secret played in the commercial success of defendant's product") (citation omitted); see also RESTATEMENT (THrnn) OF UNFAIR COMPETITION, § 45, cmt. f (1995) ("An accounting of the defendanes profits from the unauthorized use of the plaintiffs trade secret is a common remedy ... [and] ... the plaintiff is entitled to the defendant's net profits from sales of good incorporating the trade secret. (citation
1999] UNIFORM TRADE SECRETS ACT 35
the court can order an accounting to determine and calculate such profits. 137
There is also authority in New York for the use of a reasonable royalty standard. 13B A reasonable royalty has been defined as that amount which the trier of fact estimates that a party would be willing to pay and the owner would be willing to accept for use of the trade secret. 139 In calculating what a fair licensing price would have been had the parties agreed, the courts approving this \11ethod have stated that the factfinder should consider such variables as "foreseeable changes in the parties' competitive [positions]; the price[] past purchasers or licensees may have paid; the total value of the secret to the [owner], including the [owner's] development costs and the importance of the secret to the [owner's] business; the nature and extent of the use the [misappropriator] intended for the secret; and whatever other unique factors [present] in the particular case . . . , such as the
omitted) The defendant may also be held accountable for sales of other products that are dependent upon sales of the appropriated product").
137 See Defier Corp. v. Kleeman, 243 N.Y.S.2d 930, 937 (4th Dep't 1963) (stating that" . . . an accounting for the profits realized by the defendants resulting from their illegal acts may furnish the most reliable method of computing the loss")(citation omitted); see also Extrin Foods, Inc. v. Leighton, 115 N.Y.S.2d 429, 439 (Sup. Ct. Kings Co. 1952) (stating that the defendant's who had wrongfully appropriated plaintiffs secret fommlae and processes, were "required to account for the profits earned from the manufacture, sale, and distribution of the [product] prepared by it in emulation of the [plaintiff's product] .. ."); see Smith v. Little, Brown & Co., 273 F. Supp. 870, 874 (S.D.N.Y. 1967) affd 360 F. 2d 928 (2d Cir. 1968) (stating that the plaintiff was entitled to defendant's entire profit); see Elnicky Enters. v. Spotlight Presents, Inc., 213 U.S.P.Q. 855, 862 (S.D.N.Y. 1981), ("As as alternative measure of damages, defendant may be required to account to plaintiff for its profits.") (citation omitted); see generally 63 AL.R.2d 1433, 1437-38 (1959) (explaining that the award in tltis situation is typically an amount equivalent to the defendant's net profits obtained from the wrongful acts, whlch may be determined from ajudicial accounting. Basically, this type of accounting allows the defendant to deduct their costs of production, which may even include a tax deduction if the defendant is found to have not acted in bad faith).
138 See Laurie Visual Etudes, Inc. v. Chesebrough·Pond's Inc., 432 N.Y.S. 2d 457 (Sup. Ct. N.Y. Co. 1980), reD'd on other grounds, 441 N.Y.S. 2d 88 (lst Dep't 1981) (explaiIDng that damages measured by the defendant's was not appropriate and instead, "the fixation of a fair royalty would be acceptable relieF); see also Softel, 891 F. Supp. at 942 ("Another method for computing damages for trade secret misappropriation is the assessment of a reasonable royalty for the use of the trade secret").
139 See University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 539 (5th Cir. 1974) (finding that "the proper measure is to calculate what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place").
36 ALB. L.J. SCI. & TECH. [Vol. 10
ready availability of alternative processes", that may have affected the parties' agreement. "O
In sum, by recognizing that the trade secret owner is entitled to be made whole following a misappropriation of its trade secret, New York courts provide flexible compensatory damage remet;lies. The court may employ whatever method is the most reliable in computing the owner's damages and which will provide the owner the maximum recovery possible. '4l
Punitive Damages: When allowable, punitive damages, frequently referred to as
exemplary damages, are awarded "not only to punish the [wrongdoer] but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future."l42 To warrant an award of punitive damages in a tort action, there must be proof that the wrongdoing is intentional or deliberate, has circumstances of aggravation or outrage, has a fraudulent or evil motive, or is in such conscious disregard of the rights of another that it is deemed willful or wanton. '43 However, punitive damages are not permitted when the conduct in question was not "aimed at the public generally."l4'
The law is unclear as to the availability of punitive damages in a trade secrets misappropriation action sounding in tort. There is authority that punitive damages are not recoverable because "no public right is involved and the underlying private wrong is susceptible of adequate compensation'''l45 Whether these decisions are holding that punitive damages are never available because trade secret misappropriation does not involve a public wrong, or only that no public wrong was present in the facts of these cases is not readily ascertainable. In both of the cited cases, there are
"0 University Computing, 504 F.2d at 539: see generally, 4 MILGRI .. , supra note 113 at § 15.02(3)(e) (measuring damages with less need for different factors to be considered. Instead, an alternative theory is to assess the general value of the subject matter improperly obtained by the defendant).
141 See generally Defier Corp., 243 N.Y.S.2d at 930. 142 Walker v. Sheldon, 10 N.Y.2d 401, 404 (1961). 143 See Prozeralik v. Capital Cities Communications, Inc., 82 N.Y.2d 466,
478-79 (1993) (citing Prosser and Keeton, Torts § 2 at 9·10 (5th ed. 1984» (noting that punitive damages are generally not awarded when the conduct was not aimed at the general public).
144 See Vinlis Constr. Co. v. Roreck, 27 N.Y.2d 687, 689 (1970): see also Walker, 10 N.Y.2d at 405.
145 Huschle v. Battelle, 33 A.D.2d 1017, 1017 (1st Dep't 1970) (citation omitted).
1999] UNIFORM TRADE SECRETS ACT 37
strong dissenting opinions arguing for an award of punitive damages in trade secret misappropriation cases.146
On the other hand, there are decisions awarding punitive damages in trade secrets cases."7 In both cases, punitive damages awards were made based on the defendant's willfulness and bad faith. ' •8 There was no extended discussion as to the availability of punitive damages in trade secrets cases.
Where punitive damages are allowable, the decision as to whether to award them, as well as their amount, are questions for the trier of fact (judge or jury) to determine. " " As to the amount awarded, they must "bear some reasonable relation to the harm done and the flagrancy of the conduct causing it."'50 There is no specific ratio to compensatory damages that the punitive damages needs to bear .'5'
Proposed § 279-p: Proposed § 279-p provides for the recovery of compensatory and
exemplary damages. Subdivision (1): Proposed § 279-p(1) provides for the recovery of compensatory
damages by the trade secret owner. As with injunctive relief, such damages are available for the period during which the alleged trade secret was entitled to protection and not in the public domain, plus the period during which the misappropriator retained a competitive advantage from its misappropriation. Under § 279-p(1), damages may be measured by the trade secret owner's actual losses, the misappropriator's unjust enrichment, e.g., profits, or a combination of both. Damages may also be measured by the amount the trade secret owner would have reason-
146 See kl. at 1017-18; see also American Elecs., 30 A.D.2d at 120. 147 See Gen. Aniline & Film Corp. v. Frantz, 50 Misc.2d 994, 1003 (Sup. Ct.
Broome Co. 1966) (ruling that punitive damages were appropriate because of the defendant's willful breach of confidence and "wanton disregard of the property rights of others"); see also Sofiel, 891 F.Supp at 935 (awarding punitive damages to plaiotiff for defendants' trade secret misappropriation).
148 See also AF.A. Tours, Inc. v. Whitchurch, 937 F.2d 82, 87 (2d Cir. 1991) (allowing punitive damages if conduct has been sufficiently "gross and wanton").
14. See Loughry v. Lincoln First Bank, 67 N.Y.2d 369, 378 (1986); see also Nardelli v. Stamberg, 44 N.Y.2d 500, 503 (1978) (noting that the trier of fact determines the amount of punitive damages).
160 Rupert v. Sellers, 48 AD.2d 265, 269 (4th Dep't 1975) (quoting I.H.P .. Corp. v. 210 Central Park South Corp., 16 A.D.2d 461, 467 ( 1st Dep't 1962) (decreasing the judgment to match the injury).
161 See Hartford Accident. & Indem. Co. v. Hempstead, 48 N.Y.2d 218, 227 (1979) (ruling that a judge must look at all tbe factors in the case, and then determine the amount of damages that will be the most fair to the plaintiff).
38 ALB. L.J. SCI. & TECH. [Vol. 10
ably charged as a royalty for the use of the trade secret. The court may permit recovery on whichever method affords the trade secret owner the greatest recovery, provided an adequate foundation for use of that method is established and there is no double recovery.
The proposed section is consistent with present New York law. In one respect, the section goes beyond what present law provides by permitting the recovery for damages that may have been sustained after the trade secret entered the public domain, but limited to the time the misappropriator· retained a competitive advantage. Although no decision has recognized recovery in such circumstances, there is no decision that conclusively precludes recovery.,52 Recognizing the availability of damages during this limited time is consistent with permitting injunctive relief to continue during this limited time. Moreover, there is no clear indication that the New York courts would reject such a position.
Two of the provisions of the proposed section should be noted. First, the beginning "except" phrase is included to ensure that in instances where a person charged with misappropriation has materially and prejudicially changed his or her position in reliance upon knowledge of a trade secret acquired in good faith and without reason to know of its misappropriation by another, that person cannot be liable for monetary damages. Although there is no clear precedent on this point, such a provision is desirable and would appear to be the rule that would be adopted by the New York courtS.'53
The reasonable royalty alternative measure of damages should be distinguished from a royalty order injunction that is permissible under proposed § 279-0. As stated in the Comment to UTSA § 3, a proposed §279-0:
... royalty order injunction is appropriate only in exceptional circumstances; ... a reasonable royalty measure of damages is a general option. Because [proposed § 279-p(2)1 damages are awarded for a misapproprlator's past conduct and a [proposed § 279-01 royalty order injunction regulates a misappropriator's future conduct, both remedies cannot be awarded for the same conduct. If a royalty order injunction is appropriate because of a person's material and prejudicial change of position prior to having reason to know that a trade
,52 See Laurie Visual Etudes, Inc. v. Chesebrough-Pond's, Inc., 83 A.D.2d 505, 506 (lst Dep't 1981) (stating that a finding that the defendant competed unfairly and/or breached a fiduciary duty would be necessary for a recovery). .
153 See Conmar Prods. Corp. v. Universal Slide Fastener Co., 172 F.2d 150, 154-155 (2d Cir. 1949) (finding that an employer is entitled to exploit innocently acquired secrets until it learned of the misappropriation by its employee).
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secret has been acquired from a misappropriator, damages should not also be awarded for past conduct that occurred prior to notice [or reason to know] that a misappropriated trade secret has been acquired. 154 Subdivision (2): Proposed § 279-p(2) authorizes the court to award "exemplary"
damages for a willful or malicious misappropriation, but caps the amount of such damages at twice the amount of compensatory damages awarded under proposed § 279_p(1).155 Whether to award exemplary damages in a particular case, as well as the amount of such damages, if any, are questions which reside in the sound discretion of the COurt.156 Although "exemplary damages" and "punitive damages" are frequently used interchangeably, the term "exemplary damages" is used because, unlike the situation here, punitive damages are more appropriate for use when no monetary caps are present.
As the misappropriation of trade secrets causes harm to the competitive process and involves intentional conduct, there is no good reason to preclude an award of exemplary damages upon the making of the requisite showing. If the purpose of exemplary or punitive damages is to punish the wrongdoer and protect society against similar acts in the future, they should likewise be available in a trade secrets misappropriation case.
Using a standard of willfulness or maliciousness is consistent with awards of punitive damages in tort cases generally.'57 These terms have been given different meanings under the common law. In that regard, "willfulness," sometimes referred to as "wanton," will be present when the misappropriation is done under such circumstances as to show conscious and deliberate disregard of the rights or interests of another .'58 "Maliciousness" will be present
164 UNlF. TRADE SECRETS ACT §3, 14 U.L.A. 455 (1985) 165 See UNlF. TRADE SECRETS ACT § 3, 14 U.L.A. 455, 456 (1990) (explaining
that under §3, a court may award exemplary damages in addition to the actual damage).
166 See id. <stating that the court may award exemplary damages in an amount not exceeding twice any award made under subsection (a)).
161 See Prozeralik v. Capital Cities Communications, 82 N.Y.2d 466, 479 (1993) (stating that punitive damages in tort actions are awarded "[if] the defendant's wrongdoing has been intentional and deliberate, and has the character of outrage frequently associated with crime").
16B See id. (stating that something more than tort is required for punitive damages); Gostkowski v. Roman Catholic Church of Sacred Hearts of Jesus & Mary, 262 N.Y. 320, 323-24 (1933) (holding that a conscious indifference to the e!fecta of one's act may constitute willful and malicious behavior); Sweeney v. McCormick, 159 A.D.2d 832, 834 (3d Dep't 1990); 1A PATTERN JURY
40 ALB. L.J. SCI. & TECH. IVol.10
when the misappropriation is done·deliberately with knowledge of the trade secret owner's rights and with the intent to interfere with those rights.!59 Permitting recovery in these alternative instances is consistent with protecting trade secrets in our competitive economy. As these terms have an accepted meaning, there is no need to define them in the section.
Empowering only the court to award exemplary damages, and not a jury, and capping their amount at twice the amount of compensatory damages that are awarded is consistent with other statutory enactments.!60 While some jurisdictions have not imposed these limitations!6! proposed section 279-p(2) rejects this approach and adopts the position of the UTSA and the vast majority of the states that have enacted it. The section's approach is preferable as it adequately balances the desirability of exemplary damages and the possibility of unnecessarily ruinously excessive awards. It is also consistent with recent legislative enactments in the business competition area.
Variations From Uniform Trade Secrets Act: UTSA § 3(a) sets forth the Uniform Trade Secret Act's compen
satory damages provisions.!62 Proposed section 279-p(1) is identical to UTSA §3(a).
INSTRUCTIONS 2:278 (3d ed. 1998) (defining willful conduct as "'having a high degree of moral culpability' . . . or activated by an evil and reprehensible motive .. , which manifests a 'conscious disregard of the rights of others or conduct so reckless as to amount to such disregard'").
159 See Lamb v. Cheney & Son, 227 N.Y. 418, 418 (1920). !60 See, e.g., N.Y. GEN. Bus. LAW §§ 349(h), 350(d)(3), 360(m) (McKinney
1988); compare, N.Y. REAL PRoP. ACTS. LAw § 853 (1979 and Supp.I 1999) (entitling person to automatic treble damages with certain exceptions).
161 MISS. CODE ANN. § 75·26·7(2) (1972) (stating that Mississippi has no cap on award); Mo. REV. STAT. § 417.457(2); MONT. CODE ANN. § 30·14·404(2); N.C. GEN. STAT. § 66·154(a)(2)(c).
!62 UNIF. TRADE SECRETS ACT § 3(a), 14 U.L.A. 455 (1985)
Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery equitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other method, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.
[d.
1999] UNIFORM TRADE SECRETS ACT 41
UTSA § 3(b) sets forth the Uniform Trade Secrets Act's exemplary damages provisions.16a Proposed section 279-p(2) is identical to UTSA § 3(b), with one exception. Instead of "willful and malicious," § 279-p(2) uses "willful or malicious." As willful and malicious have different meanings in New York law, and it is unclear what the words willful and malicious mean or encompass under UTSA § 3(b), "or" instead of "and" is used. Such change is also appropriate because there is nothing to indicate that under UTSA § 3(b) conduct had to be both consciously and deliberately indifferent to the rights of the trade secret owner, and engaged in with knowledge of the owner's rights and with the intent to interfere with them. It should be noted that other states have used "or" instead of "and."164
E. Commentary To Proposed § 279-q
Present Law: The ordinary and historical rule in New York has been that par
ties in a lawsuit are responsible for their own attorney's fees, regardless of whether they prevail. 165 This "rule is based upon the high priority accorded free access to the courts and a desire to avoid placing barriers in the way of those desiring judicial redress of wrongs.'>!66 Only where a statute, court rule, or agreement. between parties authorizes an award of attorney's fees are they recoverable. 167 These exceptions are recognized to further other public policies: to curb the waste of judicial resources that result from frivolous litigation; to compensate fully the party harmed by unlawful conduct; and to encourage parties to vindicate their rightS.16B
163 See id. at §3(b) (stating that "[i1f willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection (a)").
164 See COLO. REV. STAT.§ 7-74-104(2) (1999) (using "or" between malice and willful); OR. REv. STAT. § 646.465(3) (using "or" between willful and malicious misappropriation).
165 See Hooper Ass'n, Ltd. v. AGS Computers, 74 N.Y.2d 487, 491 (1989) (explaining that prevailing party may not collect attorney's rees from the losing party unless there is an agreement between the parties, or it is stated in a statute or court rule).
166 Ship Maintenance Corp. v. Lezak, 69 N.Y.2d I, 5 (1986). 167 See Hooper, 74 N.Y.2d at 491 (providing an exception to the general rule). 168 See 1 MARy FRANCIS DERFNER & ARTHUR D. WOLF, COURT AWARDED
ATTORNEY FEES, ch. 5, Statutory Exceptions to the American Rule (1998), State Attorney Fee Shilling Statutes: Are We Quietly Repealing The American Rule? LAw & CONTEMP. PROBS., Winter 1984, at 321, 321.
42 ALB. L.J. SCI. & TECH. [Vol. 10
There is no statute that specifically authorizes an award of attorney's fees in a trade secrets misappropriation action. '69 However, the prevailing party may seek to invoke. CPLR § 8303-a, which authorizes an award of reasonable attorney's fees not exceeding $10,000.00 in an action to recover damages for "injury to property" if the action or defense thereto is found to be "frivolous."'70 Misappropriation of a trade secret would seem to be "injury to property," as defined in General Construction Law § 25-b. Motion practice deemed "frivolous" could give rise to an award of reasonable attorney's fees under New York Codes, Rules and Regulationspl
Proposed § 279-q: Proposed § 279-q authorizes an award of reasonable attorney's
fees to the prevailing party in three situations: (1) a claim of misappropriation is made in bad faith; (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) willful or malicious misappropriation is established. No cap on the amount recoverable is set forth. The section further states alternative grounds for "bad faith" to be present: (1) the claim or defense or motion was made or continued or resisted solely to harass or maliciously injure another or to prolong the litigation; or (2) the claim or defense or motion was made or continued or resisted with no reasonable basis in fact or law and could not be supported by a good faith argument for an extension, modification or reversal of existing law. "Willful or malicious" misappropriation is present in the same circumstances that punitive damages may be awarded pursuant to proposed § 279-p.
Although no empirical research can be cited, it seems evident that trade secret misappropriation actions present a particularly compelling need for authorizing the right to recover attorney's fees. They are now authorized in the vast majority of the states to parties that establish misappropriation.172 As previously noted, firms and entrepreneurs are relying more heavily than ever on
169 See Laurie Visual Etudes, Inc. v. Chesebrough-Pond's Inc., 105 Misc.2d 413, 421 (Sup. Ct. N.Y. Co. 1980), rev'd on other grounds, 83 A.D.2d 505 (lst Dep't 1981) (denying attorneys fees).
170 See generally, N.Y. C.P.L.R. § 8303 (a), (McKinney 1981 & Supp. 1999). 171 See 22 N.Y.C.R.R. § 130-2.1 (West 1995). 172 James Chapman, California Uniform Trade Secrets Act: A Comparative
Analysis of the Act and the Common Law, 2 SANTA CLARA COMPUTER & HIGH
TECH. L.J. 389, 409 (noting that "the California Act provides that if a claim of misappropriation is made in bad faith, the court may award reasonable attorneys' fees to the prevailing party").
1999] UNIFORM TRADE SECRETS ACT 43
trade secrets to protect their technology.173 Consequently, trade secrets play a major and increasingly important role in the advancement of technology in New York.'7' These facts also make trade secret misappropriation particularly appealing to unethical competitors. Because effective enforcement of trade secret rights is I.eft to trade secret owners, they should be encouraged to enforce their rights.'76 It would be unsound policy not to provide a complete remedy, including attorney's fees without a cap, because the complexity of litigating a trade secrets case results in large attorney's fees. Often the trade secrets owner is an individual or small entity for which attorney's fees represent a substantial deterrent to vindicating their rights. As a result, their business can be retarded or even destroyed. The provision for attorney's fees in § 279-q is thus necessary to level the playing field.176
Awards of reasonable attorney's fees without caps are authorized to be made to parties who have successfully demonstrated the illegality of challenged business conduct in other instances.177
Under General Business Law § 360-m, such award can be made only where the defendant acts in "bad faith" or "with knowledge."l78 There is no substantial reason to treat prevailing trade secret parties any different than prevailing trademarklservicemark plaintiffs.
The proposed section also permits recovery of reasonable attorney's fees by the prevailing party on a motion to terminate an injunction, either made, resisted, or continued in bad faith, or the prevailing party in an action brought or continued in bad faith. This provides protection against unfounded suits or motions brought or resisted for harassment or other reasons, as set forth in
173 Vytas M. Rimas, Trade Secret Protection of Computer Software, 5 COMPUTER L.J. 77, 84 n.58 (1984) (asserting that since "more software programs are created than are registered for copyright protection," trade secrets must be the primary avenue in which to protect this newly developed technology).
114 See id. at 99 (stating that the "most promising development has been the judicially approved use of ... trade secret[sJ ... to maximize the protection of both software and firmware.").
115 See generally 4 Mu.ORIM, supra note 113, at § 15.01[lJ (postulating that in trade secret litigation, since the plaintiff is the owner of the trade secret, the plaintiff has the burden of establishing a prima facie case against the defendant).
1,. See 4 MILGRIM, supra note 113 at § 15.02(3)(k).(1997); James Chapman, California Uniform Trade Secrets Act: A Comparative Analysis of the Act and the Common Law, 2 SANTA CLARA COMPUTER & HIGH TECH. L.J. 389,409 (1986).
111 See N.Y. GEN. Bus. LAw §§ 340(5) (antitrust violation), 349(h) (deceptive acts and practices), 350(d)(3) (false advertising), 360-m (registered trademarks! servicemarks) (McKinney 1988 & Supp.l 1999).
11S See N.Y. GEN. Bus. LAw § 360-m (McKinney 1988).
44 ALB. L.J. SCI. & TECH. [Vol. 10
the section, and should deter groundless trade secret actions that may harm the economy by deterring procompetitive conduct. '79
The proposed section does not state the guidelines for determining the amount to be awarded as a reasonable attorney's fee because present case law concerning the awarding of attorney's fees and the factors to be considered is more than adequate. '8o With a proposed amendment to N.Y.C.P.L.R. § 8303-a, adding a new subdivision (d), which is a part of this legislative package, N.Y.C.P.L.R. § 8303-a will be inapplicable to requested awards in actions subject to the Act. However, except to the extent the proposed section applies to motions to terminate injunctions, 22 N.Y.C.R.R. § 130-1.1 will still be available to other forms of frivolous conduct in actions subject to the act.
In sum, the proposed section provides an effective means to vindicate trade secret rights and deter potential misappropriation and prevent misuse of the courts by unfounded trade secret Claims and arguments. As noted by one commentator, it "helps balance the equation between plaintiff and defendant. This is done by encouraging the plaintiff to consider more carefully the likelihood of success, while allowing the defendant to consider how he wants to proceed once a complaint is filed."'81
Variations From Uniform Trade Secrets Act: UTSA § 4 provides for an award of attorney's fees. '82 The pro
posed section is identical to section 4 with four exceptions, none of which is a radical departure.
First, the proposed section adds a definition of ''bad faith."'83 This definition is taken from N.Y.C.P.L.R. § 8303-a(c). In the absence of any clear indication of what "bad faith" in section 4
179 See generally Michael J. Hutter, Recovery of Attorney's Fees in Track Secret Cases: Present Law and a Proposal, 1 'l'RAoE SECRET LAw REP. 288 (1986); Pooley, The Track Secret Lawsuit as an Anticompetitive Tool, 1 COMPo L. REP. 894 (1983) ("stating that "[T]he trade secret lawsuit is an unusually effective device for killing a 'new company. . . . [T]he attendant publicity and other restrictive effects ... can mortally wound a new enterprise by scaring away investors, customers, and employees."),
180 See generally Centre Great Neck CO. V. Penn Encore Inc., 680 N.Y.S.2d 866, 866·67 (2d Dep't 1998) (identifying types of evidence needed to meet the burden of proof to establish the necessity and reasonable value of legal services); see Ogletree, P.C. v. Albany Steel Inc., 243 A.D.2d 877 (3d Dep't 1997) (determining reasonable attorney fees under theory of quantum meruit); see Wells v. Crosson, 210 A.D.2d 932 (4th Dep't 1996).
181 Susan C. Miller, Comment, Florida's Uniform Trade Secrets Act, 16 FLA. ST. U. L. REV. 863, 886 (1988) (citation omitted).
182 UNIF. 'l'RAoE SECRETS ACT § 4, 14 U.L.A. 433, 459 (1990). 183 [d.
1999] UNIFORM TRADE SECRETS ACT 45
encompasses, it would seem preferable to adopt a standard with which the courts and bar are familiar.
Second, the proposed section adds the word "continued." Although it would appear under section 4 that "bad faith" would be present in a situation where a claim seemed valid when first made but was continued after subsequent inquiries revealed that it lacked a reasonable basis, it seems preferable to ensure such result. This is consistent with the policy underlying the proposed section, as well as with present law generally.ls4 Third, for grammatical reasons, "is established" is used instead of the word "exists" as in UTSA section 4.1S5
Fourth, "willful or malicious" misappropriation is used, instead of "willful and malicious." This variation is consistent with proposed § 279-p(2) and the Comment thereto.
F. Commentary To Proposed § 279-r
Present Law: Actions involving trade secrets will necessarily place them at
risk of further disclosure.1B6 To minimize this danger, and to encourage trade secret owners to present their claims or defenses fully, New York law provides the courts with broad authority to protect trade secrets from disclosure due to litigation. Such authority is derived from statutes or from the common law, which recognizes a limited privilege for trade secrets. 1S7
Thus, N.y'C.P.L.R. § 3103 authorizes a court in any action to issue a protective order in connection with the basic pre-trial disclosure devices to guard against any unnecessary disclosure that may endanger the value of a trade secret.1SS What protective
184 See Mitchell v. Herald Co., 137 A.D.2d 213, 219 (4th Dep't 1988). 185 See VNlF. TRADE SECRETS Am: § 4, 14 V.L.A. 433, 459. 186 See Cundiff, supra note 8 at 40 (explaining that "trade secret litigation ...
[could] place secrets at risk of further disclosure"). 187 See Drake v. Hermann, 261 N.Y. 414, 418 (1933) (stating that "disclosure
of legitimate trade secrets will not be required except to the extent that it appears to be indispensible for ascertainment of the truth"); Citibank, N.A. v. Recycling Carroll Gardens, 116 A.D.2d 494, 495 (1st Dep't 1986) (The plaintiff claims that "its procedures and policies governing approval of loan applications constitutes trade secrets." Thus the court remanded the case to "ensure proper protection against unwarranted disclosure of such data."); Cronin v. Pierce & Stevens Chern. Corp., 36 A.D.2d 764, 765 (2d Dep't 1971); (stating that defendant's employees could not be directed to testify about the defendant's trade secrets); MICHAEL M. MARTIN ET AL' I NEW YORK EvIDENCE HANDBOOK: RULES, THEORV, AND PRACTICE, § 5.9.1 (1997).
188 See DAVID D. SIEGEL, PRACTICE COMMENTARIES, N.Y. C.P.L.R.§ 3103(4), (McKinney 1991) ("examples of Protective Orders"); Steven R. Kramer,
46 ALB. L.J. SCI. & TECH. [Vol. 10
measures will be included in the protective order depends upon the circumstances. 'S9 They may include, inter alia, specific limitations on use and disclosure. '9o Furthermore, such protective orders can continue through the trial, as well as after the tria!.'91
The courts also possess the inherent authority to adopt appropriate and reasonable measures to limit access to trade secrets during the tria!.'92 Such safeguarding measures include receiving proof in camera; 193 the closure of the courtroom; 194 orders directing parties and their representatives not to disclose a trade secret;'95 and sealing records. '9S
Proposed § 279·r: Proposed § 279-r provides a court with broad authority to pro
tect trade secrets before, during, and after the trial of a trade secret misappropriation action. It sets forth as examples of protective means, several procedures that can be judicially ordered, but they are not exclusive. In essence, the court can order
Protecting Dissemination of Business Secrets During Discovery, 69 N.Y. SC. B. J., 24 (Jan. 1997) (comparing and contrasting F.R.C.P. 2b(c)(7) and § 3103 and the their ability to adequately protect trade secrets during litigation).
189 See 3 RoGER M. M11oRIM, MILGRIM ON TRADE SECRETS, § 14.02(4) (1999). 190Id. at § 14.02(4)(e). 191 Schenectady Chem., Inc. v. lmitec, Inc., 151 A.D.2d 804 (3d Dep't 1989)
(observing that the lower court properly concluded that the confidentiality agreement between the parties of the litigation should survive the final disposition of the case so as to protect the disclosing party's interest in her trade secret); 3 MILoRIM, supra note 187 at § 14.02(4)(g) (1998); see also Richard E. Lyons, Discovery in Trade Secrecy Cases, in 4 INTELLECTUAL PROPERTY COUNSELINO AND LITIO. § 72.02(2) (Lester Horwitz & Ethan Horwitz, eds. 1999) (suggesting that the best way to reduce any chance of public disclosure, is for the adversely affected party to move for a suitable protection order early in the litigation).
192 See Nat'l Starch Prods. v. Polymer Indus., 273 A. D. 732, 739 (1st Dep't 1948) (holding that the court has discretion, but must exercise "great care" in the conduct of a tria!); see Fairchild Engine & Airplane Corp. v. Cox, 50 N.Y.S.2d 643,646 (Sup. Ct. N.Y. Co. 1944) (noting that iffacts are revealed, it could cause mischieO.
193 See, Sybron Corp. v. Wetzel, 46 N.Y.2d 197, (1978); see Rabinowitz & Co. v. Dasher, 82 N.Y.S.2d 431, 436 (Sup. Ct. N.Y. Co. 1948) (involving a manufacturer whose methods and machines were so similar to the plaintiffs, the court was able to hear the testimony without revealing it to the public).
194 See Nat'/ Starch Prods., 273 App. Div. at 739 (noting that the trial court should carefully guide against disclosure during tria!).
195 See 3 MILORIM, supra note 189 at § 14.02(4)(0 (explaining that the court will interpose an attorney for "general" information), .
196 See Kaumagraph Co. v. Stampagraph Co., 197 A.D. 66, 73 (1st Dep't 1921), affd, 235 N.Y. 1 (1923) (describing that testimony taken in camera is sealable until needed at tria!); 3 M11oRIM, supra note 189 at § 14.02(6) (explaining power to seal records and hearing matters in camera).
1999) UNIFORM TRADE SECRETS ACT 47
whatever reasonable protective measures are appropriate under the circumstances.
The proposed section restates present New York statutory and common law. Although the proposed section neither limits nor adds to present law, it is desirable because it is a single reference point for the authority and means to protect trade secrets in trade secret misappropriation actions. These means, in turn, are consistent with one of the purposes of this proposed Uniform Trade Secrets Act. In actions not governed by the Uniform Trade Secrets Act, where an alleged trade secret is in issue, the trade secret can be protected by the means discussed in "Present Law."197
Variations From Uniform Trade Secrets Act: UTSA § 5 sets forth the act's protective measures for trade
secrets. Proposed § 279-r is identical to it with two exceptions, neither of which is a change in substance. First, the proposed section makes a specific reference to N.Y. C.P.L.R. § 3103 as the authority for a protective order, an approach that is preferable because that section is the source for all protective orders in New York. Second, the proposed statute adds the phrase "including, but not limited to," to assure that the specific examples are construed as illustrative and not exclusive, which is the section's intent. This phrase is consistent with New York legislative drafting form.
G. Commentary To Proposed § 279-s
Present Law: There is no statutory provision which specifically sets forth the
statute of limitations for a cause of action alleging misappropriation of a trade secret. The two most appropriate limitation periods are set forth in N.Y. C.P.L.R. § 214(4), which provides that an action to recover damages for an "injury to property" be commenced within three years, and N.Y. C.P.L.R. § 213(2), which provides that an action "upon a contractual obligation or liability, express or implied" must be commenced within six years. Because the courts are not bound by either the label the party has affixed to the cause of action or the form in which the cause of action is
197 See SIEGEl, supra note 188, at § 3103.
48 ALB. L.J. SCI. & TECH. [Vol. 10
pleaded, the limitation period to be applied turns upon the gravamen of the cause of action. 198
Where the cause of action sounds in tort, the courts have applied N.Y. C.P.L.R. § 214(4).'99 On the other hand, if the cause of action sounds in breach of contract or breach of fiduciary duty, the courts have applied the general statute of limitations."oo
Under N.Y. C.P.L.R. § 213(2) or N.Y. C.P.L.R. § 214(4), the cause of action accrues either when the defendant first discloses the trade secret or when the defendant first makes use of the trade secret. 201 Whether each subsequent use by the defendant of the trade secret establishes a new accrual date, with the limitations periods of N.Y. C.P.L.R. § 213(2) or N.Y. C.P.L.R. § 214(4) beginning to run with each new use, depends upon defendant's conduct.
If the defendant keeps the trade secret confidential, yet makes use of the trade secret to its own commercial advantage, a "continuing misappropriation" theory is used. Each subsequent use will give rise to a new cause of action with its own limitations period, three or six years, as the case may be.202 The plaintiffs cause of action is not time-barred with respect to any use within the three
198 See Wilson v. Bristol·Myers Co., 61 A.D.2d 965 (1st Dep't 1978); Petnel v. American Tel. & Tel. Co., 280 A.D. 706 (3d Dep't 1952) (allowing part of a cause of action to be dismissed, because the statute of limitation had run, however, the court allowed the valid claims to be served and to proceed); see also Lemelson v. Carolina Enters., 541 F. Supp. 645 (S.D.N.Y. 1982) (dismissing patent infringement claim because it was barred by the statute of limitations).
199 See Architectronics Inc. v. Control Systems, 935 F. Supp. 425, 432-433 (S.D.N.Y. 1996) (applying the three year statute limitations as staled by N.Y. C.P.L.R. § 214 (4) (McKinney 1990); see Lemelson, 541 F. Supp. at 658; see Kistler Instrumente A.G. v. PCB Piezotronics, Inc., 419 F. Supp. 120, 122 (W.D.N.Y. 1976); M & T Chern. v. Int'l Bus. Mach. Corp., 403 F. Supp. 1145, 1147-48 (S.D.N.Y. 1975).
200 See Wilson 61 A.D.2d at 965; see Peine! 280 A.D. at 706; Sachs v. Cluett Peabody & Co., 265 A.D. 497, 502 (1st Dep't 1943) (explaining that the "action ... [was] . . . barred by the statute of limitations whether the six or ten·year period [was] applicable").
201 See Peine!, 280 A.D. at 710 (holding that there must be "actual utilization of the plaintiff's ideas by the defendants" before the statute of limitations will run); Lemelson, 541 F. Supp. at 659 (concluding that when a defendant "discloses a trade secret he becom,es liable to plaintiff upon disclosure"),
202 See General Precision v. Ametek, Inc., 20 N.Y.2d 898, 899 (1967) (stating that there is "a cause of action for a continued breach on each occasion" the defendant uses the plaintiff's secret); see Peine! , 280 A.D. at 710 (explaining that the defendant can be subject to "successive accounts or successive actions for damage" ifthe defendant continued to utilize the plaintiff's property); Kistler 419 F. Supp. at 123 (holding that "the continued use of confidential information gives rise to successive causes of action under the law of New York").
1999] UNIFORM TRADE SECRETS ACT 49
or six years prior to the commencement of the actions, even if such use(s) occurred after three or six years had elapsed from the date of the first use.
On the other hand, once the defendant publicizes or otherwise discloses the trade secret, each subsequent use by the defendant will not give rise to any new cause of action.203 As there is no "continuing misappropriation," the plaintiff's cause of action will be time-barred unless an action is commenced within three or six years from the disclosure.
There is no provision in New York law, which provides that a cause of action for misappropriation accrues or can accrue upon the discovery of the misappropriation.204
Proposed § 279-s: Proposed § 279-s sets forth the applicable statute of limitations
for trade secret actions governed by the act. The section has three notable features: it specifies the period of time in which the action alleging misappropriation must be commenced; it states when the cause of action for misappropriation accrues; and it provides a rule for continuing misappropriation.
The proposed section provides a three-year limitation period for a cause of action alleging a misappropriation of a trade secret, regardless of the nature of the misappropriation. Consistent with the definition of "improper means" contained in Proposed § 279-n(1), providing a uniform limitations period is designed to avoid litigation over whether the tort or contract limitations period should be applied. This is a desirable result.205 In accordance with the provisions of proposed § 279-t, this section does not apply to a cause of action, involving a trade secret as defined in proposed § 279-n(4), which properly pleads a breach of contract or fiduciary duty. Such causes of action will be governed by N.Y.C.P.L.R. § 213(2).2°6 The proposed section provides that the cause of action
203 See Lemelson, 541 F. Supp. at 659 (explaining that if the defendant keeps the secret confidential, the defendant will be liable to each tort committed); M & T Chems., 403 F. Supp. at 1149 (declaring that once the "defendant 'published' the trade secret ... [the] plaintiffs rights on his trade secret were destroyed and no subsequent activities by the defendant could constitute a continuing misappropriation of the destroyed secret.").
204 See generally Thornton v. Roosevelt Hosp., 47 N.Y.2d 780, 781 (1979) (holding that "the cause of action accrued at the time" of the mistake, not at the time the injury "became apparent").
205 See Ramon A. Klitzke, The Uniform Trade Secrets Act, 64 MAnQ. L. REV. 277, 306-307 (1980).
206 See Dolgoff Holophase, Inc. v. E.!. duPont deNemours & Co., 212 A.D.2d 661, 662 (2d Dep't 1995).
50 ALB. L.J. SCI. & TECH. [Vol. 10
for nlisappropriation accrues when the trade secret owner discov(lrs or reasonably should have discovered the existence of the misappropriation of the owner's trade secret. Using a discovery date as the accrual trigger date is preferable to present law. Under present law, when the misappropriated trade secret is used in confidence to the nlisappropriator's competitive advantage, the owner may not become aware of the nlisappropriation until after the statute oflinlitations has run. Such a harsh result is unfair to the trade secret owner and would not occur under this proposed section.
The proposed section also changes present law to the extent that under present law a new cause of action accrues each time the nlisappropriator uses the trade secret, provided such use is kept confidential. The courts recognized such a "continuing misappropriation" theory presumably to assure that the trade secret owner would not be foreclosed from relief, as the accrual date for either N.Y. C.P.L.R. § 213(2) or § 214(4) was the first date of use or disclosure by the nlisappropriator. Because the cause of action under the proposed section now accrues upon discovery, there is no need to have a continuing accrual date. The trade secret owner will have three years from the date of discovery to commence an action alleging the cause of action. 207 This is sufficient time for the trade secret owner to vindicate its rights. 208
To assure that none of the provisions of article 2 of the N.Y. C.P.L.R. which conflict with the provisions of the. proposed section will be applied to a cause of action for trade secret nlisappropriation, the phrase "Notwithstanding any inconsistent provision of law" is added. Pertinent provisions of article 2 of the N.Y. C.P.L.R. which do not conflict will be applicable to a cause of action for trade secret nlisappropriation.
In sum, the proposed section is salutary. As stated by one commentator: "The combination of the single claim linlitation and the running of the period from the time of discovery balances the interests between the need for a clear date at which the statute
207 See Note, Limitation of Actions·Trade Secrets·Misappropriation and Use of Trade Secret Held Continuing Tort for Which Action May Be Maintained for Any Use Which Has Occurred During Statutory Period, 42 N.Y.U. L. REV. 565 (1967) (explaining that "[bJy running the staute from knowledge rather than the misappropriation, the injustice of barring a claim before it is realized is avoided . . . n), .
20B See UNIF. TRADE SECRETS Am: § 6, 14 U.L.A. 462 (1985) ("If objectively reasonable notice of misappropriation exists, three years is sufficient time to vindicate one's legal rights.").
1999] UNIFORM TRADE SECRETS ACT 51
begins to run and the need for injured trade secret owners to have adequate time to discover and assert their claims."209
Variations From Uniform Trade Secrets Act: Uniform Trade Secrets Act § 6 sets forth the Uniform Trade
Secret Act's statute of limitations provisions .. Proposed § 279-s is identical in language to UTSA § 6, with one exception. As discussed previously, the phrase "Notwithstanding any inconsistent provision of law" is added. The use of this phrase is consistent with New York legislative drafting form.
H. Commentary To Proposed § 279-t
Proposed § 279-t: Proposed § 279-t specifies which laws are preempted and not
preempted with the enactment of the Act. Consistent with a purpose in enacting the act to "make uniform
the law with respect to" trade secrets and to preclude inconsistent theories of relief for the same wrong, this section eliminates other causes of action where the underlying wrong is the misappropriation of a trade secret, as defined in proposed § 279-n(2). Thus, a cause of action claimed to be based only on the common law or unjust enrichment or unfair competition, or seeking an accounting where the underlying wrong was the misappropriation of trade secrets, it is preempted.
However, to the extent that a cause of action exists which is not dependent on a trade secret, that cause of action continues to exist, even though it may involve a trade secret. Thus, properly pleaded trade secret contract cause of actions or causes of action dependent upon an employee's duty of loyalty to his or her employer are not preempted.
Proposed § 279-t also makes clear that the act does not affect criminal actions.210
Variations From Uniform Trade Secrets Act: UTSA § 7 sets forth the Uniform Trade Secret Act's "Effect on
Other Law" provisions. Proposed § 279-t is identical to § 7.
1. Commentary To Proposed § 279-u
Proposed § 279-u: Proposed § 279-u sets forth a rule of statutory construction. It
recognizes that the objective of national uniformity cannot be
209 Miller, Florida's Uniform Trade Secrets Act, supra note 179, at 888. 210 See N.Y. PENAL LAw §§ 155.00, 155.30(3), §156.00 (McKinney 1999).
52 ALB. L.J. SCI. & TECH. IVol.10
achieved by ignoring the construction of identical provisions of the Unifonn Trade Secrets Act in other states.
Pursuant to the section's rule of construction, the New York courts, in the absence of precedent, may refer to decisions from other states and construe the provisions of this act in accordance with these decisions. Although decisions of courts in other states are not binding on the courts of New York, they may be persuasive authority and entitled to deference. 211 "Otherwise the courts without reason introduce distinctions that are hannful and retard unifonnity of rules in a field where unifonnity should be sought.'>212 If there is no uniformity of interpretation among the states, the courts of this state should adopt the interpretation which seems most reasonable. 213
This section is a restatement of the principle ofunifonn application in other unifonn acts adopted in New York and in effect now and in the past?14
Variations From Uniform Trade Secrets Act: UTSA § 8 sets forth the Unifonn Trade Secret Act's ''Uniformity
of Application and Construction" provision. Proposed § 274-u is identical to it.
J. Commentary To Proposed § 279·v Proposed § 279-v: Proposed § 279-v sets forth a severability provision. It is self
explanatory. The purpose is to assure that a finding of invalidity as to one provision of the Act or to its application to a person or circumstances does not necessarily invalidate the entire Act.
The section's language is identical to sections in other unifonn acts?15
Variations From Uniform Trade Secrets Act: UTSA § 10 sets forth the Act's "Severability" provision. Pro
posed § 279-v is identical to it. The provision is the model sever-
211 See Broderick & Bascom Rope Co. v. McGrath, 81 Misc. 199, 201 (1st Dep't 1913) ("The desirability of uniformity in the laws of various states ... and the legislative intent to harmonize our [ J conflicting decisions ... is so clearly expressed, that full effect should be given thereto."); see also Brown v. Rowan, 91 Misc. 220, 223 (N.Y. City Ct. 1915) (adopting and following other court's interpretation); see also Century Bank of New York v. Breitbart, 89 Misc. 30S, 311-12 (N.Y. City Ct. 1915).
212 Agar v. Orda, 264 N.Y. 24S, 253 (1934). 213 See 2B NORMAN J. SINGER, SUTHERLAND STAT. CONST. § 52.05 (5th ed.
1992). 214 See N.Y. PARTNERSHIP LAw § 4 (Mcllinney 1999); see U.C.C. § 1-102(2)(c). 215 See, e.g., U.C.C. § I-lOS.
1999) UNIFORM TRADE SECRETS ACT 53
ability section recommended by the National Conference of Commissioners on Uniform State Laws for inclusion in all acts of extensive scope.
K. Commentary To Proposed § 2 Of The Chapter
Proposed § 2: Proposed § 2 sets forth the act's effective date. Furthermore, to
assure. that the Act will not be given any retroactive effect, the section states that it will not apply to a misappropriation occurring before its effective date,. nor to a continuing misappropriation that began before the Act's effective date and continued thereafter. Thus, the Act applies only to misappropriations that begin after the act's effective date.
Variations From Uniform Trade Secrets Act: UTSA § 11 sets forth the Act's effective date (to be decided) and
applicability provisions. Proposed § 2 sets forth the Act's specific effective date and uses for its applicability language the identical substantive language in UTSA § 11. It differs only with respect to using New York legislative drafting form, which effects no substantive change from § 11.
54
§ 1. Definitions
ALB. L.J. SCI. & TECH.
EXHIBITS
Exhibit "A"
UNIFORM TRADE SECRETS ACT
[Vol. 10
As used in the [Act], unless the context requires otherwise: (1) "Improper means" includes theft, bribery, misrepresentation,
breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means;
(2) "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 a reason to know that his knowledge of the trade secret was (1) derived from or through a person who had 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 [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
(3) "Person" means a natural person, corporation , business trust, estate, trust, partnership, association, joint venture, government governmental subdivision or agency, or any other legal or commercial entity.
(4) "Trade Secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent econOInic value, actual or potential, from not being generally know to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
§2. Injunctive Relief
(a) Actual or threatened misappropriation may be enjoined. Upon application to the court, an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order
1999] UNIFORM TRADE SECRETS ACT 55
to eliminate commercial advantage that otherwise would be derived from the misappropriation.
(b) In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
(c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.
§3. Damages
(a) Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.
(b) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection (a).
§4. Attorney's Fees
If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorney's fees to the prevailing party.
§5. Preservation of Secrecy
In an action under this [Act], a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.
56 ALB. L.J. SCI. & TECH. [Vol. 10
§6. Statute of Limitations
An action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.
§7. Effect on Other Law
(a) Except as provided in subsection (b), this [Act) displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret.
(b) This [Act) does not affect: (1) contractual remedies, whether or not based upon misappropriation of a trade secret; (2) other civil remedies that are not based upon misappropriation of a trade secret; or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.
§8. Uniformity of Application and Construction
This [Act) shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this [Act) among states enacting it.
§9. Short Title
This [Act) may be cited as the Uniform Trade Secrets Act.
§10. Severability
If any provision of this [Act) or its application to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of the [Act) which can be given effect without the invalid provision or application, and to this end the provisions of the [Act) are severable.
§11. Time of Taking Effect
This [Act) takes effect on --, and does not apply to misappropriation occurring prior to the effective date. With respect to a continuing misappropriation that began prior to the effective date, the [Act) also does not apply to the continuing misappropriation that occurs after the effective date.
1999] UNIFORM TRADE SECRETS ACT
§12. Repeal
The following Acts and parts 'of Acts are repealed: (1) (2) (3)
57
58 ALB. L.J. SCI. & TECH. [Vol. 10
EXHIBIT "B"
THE LAw OF 'I'RADE SECRETS IN THE UNITED STATES
State Statute Effective Date Alabama UTSA ALA CODE §§8·27-1 to 8·27·6 August 12, 1987 Alaska UTSA ALASKA STAT. §§45.50.91O to September 2, 1988
45.50.945 Arizona UTSA ARIZ. REV. STAT. ANN. §§44·401 to April 11, 1990
44·407 Arkansas UTSA ARK. CODE ANN. §§4-75·601 to 4· Marob 12, 1981
75·607 California UTSA CAL. CIV. CODE §§3426 to 3426.11 "anuary 1, 1985 Colorado UTSA COLO. REV. STAT. §§7·74·101 to 7· July I, 1986
74·110 Connecticut UTSA CONN. GEN. STAT. §§35·50 to 35·58 June 23, 1983 Delaware UTSA DEL. CODE ANN. tit 6, §§2001 to April 15, 1982
2009 District of UTSA D.C. CODE ANN. §§48·501 to 48·510 March 16, 1989 Columbia
Florida UTSA FLA. STAT. cbs. 688.001 to 688.009 October I, 1988 Georgia UTSA GA. CODE ANN. §§10·1·760 to 10·1- July I, 1990
767 Hawaii UTSA HAW. REV. STAT. §§428B·1 to July I, 1989
482B·9 Idaho UTSA IDAHO CODE §§48·801 to 48·807 July I, 1981 Illinois UTSA 765 !LCS 1065/1·1065/9 January 1, 1988 Indiana UTSA IND. CODE §§24·2·3·1 to 24-2·3·8 February 25, 1982 Iowa UTSA IOWA CODE §§550.1 to 550.8 April 27, 1990 Kansas UTSA KAN. STAT. ANN. §§60·3320 to 60· July I, 1981
3330 Kentucky UTSA KY. REV. STAT. ANN. §§365.880 to April 6, 1990
365.900 Louisiana UTSA LA REV. STAT. ANN. §§51:1431 to July 19, 1981
51:1439 Maine UTSA ME. REV. STAT. ANN. tit. 10 May 22,1987
§§1541 to 1548 Maryland UTSA MD. CODE ANN., Com. Law §§11· July I, 1989
1201 to 11·1209 Massachusetts non·UTSA MASS. GEN. L. ch. 93, §§42, 42A Michigan UTSA MICH. CaMP. LAWS ANN. October I, 1998
§§445.1901 to 445.1910 Minnesota UTSA MINN. STAT. ANN. §§325C.01· January 1, 1981
325C.08 Mississippi UTSA MISS. CODE. ANN. §§75·26·1 to 75· July 1, 1990
26·19 Missouri UTSA MO. REV. STAT. §417.450 to October 6, 1996
417.467 Montana UTSA MONT. CODE ANN. §§30·14·401 to 1985
30·14·409 Nebraska UTSA NEB. REV. STAT. §§87·501 to 87· July 9, 1988
507 Nevada UTSA NEV. REV. STAT. §§600A.010 to Marcb 5, 1987
600A.100 New Hampshire UTSA N.H. REV. STAT. ANN. §§350·B:1 to April 3, 1989
350·B:9 New Jersey common law New Mexico UTSA N.M. STAT. ANN. §57·3A·1 to 57·3A· April 3, 1989
7 New York common law
1999] UNIFORM TRADE SECRETS ACT 59
North Carolina non·UTSA N.C. GEN. STAT. §§66-152 to 66-157 1981 North Dakota UTSA N.D. CENT. CODE §§47-25.1-01 to July I, 1983
47·25.1-08 Ohio UTSA OHIO REV. CODE ANN. §§1333.61 July 22, 1994
to 1333.69 Oklahoma UTSA OKLA. STAT. tit. 78, §§85 to 94 January 1, 1986 Oregon UTSA OR. REV. STAT. §§646.461 to January I, 1988
646.475 Pennsylvania common law Rhode Island UTSA RI. GEN. LAWS §§6-41-1 to 6-41-11 July I, 1986 South Carolina UTSA S.C. CODE ANN. §§39-8-10 to 39-8- June 15, 1992
130 South Dakota UTSA S.D. CODIFIED LAWS ANN. §§37- July I, 1988
29-1 to 37-29-11 Tennessee common law Texas common law Utah UTSA UTAH CODE ANN. §§13-24-1 to 13- May I, 1989
24-9 Vermont UTSA VT. STAT. ANN. tit. 9, §§4601 to July I, 1989
4609 ; tit. 12 § 523 Virginia UTSA VA. CODE ANN. §§59.1-336 to 59.1- July I, 1986
343 Washington UTSA WASH. REV. CODE §§19.108.010 to January I, 1982
19.108.940 West Virginia UTSA W. VA. CODE §§47-22-1 to 47-22-10 July I, 1986 Wisconsin UTSA WIS. STAT. §134.90 April 24, 1986 Wyoming common law
"UTSA" indicates that the state statute is modeled after the Uniform Trade Secrets Act "Non-UTSA" indicates that the state stature is not modeled after the Uniform Trade Secrets Act
60 ALB. L.J. SCI. & TECH. [Vol. 10
EXHIBIT "e"
UNIFORM TRADE SECRETS ACT AND PROPOSED UNIFORM TRADE
SECRETS ACT FOR NEW YORK*
§t§279-n. Definitions As used in this {Aci}article, unless the context requires
otherwise: fBI. "Improper means" includes theft, bribery, misrepresenta
tion, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; ~2. "Misappropriation" means: mea) 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 6B(b) disclosure or use of a trade secret of another without express or implied consent by a person who WCi) used improper means to acquire knowledge of the trade secret; or ffi3(ii) at the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was EB(aa) derived from or through a person who had utilized improper means to acquire it; EH1(bb) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or fHBCcc) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or tG1(iii) before a material change of his for hert position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
ffij3. "Person" means a natural person, corporation, limited liability company, business trust, estate, trust, partnership, association, joint venture, government governmental subdivision or agency, or any other legal or commercial entity.
f4i4. "Trade secret" means information, technical and non-technical, including but not limited to a formula, pattern, compilation, program, device, method, technique, or process, that: @Ca) 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
• Deletions from the Uniform Trade Secrets Act in the proposed Act are indicated by a line through the deleted language. Additions to the proposed Act are indicated by shading of the additions. Sections of the proposed Act have been rearranged to match the Uniform Trade Secrets Act.
1999) UNIFORM TRADE SECRETS ACT 61
disclosure or use, and W(b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. ~279-o. Injunctive Relief
WI. Actual or threatened misappropriation may be temporarily, preliminarily, or permanently enjoined. Upon application to the court, an injunction shall be terminatetlvacated when the trade secret has ceased to exist, but the injunction maybe continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation. ~2. In exceptional circumstances, an injunction may condition
future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
fei3. In appropria.te circumstances, the court may order affirmative acts to protect a trade secret. may be eemllelled by eetlrt ertler-;-
§3-;§279-p. Damages Wi. Except to the extent that a material and prejudicial change
of position prior to acquiring knowledge or reason to know of misappropriation that renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret. ~2. If willful amlor malicious misappropriation exists, the
court may award exemplary damages in an amount not exceeding twice any award made under stlbseetien (alsubdivision one of this section. §+.§279-q. Attorneys Fees
If (i) a claim of misappropriation is made or continued in bad faith, (ii) a motion to terminate an injunction is made or resisted or continued in bad faith, or (iii) willful amlor malicious misappropriation exists, the court may award reasonable attorney's fees to the prevailing party. For purposes of this section, a claim of mis-
62 ALB. L.J. SCI. & TECH. [Vol. 10
appropriation is made or continued in bad faith or a motion to terminate an injunction is made or resisted or continued in bad faith if it is undertaken or continued solely to harass or maliciously injure another or to delay or prolong the resolution of the litigation; or it is undertaken or continued without any reasonable basis in fact or law and could not be supported by a good faith argument for an extension, modification or reversal of existing law. §5;§279-r. Preservation of Secrecy
In an action under this {Aet;tarticle, a court shall preserve the secrecy of an alleged trade secret by reasonable means, -" meh may ifteitlffeincluding but not limited to, granting protective orders in connection with discovery flf'eeeeffiftgsdevices pursuant to the provisions of §3103 of the civil practice laws and rules, holding incamera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval. §&'§279-s. Statute of Limitations
Notwithstanding any inconsistent provision of law, Aaan action for misappropriation must be brought within 3three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim. §'h§279-t. Effect on Other Law
Wl. Except as provided in subsection ~two of this section, this {Aet;tarticle displaces conflicting tort, restitutionary, and other law of this Sifttestate providing civil remedies for misappropriation of a trade secret. ~2. This {Aet;tarticle does not affect: EB(a) contractual reme
dies, whether or not based upon misappropriation of a trade secret; (B}{b) other civil remedies that are not based upon misappropriation of a trade secret; or E&)(c) criminal remedies, whether or not based upon misappropriation of a trade secret. §&§279-u. Uniformity of Application and Construction
This {Aet;tarticle shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this {Aet;tarticle among states enacting it. §9.§279-m. Short Title
This {Aet;tarticle shall be known as and may be cited as the Uniform Trade Secrets Act. ~§279-v. Severability
1999] UNIFORM TRADE SECRETS ACT 63
If any provision of this {Aet}article or its application to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of the f.Aetlthis article which can be given effect without the invalid provision or application, and to this end the provisions of the [f,.etlthis article are severable. §H-; Section 2 Time of Taking Effect
This [Act] article takes effect on --, and does not apply to misappropriation occurring prior to the effective date. With respect to a continuing misappropriation that began prior to the effective date, the [Act] also does not apply to the continuing misappropriation that occurs after the effective date. §l2. Repeal
The fu1l6 .. ing Aets and parts eL\ets are repealed: fB ~ ffi
This document was prepared as a report to the New York State Legislature as a product of the Albany Law School Science and Technology Law Center with funding provided by the Empire State Development Corporation.
Tha Albany Law School Science and Technology Law Center was established in 1998 to provide a resource for constituencies throughout New York State with respect to the legal issues critical to forming, attracting and retaining high technology industries and to facilitate the commercialization of technologies developed at research institutions in the State. To accomplish its mission, the Center: conducts studies to increase awareness about important legal issues related to technology, such as intellectual property protection, technology transfer ,university-ind ustrial collaboration, business partnering, employment and immigration; assists in streamlining the technology transfer process and making it more understandable at research institutions and providing legal services to them; offers an extensive educational program to professionals, entrepreneurs, and others on legal topics important in developing high technology industries using traditional, distance and on-line learning; provides affordable services to start-up and early stage companies for most legal matters through its Entrepreneurial Legal Assistance Program staffed by law students under the supervision offaculty and volunteer practitioners; and promotes the use of disagreement avoidance and Alternate
64 ALB. L.J. SCI. & TECH. [Vol. 10
Dispute Resolution ("ADR") techniques in the technology arena, including training mediators and serving as a clearinghouse for ADR information.
-Editor
