Key Provisions of the Uniform Trade Secrets Act
The Uniform Trade Secrets Act (”UTSA”) is a model law that was originally proposed by the National Conference of Commissioners on Uniform State Laws in 1979. Since then, it has been enacted as law by every state in the U.S. except Massachusetts, New Jersey, New York and Texas. UTSA is being considered by the New Jersey and New York legislatures.
Before the UTSA was widely adopted, state courts judged legal cases involving trade secrets under common law and tort rules. Relying mainly on case law established in prior disputes, the rules and expectations for trade secret protection varied considerably between the states.
The implementation of uniform laws across most states has been a significant benefit to businesses operating in multiple jurisdictions. Business policies no longer have to vary to conform to the unique legal requirements in different locations, allowing businesses to operate more efficiently.
The UTSA spells out the remedies available to an injured party for misappropriation of its trade secrets and includes the following key provisions.
Definitions
The UTSA specifically defines a trade secret as:
information, including a formula, pattern, compilation, program device, method, technique, or process, that:
(i) 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
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Misappropriation is 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
(A) used improper means to acquire knowledge of the trade secret; or
(B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was
(I) derived from or through a person who has 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 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.
Proper Means
Though not spelled out in the UTSA, common law and tort rules have established the following ways in which trade secrets can be legally discovered:
- Independent discovery or invention
- Disassembling a product to discover how it works or was made (reverse engineering). To be lawful, the product must be obtained by fair and honest means, such as purchasing it on the open market.
- Discovery under a license from or the authority of the owner of the trade secret
- Observation of the item in public use or on public display
- Obtaining the trade secret from published literature
How Secret is Secret?
Given that one party can legally “independently discover” what is another party’s trade secret, it becomes possible for both parties to “own” the secret and enjoy the benefits of trade secret protection. It is not necessary for a trade secret owner to be the exclusive owner. But knowledge of the secret must be restricted enough that the owners each enjoy a potential or actual economic advantage by continuing to keep the secret safe from further discovery.
On the other hand, a secret does not have to be “publicly known” to lose its trade secret protection. For example if the process for making a highly specialized computer chip is known only by three companies in the world, but they also happen to be the only three companies manufacturing those chips, then the process is hardly a secret in their trade.
Injunctive Relief
If your trade secret is misappropriated, a court can issue an injunction restraining the offending party from future use and disclosure. Whether for months or years, such an injunction will usually be only for a specific time period and not indefinite.
The theory in determining the length of an injunction is that the advantage a misappropriator gains from illegally using your trade secret will eventually be minimized by the effects of competition reducing the value of your secret, and/or possibly the ultimate discovery of the secret by others in due time. If the court determines the villain’s illegal advantage would likely be erased in two years, then that would be the proper duration of the injunction.
Following that theory, if a different competitor discovers or reverse engineers your secret while an injunction against a misappropriator is in effect, then the injunction can be terminated early if the secret loses its protected status.
Also, if by the time a case is decided, further use and disclosure is unlikely to cause future damage to the trade secret owner, then an injunction becomes pointless.
Damages
If more than one party has the same trade secret information and the information is misappropriated from just one of the parties, only the party from whom the secret was obtained is entitled to damages.
When calculating damage awards, the law allows recovery of the trade secret owner’s actual losses plus any unjust gains received by the misappropriator that are not already counted in the actual losses. When misappropriation is willful and malicious, the court may award exemplary damages up to twice the amount otherwise calculated.
In lieu of damages, the court may award royalty payments to the trade secret owner for the misappropriator’s unauthorized use or disclosure when reasonable documentation can be provided to support a royalty value.
In some cases, a party may be sued for receiving benefits from a trade secret they acquired in good faith and without any reason to suspect it was misappropriated. When the party discovers the misappropriation and discontinues relying on privileged information it’s not entitled to use, it may suffer a monetary loss. In such a case, the court is permitted to excuse the defendant from paying monetary damages since its actions were not willful and it, too, has suffered.
In the event of willful and malicious misappropriation, or in the event of any act of bad faith by either the plaintiff or defendant, the law additionally allows awarding attorney fees to the prevailing party.
Note: Each state enacting the UTSA may have adopted its own variations of the specific clauses proposed in the model statute. If you have questions about trade secret law in your state, consult a local intellectual property attorney.
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- Choosing Between Patent and Trade Secret Protection
- How to Protect Trade Secrets
- Full Text of the Uniform Trade Secrets Act
- Trade Secrets - Fast FAQs
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