Written by: Charles Dresser
Trade secrets have a well-established legal definition. This article (1) describes the three key elements of a trade secret; (2) provides some examples of secrets that do not fit the legal definition; and (3) explains how a trade secret can represent both a property and a contract right.
Legal Definition
The Federal Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1839(3), defines a trade secret similarly to the Uniform Trade Secrets Act (UTSA), which is enacted in 49 states (New York uses the Common Law definition of trade secret). This definition of a trade secret is also been required by The Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. Accordingly, the legal definition of a trade secret is non-controversial around the world.
Under the DTSA, the term “trade secret” has three elements, (1) secret information; (2) where the owner has made reasonable efforts to maintain secrecy of the secret information; and (3) where the secret information has independent value.
(1) The first characteristic of a trade secret requires the trade secret to constitute secret information because the DTSA definition refers explicitly to any information—“financial, business, scientific, technical, economic or engineering information”—and implicitly requires the information to be secret—“[the information] derives independent economic value . . . from not being generally known.”
(2) The second characteristic of a trade secret requires the trade secret to be closely held secret by the purported owner. Specifically, the DTSA definition requires the owner of a trade secret to “take[] reasonable measures to keep . . . [the information] secret.”
(3) Finally, the third characteristic of a trade secret requires the trade secret to have independent value. This means that the secrecy of the trade secret provides value, actual or potential, to the owner of the trade secret. This characteristic is explicitly required by the DTSA: “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable . . . by the public.”
Examples of NON-Trade Secrets
NOT A TRADE SECRET: the secret handshake for The Loyal Order of Water Buffaloes
Confidential information which is likely not protected as a trade secret may include information known only to members of a community or club. Examples of such information include: a secret handshake, a secret password, a shibboleth, or the like. This information may be kept secret through reasonable means, as club members do only share this information with other member. But this information, likely, lacks any independent value. For instance, knowledge of the secret handshake for The Loyal Order of Water Buffaloes may aid Fred Flintstone in spending a night out away from Wilma and Pebbles, but it doesn’t independently provide this value.
NOT A TRADE SECRET: shortcut home from work
Another example of information which is likely not protected as a trade secret includes short-cuts. A short-cut is an atypical route from Point A to Point B, which is either shorter in distance, takes less time, or provides some other advantage (e.g., reduced toll costs). In some cases, a short-cut may be secret information, which has some value. This is because a route’s benefits may rely upon its having less traffic. Thus, the less known the short-cut is the more value it may have. However, policy likely precludes protection of short-cuts under trade secret law because knowledge that a particular public route has added benefits is open to all public travelers.
Are Trade Secrets Property or Contract Rights?
Thomas Jefferson stated that ideas may be naturally regarded as property so long as they are held secret.“[A]n individual may exclusively possess [an idea] as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it.”
While divulgence of a secret to a receiver destroys exclusive possession, it need not destroy the joint interest enjoyed by the divulger and the receiver (as long as the two keep it to themselves). This shared possession of secret information describes both an intangible property and a required aspect of an enforceable trade secret. What if, as is commonly the case with non-disclosure agreements, the receiver is under contract not to further divulge the secret? In this case, the receiver’s divulgence would entitle the original divulger to remedies for a breach of contract.
The Supreme Court, in Ruckelshaus v. Monsanto, considered trade secrets a property right in recognizing that forced public disclosure, by the government, of secret formulations amounted to a taking of property, under the Fifth Amendment. The secret formulations were recognized as a trade secret under Missouri law. (No contract necessary.)
Characterizing trade secrets as property permits remedies which are not easily availed under contract law. For instance, equitable remedies, such as injunctions, are more readily available to protect property than contractual rights.
To the practicing attorney, applying the law to facts is a functional exercise, and not an epistemological one. The goal of lawyering is advocacy not truth. In practice, therefore, trade secrets are advantageously characterized as either a property right or a contract right to serve the business needs of the client.