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Intellectual Property Rights Applicable to Software - Part 2

Trade Secrets

(i) What Is a Trade Secret?

Trade secrets are another form of intellectual property that can be used to protect software. Trade secrets are protected under the relevant state trade secret laws, almost all of which are derived from the Uniform Trade Secret Act (UTSA), which has been adopted in 49 states and the District of Columbia. Among the 50m states, only New York has not adopted the Uniform Trade Secret Act.

Under the UTSA, a trade secret is information, including a formula, pattern, compilation, program device, method, technique, or process, that: (1) 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 (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. As set forth above, the scope of trade secrets overlaps patents but is also potentially applicable to information that does not meet the standard of patentability. Thus, trade secret protection is potentially broader than that available under patent law. However, a program that is solely functional in nature, i.e., the program’s function is readily available or ascertainable, is not protectable under the UTSA.

The UTSA defines “misappropriation” to mean the (1) acquisition of a trade secret by a person who knows or has reason to know the trade secret was acquired by improper means, or (2) disclosure or use of a trade secret without express or implied consent by a person who improperly acquired knowledge of the trade secret or, who at the time of disclosure or use, knew or had reason to know that the trade secret had been improperly acquired, and there was an obligation to maintain its confidentiality. UTSA § 1(2); see, e.g., Md. Code Ann., Com. Law § 11-201(c).

A fundamental distinction between patent protection and trade secret protection is the requirement that the owner of a trade secret use reasonable efforts to maintain the secrecy of information. This is in sharp contrast to the duty of disclosure and enablement under patent law. Thus, a licensor seeking to protect software should include confidentiality provisions in the license agreement. Special care should be taken to protect the confidentiality of source code.

(ii) Advantages of Trade Secret Protection

Trade secret protection offers several advantages over other types of protection for intellectual property law, principally the perpetual protection offered for trade secrets (for example, the formula for Coke) and initially the minimal cost to obtain such protection. These benefits are often outweighed by the fluid nature of such protection and the immediate loss of trade secret status even in the event of an inadvertent disclosure. The disclosure of the protected information in a patent or copyright application will also cause a loss of protection. See BondPro Corp. v. Siemens Power Generation, Inc., 463 F.3d 702 (7th Cir. 2006). Further, a competitor who is able to reproduce a trade secret without use of illegal means is free to do so. In short, trade secrets generally retain their value so long as they remain secret.

State trade secret laws offer broader protection than copyright laws because the trade secret laws apply to concepts and information, which are both excluded from protection under federal copyright law. See 17 U.S.C. § 102(b). Information eligible for protection includes computer code, Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 663 (4th Cir.), cert. denied, 510 U.S. 965 (1993); University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir.), reh’g denied, 505 F.2d 1304 (5th Cir. 1974); Integrated Cash Management Servs., Inc. v. Digital Transactions, Inc., 732 F. Supp. 370 (S.D.N.Y. 1989), aff’d, 920 F.2d 171 (2d Cir. 1990); program architecture, Trandes, 996 F.2d at 661; Computer Assocs. Int’l, Inc. v. Bryan, 784 F. Supp. 982 (E.D.N.Y. 1992); information content including order, structure, and sequence, Q-Co. Indus., Inc. v. Hoffman, 625 F. Supp. 608, 617 (S.D.N.Y 1985); and algorithms, Vermont Microsystems, Inc. v. Autodesk, Inc., 88 F.3d 142 (2d Cir. 1996); Micro Consulting, Inc. v. Zubeldia, 813 F. Supp. 1514, 1534 (W.D. Okla. 1990), aff’d without opinion, 959 F.2d 245 (10th Cir. 1992). Mathematical algorithms are also protectable under patent law, Arrhythmia Research Technology v. Corazonix Corp., 958 F.2d 1053 (Fed. Cir.) reh’g denied, 958 F.2d 1053 (Fed. Cir. 1992); In re Iwashi, 888 F.2d 1370 (Fed. Cir. 1989).

Courts are divided as to the application of trade secret protection for customer lists. See Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (Cal. App. 1997) (file of customer business cards maintained by sales manager are trade secrets); Fireworks Spectacular, Inc. v. Premier Pyrotechnics, Inc., 147 F. Supp. 2d 1057 (D Kan. 2001) (customer lists constitute trade secrets, applying Kansas law), and In re American Preferred Prescription, Inc., 186 B.R. 350 (Bankr. E.D.N.Y. 1995) (client list is trade secret). See also DeGiorgio v. Megabyte Int’l., Inc., 468 S.E.2d 367 (Ga. 1996) (only tangible customer lists are subject to protection as a trade secret), and Ed Nowogroski Insurance v. Rucker, 944 P.2d 1093 (Wash. 1997) (memorized client list constitutes trade secret), but see Vigoro Indus. v. Cleveland Chem. of Ark., 866 F. Supp. 1150 (E.D. Ark. 1994) (customer lists alone not considered a trade secret), and WMW Machinery Co., Inc. v. Koerber A.G., 658 N.Y.S.2d 385 (App. Div. 1997) (customer lists are not trade secrets where lists are readily ascertainable from sources outside employee’s business). Further, at least one court has held that the execution of a nondisclosure agreement by an employee does not in and of itself create trade secret status for the employer’s customer lists. Equifax Servs., Inc. v. Examination Management Servs., Inc., 453 S.E.2d 488 (Ga. App. 1994). For a further discussion, see Intellectual Property Issues in the Employment Setting, 119 Intell. Prop. Couns. 1, 4 (Nov. 2006).

(iii) Preemption

A majority of courts have held that claims based on state trade secret laws are not preempted by federal copyright law (§ 301 of Federal Copyright Act). Dun & Bradstreet Software Services, Inc. v. Grace Consulting, Inc., 307 F.3d 197 (3d Cir. 2002); Nat’l Car Rental Sys., Inc. v. Computer Assocs. Intl., Inc., 991 F.2d 426 (8th Cir. 1993); Bishop v. Wick, 1998 WL 166652, 11 U.S.P.Q.2d 1360 (N.D. Ill. 1988); Brignoli v. Balch, Hardy and Scheinman, 645 F. Supp. 1201 (S.D.N.Y. 1986), but see Computer Associates Int’l v. Atari, 775 F. Supp. 544 (E.D.N.Y. 1991); Enhanced Computer Solutions, Inc. v. Rose, 927 F. Supp. 738 (S.D.N.Y. 1996); Benjamin Capital Investors v. Cossey, 867 P.2d 1388 (Or. Ct. App. 1994). See also Lennon v. Seaman, 63 F. Supp.2d 428, 437 (S.D.N.Y. 1999), which discusses in detail the dichotomy among the different courts. At the same time, two commentators have suggested that trade secret laws may be the only method of protection for the ideas incorporated in the functionality of mass distributed commercial software. Johnston & Grogan, Trade Secret Protection for Mass Distributed Software, 11 Computer Law. 1 (Nov. 1994).

(iv) Examples of Trade Secrets

Matters of public knowledge, general knowledge of an industry, routine or small skill and knowledge readily ascertainable, and differences in procedures or methodology are not considered to be trade secrets. Anaconda Co. v. Metric Tool & Die Co., 485 F. Supp. 410, 421–22 (E.D. Pa. 1996). Furthermore, any skill or experience learned during the course of employee’s employment is not considered to be a trade secret. Rigging Int’l Maintenance Co. v. Gwin, 128 Cal. App. 3d 594 (1981); American Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407 (11th Cir. 1998) (employer may not preclude former employees from utilizing contacts and expertise gained during employment), but see Air Products and Chemicals, Inc. v. Johnson, 442 A.2d 1114 (Pa. Super. 1982) (details of research and development, projected capital spending, and marketing plans are trade secrets); Den-Tal-Ez, Inc. v. Siemens Capital Corp., 566 A.2d 1214 (Pa. Super. 1989) (detailed unit costs, profit margin date, and pricing methods are trade secrets).

(v) Remedies for Misappropriation

An owner of trade secrets is entitled to receive injunctive relief and damages for the misappropriation of its trade secrets. UTSA § 3. Such damages include the actual loss caused by the misappropriation and any unjust enrichment arising as a result of the misappropriation that is not taken into account in computing any actual loss. UTSA § 3; see, e.g., Md. Code Ann. Com. Law § 11-1203. A court may also award attorney’s fees if willful and malicious misappropriation exists. UTSA § 4(iii); see, e.g., Md. Code Ann., Com. Law § 11-1204.

Section 7 of the UTSA provides that except for contractual remedies, whether or not based upon the misappropriation of a trade secret or other civil remedies that are not based upon the misappropriation of a trade secret, the UTSA “displaces conflicting tort, restitutionary and other laws . . . providing civil remedies for misappropriation of a trade secret.” See, e.g., Auto Channel, Inc. v. Speedvision Network, LLC, 144 F. Supp. 2d 784 (W.D. Ky. 2001) (Kentucky Uniform Trade Secrets Act replaces all conflicting civil state law regarding misappropriation of trade secrets, except for those relating to contractual remedies); Boeing Co. v. Sierracin Corp., 738 P.2d 665 (Wash. 1987) (UTSA merely displaces conflicting tort, restitutionary, and other law regarding civil liability for misappropriation and does not displace claims for breach of contractual and confidential relationship).

(vi) Importance of State Laws

Given the differences in state trade secret laws, the choice of governing law is very important. For example, South Carolina has enacted legislation providing that written agreements not to disclose trade secrets will be enforced without limitation on duration or geographic scope when the employee knows or has reason to know of the trade secret’s existence, S.C. Code Ann. § 39-8-30(d) (Law Co-op. 1997), while the Wisconsin Court of Appeals in an unpublished decision declined to enforce a nondisclosure provision in an agreement because it was unlimited as to time and overly broad. Williams v. Northern Technical Services, Inc., 568 N.W.2d 784 (Wis. App. 1997).

For a general overview of trade secret issues, see Rodgers & Marrs, Trade Secrets and Corporate Espionage: Protecting Your Company’s Crown Jewels, 22 ACC Docket 60–78 (April 2004); O’Brien, Trade Secret Reclamation: An Equitable Approach in a Relative World, 21 J. Computer & Information Law 227 (2003); Peterson, Trade Secrets in an Information Age, 32 Hous. L. Rev. 385 (1995); Dodd, Rights in Information: Conversion and Misappropriation Causes of Action in Intellectual Property Cases, 32 Hous. L. Rev. 459 (1995); Gross, What Is Computer “Trade Secret” Under State Law, 53 A.L.R. 4th 1046 (1987); Gulbis, Disclosure or Use of Computer Application Software as Misappropriation of Trade Secret, 30 A.L.R 4th 1250 (1984); Pooley, Trade Secrets, Law Journal Press (1997).

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