Intro to Trade Secrets

Intro to IP – Prof Merges

4.6.09

How does trade secret (TS) law relate to federal statutory IP?

• Preemption cases

• General principles: federalism, interrelationship

Kewanee Oil v. Bicron

The trade secret at the center of this case was a process that would create 17-inch crystals useful in detecting radiation. A division of the plaintiff firm, Harshaw Chemicals, was involved in the refining of uranium during World War II for the Manhattan Project. This resulted in massive ground pollution that is still a problem today. Both companies involved in the case were later bought out. Harshaw became a part of Engelhard Corporation, while Bicron joined with Saint-Gobain Crystals and Detectors.

http://www.saint-gobain.com/en

Kewanee Oil

• “Employee mobility” case

• Basic question: is TS law compatible with federal statutory IP scheme?

Burger opinion

• State variation: 18th century state patents

• Goldstein v. California: state protection for sound recordings (prior to federal statutory protection in 1972)

Potential problem

• Federal preemption

• “Dormant commerce clause” analogy

– What should the courts infer from Congress’ failure to create federal TS protection?

Inference from federal inactivity

• Congress explicitly decided to leave something unprotected?

• Congress was indifferent; or believed it appropriate for states to protect the thing in question?

Kewanee holding:

• State trade secret law is not preempted by federal IP scheme

– TS law is a “sieve”, as opposed to a “barrier” like patent law• Why? Reverse engineering/independent invention;

“commercial ethics” as well as innovation policy

– A weaker, and quite different, form of IP law

Survey evidence:• Yale survey (Levin, Klevorick, Nelson, and Winter

1983)• Carnegie-Mellon survey (Cohen, Nelson, and Walsh

1994)• Berkeley-Kauffman Survey 2009

• Firms value trade secret protection more highly than patent, copyright, TM in protecting investment in innovation

“(T)rade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industry…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.” --Rockwell Graphics (Posner, J.)

Bonito Boats

Boat molds

Bonito Boats

• Florida anti-molding statute

• Tennessee defendant

• Held: State statute pre-empted by federal law

• “Florida statute endows the original boat hull manufacturer with rights against the world, similar in scope and operation to the rights accorded a federal patentee.”

• -- p. 953

Holding:

“[T]he [state] statute … so substantially impedes the public use of the otherwise unprotected design and utilitarian ideas embodied in unpatented boat hulls as to run afoul of [the Sears-Compco doctrine].”

-- p. 952

Aftermath of Bonito Boats

Congress passed the Vessel Hull Design Protection Act as part of the Digital Millennium Copyright Act. The VHDPA provides copyright protections to hull designs, and many boat builders have registered their designs. The law has been incorporated into Chapter 13 of the Copyright Act.

• Merges, “100 Years of Solicitude,” 88 Cal. L. Rev. 2187 (2000)

–History of IP rights, 1900-2000

“Strength” of IP Rights

Value of Information

State Law ProtectionUniform Trade Secrets Act

• Trade secrets are protected under state law• Uniform Trade Secrets Act - Model Act Amended

in 1985• 41 states have enacted statutes modeled after

UTSA• 2 states (AL and MA) have separate state statutes

protecting trade secrets• 7 states protect trade secrets under the common

law

Defining Trade Secrets

• Metallurgical Industries v. Fourtek

• Interesting facts

– Plaintiff was a customer of defendant’s predecessor; contributed substantially to design of technology

Facts

• Metallurgical sued when Fourtek signed K with a Metallurgical competitor

• Common situation: the (informal) joint venture, leading to technology exchange, leading to an IP conflict

A Transactional View of Property Rights, 20 Berkeley

Tech. L.J. 1477 (2005)

Robert P. Merges

Property Rights Create a Legal “Field” Around an Information Asset (i), Protecting Seller (S)

During Buyer’s (B) Precontractual Evaluation

BS i

Metallurgical Industries

• Were the “incremental” and “public domain” contributions by plaintiff “trade secrets” as defined by Texas law?

• Unitary heating elements, vacuum filters, chill plates: all combined to form a useful – and secret – set of improvements in furnace design

Metallurgical holding

• “[Trial court] abused discretion in excluding evidence”

• New trial, with evidence of existence of TS

Trade Secret in General

• In general, a trade secret can be defined as any commercially valuable information or compilation of information that is not generally known to others who can profit from its disclosure or use

• Information, including a formula, pattern, compilation, program, device, method, technique, or process, that:–derives independent economic value from not

being generally known or readily ascertainable by proper means by other persons and;– is the subject of efforts that are reasonable

under the circumstances to maintain its secrecy

Definition of TS

UTSA

• Provides cause of action for “misappropriation” of trade secrets

• 3 year statute of limitations - action must be brought within 3 years after misappropriation is discovered or should have been discovered

• "Misappropriation” defined as: • (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:– Improperly acquired trade secret– At the time of disclosure or use, knew or had

reason to know that his knowledge of the trade secret was:• Derived from improper means• Acquired under a duty to maintain secrecy• Acquired by accident or mistake