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Article Excerpt
INTRODUCTION
I. TRADE SECRET DOCTRINE A. The History of Trade Secret Law B. The Scope of Trade Secret Law II. EFFORTS TO UNDERSTAND TRADE SECRET THEORY A. Tort Law B. Contract Law C. Property Law D. Commercial Morality and Other Theories E. Bone's Challenge: Does Trade Secret Law Serve a Purpose? III. CONSTRUCTING AN IP THEORY OF TRADE SECRETS A. Incentives To Invent B. Incentives To Disclose C. Channeling Protection Between Patents and Trade Secrets IV. IMPLICATIONS FOR TRADE SECRET LAW A. The Centrality of Secrecy B. The Relationship Between Trade Secret Law and Other Torts C. Other Implications for Trade Secret Doctrine 1. Reasonable efforts to protect secrecy 2. Contracting around trade secret law 3. IP, property, and "absolute dominion" 4. How long does secrecy last? CONCLUSION
INTRODUCTION
Trade secret law is a puzzle. Courts and scholars have struggled for over a century to figure out why we protect trade secrets. The puzzle is not in understanding what trade secret law covers; there seems to be widespread agreement on the basic contours of the law. Nor is the problem that people object to the effects of the law. While scholars periodically disagree over the purposes of the law, and have for almost a century, (1) they seem to agree that misappropriation of trade secrets is a bad thing that the law should punish. Rather, the puzzle is a theoretical one: no one can seem to agree where trade secret law comes from or how to fit it into the broader framework of legal doctrine. Courts, lawyers, scholars, and treatise writers argue over whether trade secrets are a creature of contract, of tort, of property, or even of criminal law. (2) None of these different justifications has proven entirely persuasive. Worse, they have contributed to inconsistent treatment of the basic elements of a trade secret cause of action and uncertainty as to the relationship between trade secret laws and other causes of action. (3) Robert Bone has gone so far as to suggest that this theoretical incoherence indicates that there is no need for trade secret law as a separate doctrine at all. He reasons that whatever purposes are served by trade secret law can be served just as well by the common law doctrines that underlie it, whichever those turn out to be. (4)
In this Article, I suggest that trade secrets can be justified as a form, not of traditional property, but of intellectual property (IP). The incentive justification for encouraging new inventions is straightforward. Granting legal protection for those new inventions not only encourages their creation, but enables an inventor to sell her idea. And while we have other laws that encourage inventions, notably patent law, trade secrecy offers some significant advantages for inventors over patent protection. It is cheaper and quicker to obtain, since it doesn't require government approval, and it extends to protection of types of business and process information that likely would not be patentable.
It seems odd, though, for the law to encourage secrets, or to encourage only those inventions that are kept secret. I argue that, paradoxically, trade secret law actually encourages disclosure, not secrecy. Without legal protection, companies in certain industries would invest too much in keeping secrets. Trade secret law develops as a substitute for the physical and contractual restrictions those companies would otherwise impose in an effort to prevent competitors from acquiring their information.
The puzzle then becomes why the law would require secrecy as an element of the cause of action if its goal is to reduce secrecy. I argue that the secrecy requirement serves a channeling function. Only the developers of some kinds of inventions have the option to overinvest in physical secrecy in the absence of legal protection. For products that are inherently self-disclosing (the wheel, say, or the paper clip), trying to keep the idea secret is a lost cause. We don't need trade secret law to encourage disclosure of inherently self-disclosing products--inventors of such products will get patent protection or nothing. But if trade secret law prevented the use of ideas whether or not they were secret, the result would be less, not more, diffusion of valuable information. The secrecy requirement therefore serves a gatekeeper function, ensuring that the law encourages disclosure of information that would otherwise be kept secret, while channeling inventors of self-disclosing products to the patent system.
My argument has a number of implications for trade secret policy. First, the theory works only if we treat trade secrets as IP rights, requiring proof of secrecy as an element of protection. If we give the protection to things that are public, we defeat the purpose and give windfalls to people who may not be inventors (what we might call "trade secret trolls"). Courts that think of trade secret law as a common law tort rather than an IP fight are apt to overlook the secrecy requirement in their zeal to reach "bad actors." But it is the courts that emphasize secrecy, not appropriation, as the key element of the cause of action that have it right. Second, an IP theory of trade secrets also encourages preemption of "unjust enrichment" theories and other common law ways courts are tempted to give private parties legal control over information in the public domain. Thus, an IP theory of trade secrets is in part a "negative" one: the value of trade secret law lies in part in defining the boundaries of the cause of action and preempting others that might reach too far. Analyzing trade secret claims as IP claims rather than common law contract or tort claims requires courts to focus on what the law is protecting, how, and why--something the common law did not do. As a result, the unified trade secret approach does not expand, but rather cabins, the overbroad reach of the common law. (5) Understanding trade secrets in this negative way--as imposing a consistent set of standards on claims that would otherwise be based on disparate legal theories and claims of entitlement or free riding--advances the goals of innovation and promotes responsible business conduct without limiting the vigorous competition on which a market economy is based.
Finally, treating trade secrets as IP rights helps secure their place in the pantheon of legal protection for inventions. The traditional conception of the trade-off between patents and trade secrets views the disclosure function of the patent system as one of its great advantages over trade secret law. And indeed the law operates in various ways to encourage inventors to choose patent over trade secret protection where both are possible. But for certain types of inventions we may actually get more useful "disclosure" at less cost from trade secret than from patent law.
In Part I, I review the origins and contours of trade secret law. Part II discusses the various theories of trade secret law, and how they have split courts and commentators. In Part III, I argue that the virtue of treating trade secrets as IP rights is--or at least should be--that it limits business tort claims to circumstances in which there is really a secret to be protected, and therefore compensates for the lack of clear standards in defining what constitutes misappropriation. Finally, in Part IV I discuss the uneven internalization of this lesson in trade secret cases to date, and some of the implications the IP theory of trade secret law has for trade secret doctrine.
I. TRADE SECRET DOCTRINE
A. The History of Trade Secret Law
Trade secret law is a relative latecomer to the IP pantheon. While patent and copyright law were well established in Europe by the founding of the Republic, and trademark law had common law roots in various trade doctrines, trade secret law in its modern form in Anglo-American jurisprudence is a common law creation of the nineteenth century. English and American courts first recognized a cause of action for damages for misappropriation of trade secrets in 1817 and 1837, respectively; (6) injunctive relief against actual or threatened misappropriation came later still. (7) These early decisions concerned issues that are still debated in trade secret cases today: the circumstances in which an employee may continue her business after departing her employer, the circumstances in which a competitor may copy another's publicly sold product, and whether courts will enforce a contract requiring that business information be kept confidential. While there were forms of trade secret protection on the Continent dating perhaps as far back as Roman times, (8) modern trade secret law is primarily an Anglo-American doctrine. Indeed, even today trade secret law is not well established outside of common law countries, (9) notwithstanding treaties that require most countries of the world to implement trade secret protection. (10)
The doctrine of trade secrets evolved out of a series of related common law torts: breach of confidence, breach of confidential relationship, common law misappropriation, unfair competition, unjust enrichment, and torts related to trespass or unauthorized access to a plaintiff's property. It also evolved out of a series of legal rules--contract and common law--governing the employment relationship. In the nineteenth century, courts periodically spoke of trade secrets as property rights, though it is not clear that they meant by that term what we mean today. (11) By the early twentieth century, the paradigm had shifted, and misappropriation of trade secrets was treated as a tort based on the confidential relationship between the parties or the misbehavior of the defendant. (12) The standards for trade secret law were collected in the Restatement of Torts in 1939, (13) and that Restatement was strongly of the view that trade secrets were not property rights but torts based on bad-faith competitive conduct. By the 1980s, a view of trade secrets as based in some combination of contracts and property was on the ascendancy, both in the Supreme Court (14) and in state legislatures, the overwhelming majority of which have adopted the Uniform Trade Secrets Act (UTSA) within the last twenty-five years. (15)
B. The Scope of Trade Secret Law
A trade secret claim can be broken down into three essential elements. (16) First, the subject matter involved must qualify for trade secret protection: it must be the type of knowledge or information that trade secret law was meant to protect, and it must not be generally known to those in the industry. On eligible subject matter, the current trend, exemplified by the UTSA, is to protect any valuable information as a trade secret. So long as the information is capable of adding economic value to the plaintiff, it can be protected by trade secret law. The requirement that the information not be generally known follows from the label "trade secret." The requirement is meant to ensure that no one claims intellectual property protection for information commonly known in a trade or industry. (17)
The second element to be established by the plaintiff in a trade secret case is that the plaintiff, holder of the trade secret, took reasonable precautions under the circumstances to prevent its disclosure. Courts have shown some confusion over the rationale for this requirement. Some see in it evidence that the trade secret is valuable enough to bother litigating; others argue that where reasonable precautions are taken, chances are that a defendant acquired the trade secret wrongfully. (18) Whatever the justification, no one may let information about products and operations flow freely to competitors at one time and then later claim that competitors have wrongfully acquired valuable trade secrets. To establish the right to sue later, one must be reasonably diligent in protecting information. As always, however, the presence of the term "reasonable" ensures close cases and difficult line drawing for courts, and it is clear that only some precautions, not completely effective ones, are required.
Finally, a trade secret plaintiff also must prove that the defendant acquired the information wrongfully--in a word, that the defendant misappropriated the trade secret. Just because a person's information is valuable does not make it wrong for another to use it or disclose it. But use or disclosure is wrong, in the eyes of trade secret law, when the information is acquired through deception, skullduggery, or outright theft. Close cases abound in this area, not simply because of the creativity of competitors in rooting out information about their rivals' businesses and products but because the concept of misappropriation is itself ill-defined.
In many cases a defendant's use or disclosure is wrongful because of a preexisting obligation to the plaintiff not to disclose or appropriate the trade secret. Such an obligation can arise in either of two ways: explicitly, by contract; or implicitly, because of an implied duty. A classic example of an implied duty is the case of an employee. Even in the absence of an explicit contract, most employees are held to have a duty to protect their employers' interests in the employers' secret practices, information, and the like. Even where the duty arises by explicit contract, however, public policy limitations on the scope and duration of the agreement will often come into play, in some cases resulting in substantial judicial modification of the explicit obligations laid out in the contract.
Trade secret cases come up in three basic sets of circumstances: competitive intelligence, business transactions, and departing employees. The intelligence-gathering cases define rights between strangers, usually competitors, when the defendant engages in some conduct designed to learn of information in the possession of the plaintiff. Some amount of competitive intelligence gathering is permissible, but courts have said that if that activity exceeds some (relatively ill-defined) bounds of commercial morality it is misappropriation of trade secrets. Often those cases will involve violations of some other law. But that is not always true. In E.I. du Pont de Nemours & Co. v. Christopher, for example, the court held that the defendant misappropriated secrets by taking aerial photographs of the plaintiff's chemical engineering plant while it was under construction. (19) There was no law preventing the Christophers from flying where they were, or taking pictures, but in the court's view it was a "school boy's trick" that trade secret law should not permit. (20) Not surprisingly, the genesis of these cases is in tort (and, to a lesser extent, criminal) law, which traditionally governs relations between strangers.
The business-transaction and departing-employee cases, by contrast, involve parties who have been in a business relationship, or at least a negotiation towards a business relationship. As a result, the trade secret rules in these cases tend to derive from contract law. Sometimes this is express: the question the court considers is whether negotiating parties signed a nondisclosure agreement, or whether an employee signed an employment agreement restricting the use or disclosure of trade secrets. In other cases, courts are willing to imply restrictions on the use of confidential information created or disclosed in such a relationship even in the absence of a contract. In Smith v. Dravo Corp., for example, the court implied a confidentiality restriction when the plaintiff disclosed confidential information to the defendant, who was considering buying the plaintiff's company. (21) The departing-employee cases take the same form, though in the modern world it is rare for such employees not to have an employment contract. As with the competitive-intelligence cases, trade secret law takes a basic common law principle (there tort, here contract) and supplements it in certain cases in the interest of fairness.
Misappropriation of trade secrets, then, does not simply require use of a trade secret, but acquisition, use, or disclosure of a secret in a way that runs afoul of the prohibitions of trade secret law. Further, some conduct will be protected even if it discloses a trade secret. For example, a defendant who acquires a trade secret by developing it on her own or by reverse engineering it is free to do what she wants with the secret.
Proof of trade secret misappropriation gives rise to a panoply of remedies whose origin is as diverse as the original sources of trade secret law. Depending on the circumstances, trade secret owners can obtain criminal penalties (a remedy based in criminal law), an injunction (a remedy that sounds in property law), damages measured by the greater of the owner's loss or the defendant's gain (a remedy based in tort law), or a limited "head start" injunction (22) designed to put the parties back in the same situation they would have been in had the misappropriation not occurred (a remedy that sounds in the expectation-damages rule of contract law).
II. EFFORTS TO UNDERSTAND TRADE SECRET THEORY
Legal protection for trade secrets has been premised primarily on two theories that are only partly complementary. The first is utilitarian. Under this view, protecting against the theft of proprietary information encourages investment in such information. This idea is sometimes associated with the view that trade secrets are a form of property. The second theory emphasizes deterrence of wrongful acts and is therefore sometimes described as a tort theory. Here the aim of trade secret law is to punish and prevent illicit behavior, and even to uphold reasonable standards of commercial behavior. (23) Although under the tort theory trade secret protection is not explicitly about encouraging investments, it is plain that one consequence of deterring wrongful behavior would be to encourage investment in trade secrets. Hence, despite their conceptual differences, the tort and property/incentive approaches to trade secrets may well push in the same direction in many respects. These primary theories coexist with other explanations. In this Part, I discuss the strengths and weaknesses of each existing theory of trade secret protection.
A. Tort Law
A primary explanation for trade secret law throughout the twentieth century is what might be described as a "duty-based" theory, or what Melvin Jager calls "[t]he maintenance of commercial morality." (24) The Supreme Court adopted this view in E.I. du Pont de Nemours Powder Co. v. Masland, a famous early decision, albeit one that bore only a tangential relationship to trade secret law:
The word "property" as applied to trademarks and trade secrets is an unanalyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith. Whether the plaintiffs have any valuable secret or not the defendant knows the facts, whatever they are, through a special confidence that he accepted. The property may be denied, but the confidence cannot be. Therefore the starting point for the present matter is not property or due process of law, but that the defendant stood in confidential relations with the plaintiffs.... (25)
This tort-based view gained significant currency at the beginning of the twentieth century, in part because of Masland but also because of changing conceptions of property. (26) By 1939, the American Law Institute firmly classed trade secret misappropriation as a tort, including it in the Restatement of Torts. (27) The tort-based view is also frequently invoked today by scholars seeking to justify trade secret law, (28) and sometimes by those who believe the tort approach will help limit that law. (29) The ultimate expression of the tort view would replace trade secrets entirely with a general tort of wrongful misappropriation of information. (30)
The problem with the tort view is that it is ultimately empty. It presupposes a wrong without offering any substantive definition of what that wrong is. In Masland, it appears to be the breach of a confidential relationship that is the problem. Masland is not alone: many trade secret cases arise out of a "duty" explicitly stated in a contract, such as a technology license or an employment agreement. But if that is the wrong, trade secret law is nothing more than contract law. (31) The tort-based theory of breach of duty merges in those cases with a standard common law action for breach of contract, express or implied. Calling this breach a trade secret claim merely adds a stronger panoply of remedies for what is in essence a breach of contract claim. And if the gravamen of trade secret misappropriation is nothing more than contract, why would we want to make breach of that contract a crime?
The problem of lack of substantive guidelines becomes more acute with the "improper means" prong of trade secret law. It is unhelpful for courts to say no more than that people cannot act "improperly" in acquiring information. If by "improper means" the law intends nothing more than that acts already illegal (hacking, trespass, theft) are illegal here as well, then it has the same problem as the breach of confidence prong: trade secret law adds nothing to existing doctrine. (32) But most people think improper means encompasses more. In E.I. du Pont de Nemours & Co. v. Christopher, (33) for example, the aerial photography case discussed above, the court acknowledged that the defendants had broken no law. Nonetheless, the court found that their "school boy's trick" was improper. The court does not offer a particularly clear standard, however:
[W]e realize that industrial espionage of the sort here perpetrated has become a popular sport in some segments of our industrial community. However, our devotion to free wheeling industrial competition must not force us into accepting the law of the jungle as the standard of morality expected in our commercial relations. Our tolerance of the espionage game must cease when the protections required to prevent another's spying cost so much that the spirit of inventiveness is dampened. Commercial privacy must be protected from espionage which could not have...
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