A Brief History of Trade Secret Law, Part 2 by Ernie Linek

Reprinted with permission from BioProcess International 2(10):20-26 (November 2004)

veryone has heard of trade federal level, because the states did secrets. Employees are not uniformly adopt the act. often asked to sign an In 1996, Congress passed the agreement regarding their EEA to close a federal enforcement protection, whereas gap in this important area of Eemployers often worry that intellectual law and in employeesE will move to a recognition of the increasing competitor and take the company’s importance of the value of trade secrets with them. The in general Internet appears to contain (and trade secrets in particular) to information on every company the economic well-being and now in (and many no security of the United States. The longer in business). Much of the EEA’s definition of trade secrets is public corporate information now even broader than those of the available online would have been UTSA (1) and the 1939 viewed as trade secret information Restatement of Torts (2). It defines just a few years ago. trade secrets as What is a trade secret today? Are All forms and types of financial, trade secrets still important? Are business, scientific, technical, ILLUSTRATION BY C.A. SCOTT USING there any left to protect? If yes, PHOTOGRAPHS FROM PHOTOS.COM economic, or engineering how can those secrets be protected information, including patterns, in today’s information age? Part (B) the information derives plans, compilations, program one of this article (in BioProcess independent economic value, devices, formulas, , International’s October issue) actual or potential, from not prototypes, methods, techniques, discussed legal definitions of trade being generally known to, and processes, procedures, programs, secrets in the United States and not being readily ascertainable or codes, whether tangible or their implications for protection. through proper means by, the intangible, and whether or how Part two discusses federal public. (3) stored, compiled, or enforcement provisions and specific In addition to the broad memorialized physically, methods companies can use to definition of trade secrets, the EEA electronically, graphically, protect their trade secrets. includes both civil and criminal photographically, or in penalties for violations. It is not writing if — THE ECONOMIC intended to criminalize every (A) the owner thereof has ACT OF 1996 (EEA) of trade secrets for which civil taken reasonable measures to Although the Uniform Trade remedies may exist under state laws keep such information secret; Secrets Act (UTSA) was a valuable (such as under the UTSA). and update of the laws designed to Appropriate discretionary factors protect trade secrets, clearly more that the US Justice Department was needed, particularly on a

NOVEMBER 2004 BioProcess International 1 will consider in deciding whether to The EEA does not expressly initiate a criminal prosecution under provide for any defenses. However, the EEA include the scope of  the legislative history of the EEA criminal activity (including evidence Acquiring a trade suggests that defenses traditionally of involvement by a foreign secret through available in a civil action for theft of government, foreign agent, or trade secrets are equally applicable foreign instrumentality); the degree parallel to defend against criminal charges. of economic injury to the trade development Specifically, the legislative history secret owner; the type of trade or reverse indicates that acquiring a trade secret misappropriated; the secret through parallel development effectiveness of available civil engineering is or is not illegal. remedies; and the potential NOT illegal. Parallel Development: The owner deterrent value of prosecution. of a trade secret, unlike the holder of Some acts prohibited by the EEA a , does not have an absolute include unauthorized taking, on the information or copying, and receiving of trade A domestic offense also carries data that compose it. Other secrets. The EEA also prohibits any criminal penalties of up to 10 years, companies and individuals have the attempt at such activity or making the penalties for US right to discover the elements of a conspiracies with others to engage violations somewhat less severe than trade secret through their own in such activity. Moreover, the those related to foreign activity. For research and hard work. In 1974, the statute broadens this description to foreign activity, the EEA protects Supreme Court recognized this fact, include any possible means of against the conveyance of merely a stating: committing the offending acts, “benefit,” rather than an “economic If something is to be discovered at including all forms of electronic benefit,” as for domestic activity. all, very likely it will be discovered activity. The EEA covers not only This recognizes that the benefit by more than one person. . . . the activities of corporations, but bestowed on a foreign government Even were an inventor to keep his also those by and on behalf of or instrumentality need not be an discovery completely to himself, foreign governments. economic one. something that neither the patent Foreign Activity (Economic Violators of the EEA are subject nor trade secret laws forbid, there Espionage): The EEA prescribes a fine not only to the criminal penalties is a high probability that it will be of up to $500,000 or imprisonment described above, but to the soon independently developed. If for not more than 15 years (or both) forfeiture of any proceeds obtained the invention, though still a trade to anyone who commits the by the violator, either directly or secret, is put into public use, the prohibited acts intending or indirectly, as a result of such competition is alerted to the knowing that such events will benefit violation. Moreover, the violator’s existence of the inventor’s solution a foreign government, property used or intended to be to the problem and may be instrumentality, or agent. used to commit or facilitate the encouraged to make an extra Domestic Activity (Theft of Trade commission of the violation can be effort to independently find the Secrets): The EEA similarly prohibits seized by the US government. solution thus known to be taking, copying, or receiving trade The US Justice Department may possible. (4) secrets without authorization in the also use a civil action to seek and domestic context for those trade maintain appropriate injunctive relief Reverse Engineering: Similarly, a secrets that are related to or against violation of the EEA. The person can legally discover the included in a product and placed in EEA provides no injunctive relief to elements of a trade secret by reverse interstate or foreign commerce. private parties. They must continue engineering, the practice of taking The statute adds three to resort to the traditional civil something apart to determine how it requirements that are not present injunctive remedies of state courts. was made or manufactured. The with regard to espionage on behalf The EEA clearly has a global Supreme Court recognized this of foreign governments or reach by extending beyond the important fact as well, stating that instrumentalities. The wrongful borders of the United States when the law does not protect the owner conduct must an offender is a citizen or permanent of a trade secret from “discovery by • be committed with the intent resident alien of the United States or fair and honest means, such as to convert the trade secret is an organization organized under independent invention, accidental • economically benefit anyone the laws of the United States or a disclosure, or by so-called reverse other than the owner, and state or political subdivision thereof. engineering” (4). • be committed with the intent The EEA also applies to conduct The EEA does not expressly or knowledge that the offense will outside the United States if an act to address when reverse engineering injure the owner of the trade secret. further such conduct was committed would be a valid defense; however, inside the United States. legislative history suggests that “the

2 BioProcess International NOVEMBER 2004 research and materials from the Cleveland Clinic Foundation (CCF).  The accused falsely understated the The proper focus of inquiry is not whether an number of vials of research material alleged trade secret can be deduced by reverse that had been taken from a laboratory by a second defendant, by engineering, but whether IMPROPER means are initially indicating that 10 or fewer required to access it. vials had been taken, when in fact, several hundred vials were taken. An indictment is still pending important thing is to focus on It is alleged that the individuals against the second defendant, whether the accused has committed each signed a participation charging him with conspiracy, one of the prohibited acts of this agreement upon coming to economic espionage act offenses, statute rather than whether he or Harvard, in which they agreed that and transporting stolen property in she has reverse engineered. If all rights to any invention or interstate and foreign commerce. someone has lawfully gained access discovery conceived or first reduced Defendant 2 is alleged to have to a trade secret and can replicate it to practice as part of, or related to, conspired to steal from the CCF without violating , patent, their university activities were DNA and cell line reagents and or this law, then that form of reverse assigned to Harvard, and that their constructs developed by researchers engineering should be fine” (5). obligations would continue after at CCF and to have committed two Therefore, to avoid a successful termination of their Harvard counts of economic espionage by claim by a defendant that he employment. It is alleged that stealing trade secrets and altering discovered the trade secret by despite their legal and contractual and destroying them. reverse engineering, the means by obligations, they took and conspired In 2004, the Tokyo High Court which that defendant to take proprietary and highly turned down a request to extradite misappropriated the trade secret marketable scientific information Defendant 2 to the United States to should be established. Furthermore, belonging to Harvard with the stand trial on a defendant cannot defeat a criminal intention of profiting from it by charges, marking Japan’s first prosecution simply by claiming the collaborating with a Japanese rejection of an extradition request trade secret could have been company to create and sell related from American authorities. discovered by reverse engineering. and derivative products or otherwise January 2002: The US Attorney The proper focus of inquiry is not capitalize on the information. announced that two defendants whether an alleged trade secret can If convicted, they each face a were sentenced after entering guilty be deduced by reverse engineering maximum sentence of five years’ pleas to a two-count indictment but rather, whether improper means imprisonment on the conspiracy charging them with conspiracy to are required to access it. charge, 10 years on the theft of trade convey trade secrets and the secrets charge, and 10 years on the substantive offense of conveying A FEW REPORTED EEA CASES interstate transportation of stolen trade secrets. June 2002: Two people were arrested property charge. Additionally, the Defendant 1 was sentenced to 14 in California on a federal complaint defendants face a maximum fine of months confinement (seven to be issued out of federal court in Boston $250,000 on each of the charges, and served in a community correctional charging them with theft of trade any prison term would be followed center), two years supervised release, secrets from Harvard Medical by three-years of supervised release. and a special assessment of $200. School’s Department of Cell May 2002: In another case, the US Defendant 2 was sentenced to 10 Biology while they were research Attorney for the Northern District of months confinement (five in a fellows. They were charged in a Ohio announced that an accused community correctional center), criminal complaint with conspiracy, pled guilty to a one-count two years supervised release, and a theft of trade secrets, and interstate Information (a formal criminal special assessment of $200. transportation of stolen property. charge filed by a prosecuting These defendants were convicted The charges arose out of the alleged attorney without the aid of a grand of conspiring to convey trade secrets theft of certain trade secrets jury), charging him with making false and conveying trade secrets. belonging to Harvard Medical statements to the government. The Defendant 1 obtained numerous School, including reagents made Information charges that on pieces of proprietary information and used by the school to develop 2 September 1999, the accused owned by RP Scherer, Inc. (RPS) new immunosuppressive drugs for provided a materially false, fictitious, from a friend in Florida. The controlling organ rejection and also and fraudulent statement in an information included gel formulas, to study the genes that regulate an interview with special agents of the fill formulas, shell weights, and important signaling enzyme in the Federal Bureau of Investigation, who experimental production order heart, brain, and immune systems. were investigating the theft of

NOVEMBER 2004 BioProcess International 3 (EPO) data. This information was receive instant recognition for the Keeping a Trade Secret “Secret” Can known by the defendant to be discovery but no right to prevent Be Difficult: Again, the Coca-Cola® proprietary information and trade others from copying it. formula is a prime example. As a secrets of RPS. Defendant 1 and • Patent the discovery so you can search of the Internet shows, many Defendant 2 attempted to sell the have the right to exclude others people have tried and are likely still information to NPB, a competitor from using it for up to 20 years — if trying to duplicate the “secret” of RPS. a patent issues. formula. Some do it to satisfy their NPB actively cooperated with • Keep the discovery a secret. It intellectual curiosity. Others do it to federal authorities and the victim is your property and it gives you a make a competitive product. If your corporation. Without the assistance competitive advantage. Why disclose trade secret can be determined by of this competitor corporation, the it to others? , if granted, reverse engineering, you can be sure successful prosecution of this case don’t last forever, so keep it secret that someone will find it. would not have been possible. — unless the secret is easy to reverse In addition to reverse engineer or you fear parallel engineering, you can lose your trade TAKE-HOME LESSONS development. secret in other ways. If visitors to What does all of this mean to a A Trade Secret Can Last Forever — your company can learn your secrets, reader of this publication — as an As Long As You Keep It a Secret: Think they may do so. Former employees employee or an employer? of the formula for Coca-Cola®. A may take your secrets with them. Trade Secrets Still Exist, and They search of the Internet for the Employment agreements may be Are Protectable Under Both Federal “formula” reveals many, many needed to reinforce employee and State Law: Employers and guesses — each claiming to be the recognition of the importance of employees must make adequate real deal. It is likely that the formula protecting your trade secrets. And if efforts to protect secrets for them to for Coca-Cola® has been modified you enter into a joint development remain valid. For example, when a more than once since the original agreement with another company new discovery is made you have version was first sold in 1886, but and fail to protect your trade secrets, three choices: only the owner of the trade secret they may no longer be protectable • Announce your discovery to — The Coca-Cola Company — even before that development the world — make it public. You knows the actual formula. agreement ends.

A SAMPLE EMPLOYMENT AGREEMENT

EMPLOYEE AGREEMENT REGARDING CONFIDENTIAL INFORMATION I, the undersigned employee, in consideration of my employment or continued employment in any capacity with ______[hereafter, THE COMPANY], the salary or wages paid for my services in the course of such employment, and the use of the facilities and experience of THE COMPANY, and of the opportunity given by THE COMPANY to me to acquire CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION relating to the business of THE COMPANY, voluntarily agree as follows: I agree to keep secret and not to disclose any CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION of THE COMPANY, including information received in confidence by THE COMPANY from others, either during or after my employment with THE COMPANY, except upon written consent of THE COMPANY. I understand that the terms CONFIDENTIAL INFORMATION and PROPRIETARY INFORMATION are used by THE COMPANY to identify valuable and protectable business information which may be used in conducting the business of THE COMPANY and which may give THE COMPANY an opportunity to obtain an economic advantage over competitors who do not know it or use it. This includes information that I conceive or develop as well as information that I learn from other employees of THE COMPANY. I will not, except as THE COMPANY may otherwise consent or direct in writing, reveal, or disclose, sell, use, lecture upon, or publish any CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION of THE COMPANY, or authorize anyone else to do these things at any time either during or subsequent to my employment with THE COMPANY. I understand that this Agreement shall continue in full force and effect after termination of my employment. Provided however, that my obligations under this Agreement shall cease when any specific CONFIDENTIAL INFORMATION or PROPRIETARY INFORMATION of THE COMPANY becomes publicly known through the activities of another, without my direct or indirect aid or assistance.

EMPLOYEE's NAME: ______EFFECTIVE DATE: ______

EMPLOYEE's SIGNATURE: ______WITNESS: ______

4 BioProcess International NOVEMBER 2004 Can I Use Both Patent Law and Patent Protection? During the information contained in this Trade Secret Law to Protect the Same lifetime of a US utility patent (up to document, other than as Discovery? Generally — no. The 20 years from the filing date), the authorized by ABC. patent laws of the United States patentee has the right to seek require full disclosure of an injunctive relief and monetary What Steps Can a Company Take to invention, including the best mode from a federal court based Discourage Its Employees from Taking (the base way to make and use the on the unauthorized making, using, or Giving Its Trade Secrets to New invention) known or contemplated selling, or offering for sale of the Employers or Other Companies? by its inventor when the patent invention claimed in the patent. Employment agreements can be application is filed. Any attempt to There is no defense in patent law useful as an effort to protect your keep part of the invention a trade based on parallel development or trade secrets. Check with your local secret would invalidate the patent reverse engineering. attorney for specific requirements of because the “best mode” would not The owner of a trade secret, your state. A sample agreement on be disclosed. On the other hand, depending on the law of his state this subject is shown in the box improvements of an invention, (or the decision of the Department accompanying this article. made after filing a patent of Justice), may (or may not) have application, could be preserved as similar rights to seek an REFERENCES trade secrets — but not if another or monetary damages — provided 1 The Uniform Trade Secrets Act patent application were to be filed. that there is a defined and (“UTSA”) is model legislation drafted by the National Conference of Commissioners on What Are Some Advantages to protectable trade secret that has Uniform State Laws. A hard copy with Maintaining a Trade Secret? A trade been misappropriated by the commissioners’ comments on the various secret can give you an edge over the accused. Under some state laws sections can be ordered from the National competition in manufacturing, (and the ) the trade Conference of Commissioners on Uniform particularly if the secret cannot easily secret owner has almost no rights State Laws, 676 North St. Clair Street, Suite 1700 Chicago, Il 60611. be reverse engineered. A trade secret except against those who have 2 Restatement of Torts, Section 757, can be used by a seller to bind a contracted, expressly or by Comment b (1939). prospective purchaser or implication, not to disclose the 3 Economic Espionage. US Code, subcontractor to secrecy regarding secret or who have obtained it Section 1831 et seq., Title 18, 1996: how a product is made. unfairly. Further, if a trade secret is www4.law.cornell.edu/uscode/18/1831. What Are Disadvantages to disclosed to the public by a breach html. Maintaining a Trade Secret? Reverse of confidence, the secret dissolves, 4 Kewanee Oil Co. v. Bicron Corp., 416 engineering, parallel development, and the former trade secret holder US 470: 490–491 (1974). and inadvertent disclosures — generally has no recourse against 5 142 Congressional Record, S12201, S12212 (daily edition, 2 October 1996).  anyone who has lawfully acquired a new users. trade secret may use it without What Steps Can a Company Take to liability unless he acquired it subject Discourage Subcontractors from Giving Ernie Linek is senior partner at Banner to a contractual limitation or Its Trade Secrets to Other Companies? & Witcoff, Ltd., 28 State Street, 28th restriction regarding its use. For In addition to using Floor, Boston, MA 02109-1775, many products, trade secret agreements between you and any [email protected]. protection is therefore not feasible outsider that does work for you, because the nature of the product your company should stamp a can be readily determined by any notice, such as the following, on purchaser, either directly by each document sent out (check with inspection or by reverse engineering. your local attorney for specific When Should We Choose Trade requirements of your state): Secret Protection Instead of Patent Notice to All Persons Receiving Protection? Trade secret protection This Document should be relied upon if an invention This document contains is not patentable. Furthermore, trade proprietary information and is the secret protection also may be relied property of ABC, Inc. (“ABC”) on when the process or product is and is delivered to you on the one that can be readily maintained as express condition that it is not to a secret because it defies reverse be disclosed, reproduced in whole engineering (such as the Coca-Cola® or in part, or used for formula) so that the period of manufacture for anyone other exclusivity can extend beyond the than ABC without ABC’s prior 20-year maximum term of a patent. written consent; and that no right What Are Some Disadvantages of is granted to disclose or use any Trade Secret Protection Compared with

NOVEMBER 2004 BioProcess International 5