EXPLAINER: Trade Secrets
- the information is not generally known (i.e., it is secret);
- the information has economic value (actual or potential) by virtue of its being not generally known;
- the information has value to others who do not have access to it (and they cannot obtain it by legal means); and
- the person, entity, or business that holds the information takes reasonable efforts to maintain its secrecy.
- The Economic Espionage Act of 1996 (the EEA)
- The Defend Trade Secrets Act of 2016 (the DTSA)
- for individuals, fines of up to $500,000 and imprisonment of up to 15 years; and
- for organizations, fines of up to $10 million.
Notably, the EAA claims extraterritorial jurisdiction where (i) the offender is a U.S. citizen or resident; (ii) the offender is an entity organized under U.S. (or a State’s) law; or (iii) part of the offense was committed in the U.S. Meaning that liability in a U.S. court for acts occurring outside of the U.S. is entirely possible, depending upon the circumstances.This first section of the EAA has been used for several high profile prosecutions, including the 2018 prosecution of Yanjun Xu, the deputy division director at China’s Ministry of State Security (or MSS – which is sort of like a hybrid of the U.S. FBI and CIA). Yanjun Xu was arrested in a sting operation in Belgium, which extradited him to the U.S. to face charges. Another example of the EAA’s foreign-entity prohibitions was the high-profile prosecution of Chinese telecom giant Huawei by the DOJ in 2019. Huawei’s defense/response essentially amounted to “this case is political theater and we are being unfairly targeted.” Both of these were part of a broader “China Initiative” undertaken by the DOJ and other agencies, focused on the ongoing efforts of Chinese companies and government agencies to steal U.S. trade secrets and intellectual property. But, what if the dishonest person or company stealing your trade secrets is not a foreign entity? This is where the second of the EAA’s two major prohibitions – codified in §1832 – comes into play. This second area is theft of a trade secret that “is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret” Penalties for the violation of this section of the EAA are somewhat less than the above, but nonetheless extremely severe:
- for individuals, imprisonment for up to 10 years (no fines); and
- for organizations, fines of up to $5 million.
Forbes Magazine called the passage of the DTSA “The Biggest IP Development In Years”
I’m inclined to agree with that assessment.The first verdict under the DTSA came in 2017 when a Pennsylvania jury in Dalmatia Import Group, Inc. v. FoodMatch Inc. et al. awarded Dalmatia $2.5 million for the misappropriation of a recipe for fig spread by its former contract manufacturer and former distributor. $500,000 of the total $2.5 million judgment was attributed to DTSA (other claims included trademark infringement and counterfeiting). While the DTSA parallels the UTSA (model state law) in many respects, it also has some very notable and unusual features. Perhaps the most striking of these is that the DTSA allows for ex parte seizure orders in “extraordinary circumstances” (such as cases where the alleged thief or misappropriator would destroy, hide, or cause publication of a trade secret if given notice.)
For those non-lawyers reading this, an “ex parte” order (which literally translated is “from the party/faction of”) means that the statute permits a court to issue an order based on one party’s request only, without notice, warning or an opportunity for a hearing to the other side. Even when limited to “extraordinary circumstances,” this is strong medicine, indeed.One can understand how an ex parte remedy might be appropriate in this situation. By their very nature, the value of a trade secret is dependant upon secrecy, and swift action outside of the typical “notice and due process” framework might well be the best way to prevent further damage. Under the statute, an aggrieved party can petition the court to order federal marshals to seize “property necessary to prevent the propagation or dissemination” of the stolen or misappropriated trade secret. As noted above, the seizure would proceed without notice to the accused thief or misappropriator of the trade secret. Victims of a wrongful seizure may avail themselves of a damages award, attorney fees, and (in the case of bad faith) punitive damages. Another unique feature of the DTSA is its whistleblower protections. Suppose, for instance, that an employee of a company has knowledge of an actual or potential trade secret theft or misappropriation and wants to report it to the appropriate authorities. In order for the report to be meaningful, complete, actionable, etc., it would have to include a fair amount of specificity, almost certainly including some amount of substantive disclosure of the trade secret. In other words, wouldn’t the report of the violation, itself, technically be a violation of trade secret law? Well, in a lot of cases, the answer could be “yes.” But not to worry. The DTSA grants very broad legal immunity to whistleblowers to protect them from this scenario. Recognizing this, the DTSA provides that companies may receive enhanced damages if employees are notified of their whistleblower immunity rights. This has, unsurprisingly, caused many employers to add language like the following to their HR manuals, policies & procedures, employment contracts, etc. that very closely tracks the statutory whistleblower-immunity provisions:
An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in confidence to a Federal, State, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law. An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal; and does not disclose the trade secret, except pursuant to court order.But the DTSA, being a federal law, suffers from the same jurisdictional problems that plague the EAA – to wit: the federal government cannot Constitutionally legislate on or regulate conduct that is solely within a state. It is the domain of that state and no other authority to exercise its police power and regulate such solely-internal affairs. What’s a small business to do? Fortunately, most states (including Texas) do have trade secret laws on the books. Protection of Trade Secrets Under Texas Law You may have noted that both of these federal statutes discussed above are fairly recent legislation (1996 and 2016). And you might fairly ask: prior to the first of these in 1996, was the misappropriation or theft of trade secrets legal? Certainly not. The Espionage Act of 1917, which involved national defense information or classified information, has sometimes been used where the trade secrets had an impact on national security. But more broadly, trade secrets have been protected by courts under common law principles for quite some time, as well as having been granted statutory protection under various state laws based on the Uniform Trade Secrets Act (UTSA), originally published in 1979 and amended in 1985. First, we will take a brief look at common law protection of trade secrets. The Restatement of Torts, Section 757 defines trade secrets as follows:
A trade secret consists of a formula, process, device, or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.Under this body of law, Texas recognized a cause of action for misappropriation, which consisted of
- the use, publication, sale, disclosure, etc. of a trade secret that
- was acquired via (a) a relationship of trust (for example, through a confidentiality agreement or NDA, through employment, through a fiduciary or agency relationship, etc.), or (b) through fraud, theft, deception, bribery, computer hacking, or other improper means
information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, thatThe statutory trade-secret misappropriation claim established by TUTSA for the improper acquisition or disclosure of a trade secret has three distinct elements:
a. derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable 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.
- a trade secret exists and is owned by the plaintiff; and
- the trade secret was improperly acquired; or
- the trade secret was disclosed or used without the owner’s permission;
A person commits an offense if, without the owner’s effective consent, he knowingly:(1) steals a trade secret;(2) makes a copy of an article representing a trade secret; or
(3) communicates or transmits a trade secret.
- Coca-Cola: the Coca-Cola Company made the decision many years ago to protect its recipe as a trade secret rather than protecting it as a patent. Among other things, filing a patent requires a full disclosure, and patents expire after a period (usually 20 years). Supposedly, the ingredients are shipped to Coca-Cola factories in containers labelled only 1 through 9, with a ratio provided – the actual contents of Ingredients 1 through 9 are not printed on the ingredient packages. The recipe for Coca-Cola has spawned many urban legends and stories (some true, some untrue), including theories that the company still uses Coca leaves (with the cocaine removed from them), an NPR special that followed stories of maybe-original-maybe-alternate recipes being discovered in old cookbooks that the, a caper in which two employees stole the recipe and attempted to sell it to Pepsi (Pepsi whistleblew, and the two recipe thieves were arrested), urban legends about bugs being used in the formula, theories that the ingredients are produced by two different employees, so that each only knows half, an enormous vault at Coca-Cola corporate headquarters that supposedly contains the only written copy of the recipe, and more.
- McDonalds Big Mac Special Sauce: the special sauce was one of McDonalds’s competitive advantages for years. Then in the 1980s, during some recipe reformulations and other corporate shake-ups, it was lost and couldn’t be located. Fortunately, the Company was eventually able to retrieve it from a company who had helped produce it as a contract manufacturer. But, in an interesting twist, this little maneuver might have actually voided the Special Sauce’s status as a trade secret, since McDonalds’s ownership of the information might have lapsed (does the recipe belong to the contract manufacturer or to McDonalds?). Nonetheless, it’s unlikely that this hypothetical conflict is ever going anywhere, and you’re reasonably certain to be able to get your Big Macs for the foreseeable future.
- Krispy Kreme Donuts: In 1933, Ishmael Armstrong bought the original Krispy Kreme doughnut shop (in Kentucky), from Joe LeBeau, a Frenchman from New Orleans. As part of the purchase, Mr. Armstrong and his nephew, Vernon Rudolph, also acquired the shop’s secret donut recipt. More than 70 years later, they have kept the recipe a secret, locked in a safe in Winston-Salem, North Carolina (Krispy Kreme’s headquareters). While it isn’t so difficult to figure out what ingredients go into a Krispy Kreme donut (under FDA rules, they are required to list the ingredients on the back of the dry donut mix they sell), finding out the ratio of those ingredients and how they mix together might be a little harder. Regardless, if you ask a Krispy Kreme fan what makes the donuts so great, it isn’t strictly their ingredients, but rather the ability to purchase the fresh (and warm!) finished product that is so critical to the flavor of the donuts and the success of the company. The process that allows this is also a secret. Go figure.
- KFC (Kentucky Fried Chicken): 70 years ago, the white-suited Colonel Harland Sanders created a recipe for a tasty chicken coating containing 11 herbs and spices. The original, handwritten copy of the recipe – which is still used today at KFC – is hidden in a safe in Kentucky, and only a handful of trusted, high-level employees (presumably bound by the mother of all nondisclosure agreements), know its contents. For an added measure of security, KFC contracts out to two separate companies to blend the mixture – each blends only half of the recipe, without knowing what is in the other half. Each of the two outputs are then mixed together, and voila! you have your KFC chicken coating. Additionally, rumor has it that the select number of employees who are trusted with parts of the recipe are prohibited from socializing, travelling together, etc.
- Twinkies: Invented in 1930, the yellow spongy cake with the cream filling has been the poster-child for artificial food. Old television advertisements actually touted the health benefits of Twinkies: “Hostess Twinkies give your child energy to go on, plus protein to grow on,” “The inside has a super-delicious cream filling,” and “Hostess Twinkies supply whole egg protein for rich, red blood.” Imagine that. Nevertheless, the original manufacturer, Continental Baking Company (now Interstate Bakeries Corporation), opted to keep the recipe secret, opting for trade secret protection rather than patent. Today, some speculate that the ingredients continue to be kept secret more as a marketing device than any kind of real secret recipe (even if they’re actually harmless, who wants to eat something that has 100 super-artificial-sounding ingredients you can barely pronounce?)
- WD-40: This iconic spray is one of the go-tos for DIYers, handymen, and dads across America. With its blue & yellow can and narrow, red straw, WD-40 was originally developed in 1953. The chemist who invented it (to prevent corrosion) sold the formula and his company for $10,000 just a few years later. Today, WD-40 is used for everything from its intended use of preventing corrosion, to removing adhesives, to cleaning tools and equipment, to lubricating things that just don’t want to “un-jam”. The company that makes WD-40 makes only WD-40 and no other product. Its secret formula was never patented so competitors couldn’t copy it. The company does provide a list of a few chemicals that it says are NOT in WD-40: “silicone, kerosene, water, wax, graphite, chlorofluorocarbons (CFCs) or any known cancer-causing agents.” Like a few of the other products on this list, in order to keep the formula secret, the company mixes it in three different cities around the globe, before passing it on to contract manufacturers and others. The revered formula has only been removed from its bank vault a handful of times – once, when the company’s CEO brought it out for the company’s 50th birthday party. And because of course he did… he removed it from the vault armored and riding a horse like a knight.
- Listerine: The Listerine case is a law school classic. Dr. J.J. Lawrence invented the antiseptic liquid compound Listerine in the 1880s. He licensed his secret formula to J. W. Lambert and the Lambert Pharmacal Co. for a royalty on Listerine’s sales. Lambert’s successor entity made the royalty payments required under the contract for roughly 70 years, amounting to a total in excess of $20 million. Plot twist: in the meanwhile, Listerine’s formula was revealed to the public, without any breach of contract or similar foul play – some folks just figured it out. Then, in the 1950s, the successor (now Pfizer), decided that because the formula was now public, it was not required to make any more royalty payments (the secret formula was not secret any more). The Lawrence family sued and won – the original royalty agreement made no mention of what was to happen if the trade secret were discovered by others, and in any event, Pfizer’s marketplace and brand first-mover advantage from the time the formula had been secret was enormous.
- The New York Times Bestseller List: The New York Times Bestseller List is one of the most influential book lists in the world, and making the list will virtually guarantee a storm of interest and sales in an author’s book. But What is the Times’s definition of “a bestseller”? They won’t say. And while you would think it’s as simple as “a book that sells a lot is a bestseller” – it’s not that simple. One book that sells 50,000 copies can be on the bestseller list, while another book that sells 60,000 copies will fall short. So, while we know that the times does poll bookstores about their sales numbers, it’s not just a simple addition problem. What are the other factors? Times employees won’t say. This practice has gotten the company some controversy from time to time. For example, William Peter Blatty, author of “Exorcist,” sued the Times for $9 million in lost profits when his novel “Legion” was not included on the best-seller list in 1983. He lost the suit.
- Lena Blackburne Rubbing Mud: If you’re not a baseball fan, you might not have heard of this one. In 1938, Lena Blackburne, who was a coach of the Philadelphia Athletics, was searching for a substance that would dull the surface of glossy new baseballs, making them easier to grip, but that would do so without breaking the rules of baseball or damaging the ball. Umpires had previously tried shoe polish, tobacco juice and the dirt beneath their feet to fix the balls. None of these worked. Eventually, Blackburne tried a concoction created from mud found at his favorite fishing hole in southern New Jersey. It worked, and didn’t wreck the balls. The chief umpire signed off on the concoction, and the rest is history. Today, every Major League Baseball team uses the product, and nobody else knows exactly where the revered mud hole is.
- Google’s Search Ranking Algorithm: Google is the most popular search engine in the world, and one of the most profitable companies in the world, largely as a result of its algorithm’s ability to deliver relevant, on-point results in response to searches while filtering through spam and attempts at ranking manipulation. That’s no easy feat. And while the ever-changing nature of the algorithm could give rise to an interesting academic discussion of whether the Google Search Algorithm is technically one trade secret or many, good luck getting your hands on this ultra-closely guarded secret.
- Irn-Bru: Launched in Scotland in 1901 by A.G. Barr Plc, Irn-Bru is a unique carbonated soft drink that is one of the most popular soft drinks in Scotland (in Scotland, its consumption and sales are roughly on par with Coke and Pepsi). Rumor has it that the full recipe is known to only three people in the world: Robin Barr (former Chairman), his daughter Julie Barr and one Director of the company A.G. Barr Plc, with the only written copy of the recipe locked inside a bank vault in Switzerland.