Defining Trade Secrets in the United States: Past and Present Challenges – A Way Forward?

Abstract

When approaching an analysis of a particular area of law, one must initially locate and understand the definition of its core concept. Yet in trade secret law serious obstacles impede the process. Unlike other intellectual property (IP) regimes, such as copyright and patent law, the core concepts of which are subject to unitary definitions governed by international treaties or domestic statutes, the trade secret concept has received no parallel treatment and, until recently in the United States, remained mainly defined under common law. Subtle differences in the way trade secrets were judicially conceived often generated conflicts between courts, opening the door for the application of divergent rules on similar points. This confusing background prompted the individual U.S. jurisdictions to gradually orient towards implementing statutory provisions in defining trade secrets. Despite the fact that U.S. trade secret law has since seen several statutory interventions at state and federal level, the precise meaning and definitional parameters of the concept remain elusive. This paper probes the existing trade secret definitions applicable in the U.S. via analysis of the divergent sources of law that underscored their formulation from the past until the present and identifies the challenges pertinent to their application in practice. Its aim is to analyze and compare these legal sources: first, to determine whether the current definition for the concept of a trade secret is adequate, or whether perhaps the existence of the multi-tier system impedes a party’s ability to identify trade secrets in a cross-border context; and second, to investigate whether a unanimously accepted definition under a pre-emptive statute complementary to one under an elaborated internationally binding treaty might remedy this issue.

1 Introduction

When approaching an analysis of a particular area of law, one must initially locate and understand the definition of its core concept. Yet in trade secret law serious obstacles appear in this process. Unlike the other intellectual property (IP) regimes, such as copyright and patent law, the core concepts of which are subject to unitary definitions governed by international treaties or domestic statutes,¹ the trade secret concept has not received a parallel treatment and, until recently in the United States (U.S.), has mainly been defined under common law.²

The absence of a unitary statutory regime meant that the subject matter and definitional parameters of trade secrets were shaped under the influence of various common law doctrines which generated little certainty as to their scope.³ A handful of courts in trade secret proceedings appeared to view the lack of a precise definition as a problem, prompting less or almost no hesitation to rely on inconsistent doctrinal policies in determining what comprised a trade secret. Subtle differences in the way trade secrets were judicially conceived often generated conflicts between courts, opening the door for the application of divergent rules on similar points. That is not to say that the lack of a unanimously accepted definition led the courts to apply different rules when deciding remedial or other procedural law aspects, but that the very notion of secrecy saw varying application.⁴ Leading trade secret practitioner and commentator Charles T. Graves highlighted the importance of this issue, remarking that: “to recognize different definitions of secrecy is to acknowledge that the whole regime can serve inconsistent, even conflicting policy objectives … [and the] question of whose interests can be served, and whose will be less favored by choice”.⁵

This blurred backdrop is perhaps unsurprising given the comparatively scant treatment that trade secrets have received in commentaries.⁶ The fluid nature of trade secrets was often the reason for U.S. scholars and practitioners to devote little interest to their definition and simply brand them as an “anomaly” or “parasitic part” of IP law.⁷

As a result, the individual U.S. jurisdictions started to gradually orient towards implementing statutory provisions in defining trade secrets. The first initiative was undertaken by the National Conference of Commissioners of Uniform Law (“NCCUL”), which introduced the trade secret definition under the Uniform Trade Secrets Act (“UTSA”).⁸ In essence, the UTSA was not designed as a statute but rather as a document which proposed the first uniform law text for individual states to adopt in their legislation. The first federal legislative definition was enacted under the Economic Espionage Act (“EEA”)⁹ and was subsequently amended under the Defend Trade Secrets Act (“DTSA”).¹⁰

Despite the fact that U.S. trade secret law has seen several statutory initiatives, the precise meaning and definitional parameters of the trade secret concept remain elusive. It could perhaps even be argued that the statutory initiatives only exacerbated this problem given that the U.S. trade secret regime is currently featured by the parallel application of state and federal laws. The variations in the wording of the definitions and, more specifically, definitional parameters under the current definitional sources create significant challenges for trade secret owners when trying to delineate and protect the scope of their assets against third parties such as contractors, employees, business partners and the like. The multi-tier system also poses significant challenges for judges when trying to navigate a labyrinth of different laws which have parallel application.

This paper probes the existing trade secret definitions applicable in the U.S. via analysis of the divergent sources of law that underscored their formulation from the past until the present and identifies the challenges pertinent to their application in practice. Section 2 focuses on the trade secret definition itself. Its object is not to offer a theory for the definitions promulgated, but to locate the sources where the interested parties might find the references that serve as a basis for a provisional assessment of what qualifies as a trade secret at the state or federal level. At the same time, the analysis aims to outline the “drawbacks” in the wording of each definition that prompted their amendment. The analysis commences with the common law definition and the definition under the UTSA to then examine the definition enacted by the EEA, concluding with the analysis of its amendment under the DTSA.

Section 3 focuses more closely on the definitional parameters, such as secrecy, economic value and reasonable efforts to maintain secrecy, and outlines the different interpretations of the definitional parameters as a factor that might impede a party’s ability to identify trade secrets in a cross-border context. In terms of the methodology applied below, it follows the pattern applied in Sect. 2. It commences with an analysis of common law, before supplying an overview of the statutory instruments by way of comparison. This provides a basis for evaluating any differences between the sources of law and also lays down the foundations for drawing a conclusion as to whether they are likely to create challenges for the parties in proving the requirements and subsequently identifying their assets as trade secrets in a cross-border context.

This methodological approach was adopted because no aspect pertinent to trade secret law can be explained without a clear initial understanding of what a “trade secret” is. That has in turn resulted in the application of a mosaic-like methodology in analyzing the regime as a whole. In defining trade secrets, some of the theories, documents, and statutes that underlined their formulation are mentioned in general in Sect. 2, to which the paper returns, but in greater detail in Sect. 3 when explaining how they underscored the formulation of the definitional parameters. An example is the analysis of the UTSA. According to the methodology outlined above, the analysis of the UTSA trade secret definition is included in Sect. 2, whereas Sect. 3 analyzes the UTSA view on trade secret definitional parameters. Such methodology may seem “repetitive to the cursory reader [however] was deliberately used to provide a comprehensive and thorough analysis”.¹¹

In Sect. 4, the paper refers to the terminological confusion arising out of the not infrequent interchangeable use of “trade secrets” and “know-how”, which surfaces in the case law, commentary and even the UTSA, and further complicates the ability to delineate the scope of the former concept with precision. The findings of this analysis will be utilized in Sect. 5 as a mapping point of the potential differences between these legal sources and: first, to inform whether the current trade secret definition is adequate, or perhaps the existence of the multi-tier system might impede a party’s ability to identify trade secrets in a cross-border context; and second, to investigate whether an initiative for pre-emption under the DTSA coupled with a complementary trade secret definition under an internationally binding treaty might be an apt response to remedy this issue.

2 Locating the Trade Secret Definitional Sources Under U.S. Law

The principles governing U.S. trade secret law including its definition derive from both common law and statutes. The first definitional pillar having a common law prominence are the principles encapsulated under the Restatement (First) of Torts (“Restatement”) promulgated in 1939.¹² Parallel sources for defining trade secrets exist in state trade secret law regimes based on the Uniform Trade Secrets Act published in 1979, currently adopted in 51 states.¹³ The enactment of the Economic Espionage Act in 1996, and its recent amendment with the Defend Trade Secrets Act of 2016, established a new definitional pillar, placing the definition and its interpretation within the federal ambit.

One might wonder why the U.S. legislators opted to rely on parallel definitional sources instead of establishing a unitary, i.e. uniform, trade secret definition. The answer to this inquiry could perhaps be found within a broader analysis of the origin and development of U.S. trade secret law against the socio-economic background that affected the formulation of its core principles, including the trade secret definition.

2.1 The Concept of Trade Secret Under Common Law

The “trade secret” concept was introduced in U.S. legal terminology in the 1800s to refer to and accommodate the protection of the “new assets” that emerged in the process of the transition from agrarian to manufacturing production.¹⁴ The novelty of the concept was the reason why in the very first judgments the focus of the judges was not on providing a precise definition for a trade secret, but rather on attempting to “conceptualize” its meaning via a description of what the concept consisted of.¹⁵ What appear to be the first dicta in this context emerged from Peabody v. Norfolk in 1868.¹⁶ There, the Supreme Court of Massachusetts held that trade secrets might relate to a relatively novel and “safeguarded” process of manufacture that gives its owner some sort of property rights that courts are bound to protect against unauthorized use or disclosure by third parties.¹⁷

Ensuing case law offers what may be described as a mosaic of decisions on what constitutes a trade secret.¹⁸ The lack of a precise and uniformly accepted definition of the concept caused confusion among judges not just in terms of assessing the subject matter but subsequently when applying the rules pertinent to its protection. This confusing backdrop prompted the American Law Institute (“ALI”) to undertake an initiative to “restate” the body of trade secret law to bring greater consistency while making the task of defining the trade secret concept a top priority.

The result of the initiative came into effect in 1939 when the ALI published the Restatement (First) of Torts.¹⁹ The Restatement, however, did not introduce a solution to the problem with a trade secret definition. As foreshadowed above, the lack of clarity surrounding a judicial definition impeded the drafters’ task in stipulating the primary characteristic of trade secrets. The noticeable reticence existing among them in terms of drafting the definition surfaced in the acknowledgement, appearing in the preface to the Restatement, where they highlighted that providing: “an exact definition of trade secret is not possible”.²⁰

The drafters, therefore, offered two solutions to the issue. The first was a list of six factors, which if present might prove the existence of a trade secret. The second was the insertion of a non-formal definition via comment b to § 757 to assist judges in cases where they confront difficulties in reaching a conclusion upon the examination of the six factors. Yet these factors were not intended to operate as an exhaustive checklist.²¹ They allowed judges to adopt a case-by-case approach in determining whether a trade secret exists based on:²²

• (1) the extent to which the information is known outside of his business;

• (2) the extent to which it is known by employees and others involved in his business;

• (3) the extent of measures taken by him to guard the secrecy of the information;

• (4) the value of the information to him and to his competitors;

• (5) the amount of effort or money expended by him in developing the information;

• (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

As much as the enumeration of the above criteria provided a template for understanding the meaning of the term “trade secret”, it was not always conducive to certainty, given that trade secrets vary widely in their nature. For instance, in the vast bulk of cases, the courts did not require that all of the criteria were complied with. In Re Bass, for example, the Court held that: “[w]e agree with the Restatement and the majority of jurisdictions that the party claiming a trade secret should not be required to satisfy all six factors because they do not fit neatly into each other every time”.²³ To address this challenge, as noted above, the drafters inserted what could be termed a descriptive definition in the Restatement:²⁴

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. It differs from other secret information in a business … in that it is not simply information as to single or ephemeral events in the conduct of the business, as, for example, the amount of other terms of a secret bid for a contract or the salary of certain employees, or the security investments made or contemplated, or the date fixed for the announcement of a new policy or for bringing out a new model or the like. A trade secret is a process or device for continuous use in the operation of business. Generally, it relates to the production of goods, such as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.

This formulation in the Restatement recognized (and protected) as a trade secret: a) any type of business information;²⁵ b) that is secret;²⁶ c) is used for business purposes;²⁷ and d) provides a competitive advantage to its owner.²⁸ Shortly after its publication, the Restatement gained widespread acceptance and “became a primary authority by adoption in virtually every reported case”.²⁹ A study found that the trade secret definition was cited in some 500 cases,³⁰ including ones where the reliance upon the Restatement was used as the interpretative source of states’ statutory definitions.³¹

2.2 The Demise of the Common Law Approach

Despite its wide acceptance, the Restatement’s definitional view on trade secrets gradually receded because of its overall failure to deliver consistency of trade secret law.³² When it came to a trade secret definition, a hurdle to consistency emerged from the fact that the Restatement’s principles were non-binding, allowing judges freedom to accept or reject the operational definition and the list of factors, or to apply these factors differentially.³³ This uncertainty escalated to a point where judges were dealing with misappropriation of trade secrets, without attempting to either define the parameters of the trade secret in a specific case³⁴ or to even determine if it really exists. For example, in Lear Siegler Inc. v. Ark-Ell Springs Inc., the court encountered this difficulty and avoided defining the concept of a trade secret by simply stating “the term ‘trade secret’ is one of the most elusive and difficult concepts in the law to define”.³⁵

Defining trade secrets against these parameters also proved challenging for scholars. In the words of one commentator, the confusion is obvious as the definition of “[t]he term seems to imply the existence of some sort of property and suggests that trade secrets ought to be definable as such. In fact, this is however but rarely the case”.³⁶

The challenges for trade secret owners and courts intensified when in 1979 the ALI published the Restatement (Second) of Torts³⁷ and deleted all provisions relevant to trade secrets. The ALI’s rationale for excluding trade secrets from the scope of regulation was that trade secret principles “have become substantial specialties, in their own right … and largely divorced from their initial grounding in the principle of torts”,³⁸ and that the regulation of misappropriation under the tort law was “largely of historical interest”.³⁹ As a result of this drafters’ recommendation, trade secret law ultimately became the subject of independent projects rather than being governed by the Restatements on Torts.⁴⁰

The failure to address trade secrets explicitly under the Restatement (Second) left judges again with very limited guidance when dealing with the meaning of the concept.⁴¹ The confusing backdrop was a strong indicator that further intervention in the area was inevitable to try to fill the gap and set some uniform guidance in this context. As discussed below this intervention eventuated in 1979.

2.3 Defining Trade Secret Under the Uniform Trade Secrets Act (UTSA)

The initiative to overcome the uncertainty surrounding the application of the general principles of trade secret law, including its definition, was taken by the National Conference Commissioners on Uniform State Laws (“NCCUSL”).⁴² After more than a decade of substantive work on an initially proposed text in 1968, the Commissioners succeeded in consolidating the scattered principles of common law, along with the findings of the best-reasoned cases, via the Uniform Trade Secrets Act in 1979. The UTSA’s text was built upon the common law principles embodied in the Restatement and was structured to recommend a uniform law text for state legislatures to adopt.⁴³

The primary motivating factor for the UTSA’s publication was again “the perceived need to more precisely define the parameters of trade secrets”.⁴⁴ This spawned a broad conceptualization of “trade secret”, allowing almost any information to be regarded as a trade secret provided it met the mandatory requirements.⁴⁵ In the parlance of the UTSA:⁴⁶

“Trade secret” means 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.

From a semantic perspective, this definition closely resembled that of the Restatement,⁴⁷ which is not surprising knowing that its principles served as a forerunner for the UTSA text. It nonetheless “demonstrated a reasonable departure”⁴⁸ from the Restatement. For instance, the UTSA replaced the Restatement’s operational definition and list of factors with three prerequisites to guide the courts in determining the existence of a trade secret. As stipulated in § 1(4) these prerequisites targeted the presence of: (1) information; (2) that has an actual or potential independent economic value (deriving from being secret or not generally known); and (3) that is subject to efforts that are reasonable under the circumstances to maintain its secrecy.⁴⁹ Also, the list of examples of protectable information “that the Act borrowed from the Restatement”⁵⁰ was expanded by adding “program”, “method” and “technique”, and reduced by omitting “list of customers”.⁵¹

A further divergence was that the UTSA eliminated the requirement that the trade secret be “in continuous use” by its owner.⁵² This spoke of the Commissioners’ intention to protect information that has potential use or value for its owner, but where he or she had not yet had an opportunity or acquired the means to put it into use.⁵³ At first glance, it might appear that eliminating the “in continuous use” criterion extended the protectable subject matter. This is, nevertheless, not an entirely correct conjecture, as a balance in the scope of protectable subject matter under the definition was achieved via the implementation of a new and mandatory requirement for qualification of information as a trade secret – “reasonable efforts” to maintain its secrecy.⁵⁴

Although the UTSA definition was largely welcomed – after all, it offered the states a model to shape their trade secret definition – it did not result in greater consistency in its application. The main hindrance was again the non-binding character of the Act, which offered states an option to either modify the text by implementing their own variations or not to adopt the text at all.⁵⁵ Thus although the UTSA has been adopted by 51 states, some 16 different variations among state law definitions have emerged.⁵⁶

For instance, some variations appeared in terms of the specification of the definitional parameters.⁵⁷ Most states required that the information be not “generally known” or “readily ascertainable”, though Colorado’s UTSA, for instance, omits both criteria.⁵⁸ Some states, including California, Illinois, and Oregon, omitted the requirement for the information to be not “readily ascertainable” under their respective laws.⁵⁹ Differences remain in regard to the listed forms or types of information that can be considered a trade secret. As noted above, while the UTSA’s text has omitted the customer list from the types of information that could be regarded as a trade secret, this was nevertheless explicitly included under the UTSA’s texts in Connecticut, Ohio, Oregon, Pennsylvania, and Texas.⁶⁰ Alaska’s UTSA stands alone in not listing any type of information that can qualify as a trade secret, specifying generally that a trade secret means information that meets the mandatory definitional criteria.⁶¹

These variations spawned a source for a potential conflict in their practical application at an interstate level yet this proved not to be the only challenge. As discussed in the following section, further challenges arose in the applicability of the UTSA definitions given that almost none of them⁶² included in their listing the new forms in which trade secrets have become more frequently stored, i.e. electronic form. Eventually, this drawback was addressed in 2016 under amendments that ensued as a part of the new intervention in U.S. trade secret law, now at a federal level.

2.4 Defining Trade Secrets at a Federal Level

2.4.1 The Enactment of the EEA

The years following the passage of the UTSA witnessed significant changes for the U.S. businesses dealing with trade secrets. What once was the subject of state commerce gained an interstate or international dimension, and what once was kept as a secret stored on paper was translated into electronic form.⁶³ Previous definitions were not tailored to encompass the new forms in which trade secrets became frequently stored and thus an amendment was needed. The U.S. Congress filled the breach, first via a criminal statute in the form of the Economic Espionage Act in 1996 and then by amending its text with the Defend Trade Secrets Act in 2016.

The EEA’s amendment made it explicit that trade secrets are not restricted to formulas, patterns, or compilations (per the USTA), but also include “programs and codes, whether tangible or intangible … stored, compiled, or memorialized physically, electronically”.⁶⁴ More explicitly, the EEA trade secret definition was worded as follows:⁶⁵

[T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

This amendment made the EEA’s definition broader than its UTSA counterpart.⁶⁶ What further extended the definition was the use of the word “public” at the conclusion of paragraph (B) of the EEA’s original definition.⁶⁷ The initial wording of the definition was not without a drawback. The fact that the wording of § 1832 in the original version of the EEA extended only to a product (but not to a service) produced for or placed (not just intended but actually placed) in interstate or foreign commerce created an inability to prosecute a number of cases of theft resulting from a cyber intrusion.⁶⁸

The weakness of the wording of this provision surfaced in United States v. Aleynikov.⁶⁹ There a prosecution was instigated against the defendant Sergey Aleynikov, who was one of Goldman Sachs’ computer programmers working on developing and maintaining source code for the company’s high-frequency trading (“HFT”) system.⁷⁰ Given the value of the system, the company treated all of its components, including the ones developed by Aleynikov, as highly confidential.⁷¹ To safeguard its secrecy Goldman Sachs’ officials required all employees to sign a confidentiality agreement that barred them from disclosure while employed by the company and also from taking or using the information after their employment ceased.⁷² Breach of this agreement triggered an indictment against Aleynikov in 2009 when he resigned from Goldman Sachs to accept a position at the competing start-up venture Teza.⁷³ Aleynikov was offered a vice-presidential position which required him to develop an HFT system that would allow Teza to compete with Goldman Sachs.⁷⁴ Aleynikov accepted the offer and, as the court noted, on his last day copied a huge amount of data from Goldman Sachs’ source code.⁷⁵ The court found that Aleynikov uploaded this data on a German server and covered his actions by deleting the encryption key.⁷⁶ He then downloaded the same data to his home computer.⁷⁷ Goldman Sachs’ security team members became aware of Aleynikov’s activities and reported him to the officials who arrested him in Chicago after he flew back from Germany where he attended a meeting with Teza.⁷⁸ The officials also found that the flash drive that Aleynikov was carrying with him, contained some of Goldman Sachs’ source code lines. These were also found when searching Aleynikov’s own computer.⁷⁹

The indictment against Aleynikov was based on three counts: violation of the EEA – theft of a trade secret,⁸⁰ violation of the National Stolen Property Act (“NSPA”) – transportation of stolen goods, wares and merchandise in interstate commerce;⁸¹ and violation of the Computer Fraud Act (“CFA”) – unauthorized and exceeding authorized computer access.⁸² Aleynikov filed a motion to dismiss the charges, arguing that source code for the HFT system, i.e. Goldman Sachs’ trade secret, was not a product produced or placed in interstate commerce,⁸³ nor represented goods, wares and merchandises.⁸⁴ The court dismissed this motion, ruling that the high frequency platform allows trading interstate and could therefore be seen as being able to be “placed” interstate.⁸⁵ Aleynikov subsequently appealed the judgment. In adjudicating on the matter, the appellate court reversed the judgment,⁸⁶ determining that the “HFT system was not designed to enter or pass in commerce, [thus] Aleynikov’s theft of source code relating to that system was not an offense under the EEA”.⁸⁷

This outcome generated an immediate response from Congress, which enacted the Theft of Trade Secrets Clarification Act in 2012.⁸⁸ The Act modified and expanded § 1832(a) by replacing (striking) the previous wording “a product that is produced for or placed in” with “product or service that is used or intended for use in interstate or foreign commerce”.⁸⁹

2.4.2 The Enactment of the DTSA

These differences gained attention when, in 2016, Congress amended the EEA with the enactment of the DTSA. The DTSA was intended to “modernize” the civil law aspects of trade secret law by introducing a federal civil cause of action and extending its application extraterritorially.⁹⁰ Although the UTSA’s state-based laws already provided a civil cause of action against trade secret misappropriation, their “non-uniform” application spawned conflicting results when applied in practice at an interstate level. The growing concern regarding the disjointed and “non-uniform” application arising out of the differences between state laws as to what constitutes a trade secret, the requirements in proving misappropriation, and procedural aspects was not lost on legislators, academics and practitioners. For instance, in one of its reports⁹¹ the U.S. Senate acknowledged that the impact of differences in application between the UTSA’s versions with respect to the trade secret definition “can prove case-dispositive”, and as such:⁹²

[T]hey may affect which party has the burden of establishing that a trade secret is not readily ascertainable, whether the owner has any rights against a party that innocently acquires a trade secret, the scope of information protectable as a trade secret, and what measures are necessary to satisfy the requirement that the owner employ “reasonable measures” to maintain secrecy.

Academics were perhaps the most vocal critics of the then current trade secret regime.⁹³ The leading U.S. commentator James Pooley branded variations in the application of the trade secret law as “too numerous to mention”,⁹⁴ prompting him to label the Uniform Trade Secrets Act as a non-uniform rather than a uniform law.⁹⁵ He went so far as to surmise that the UTSA spawned greater confusion than before its enactment.⁹⁶ It has been suggested that the lack of uniformity in this regard, when translated into practice, has conspired to increase the risk of trade secret misappropriation, to make its litigation time-consuming⁹⁷ and resource-intensive,⁹⁸ and perhaps most notably to reduce the incentive for innovation.

Aside from non-uniform application, the state-focused regime suffered from an inability to provide relief when trade secrets were removed to another jurisdiction. The only set of provisions with extraterritorial applicability available under the EEA were of limited utility as they dealt chiefly with the criminal aspects of the misappropriation.⁹⁹ This ran counter to the interests of trade secret owners, whose primary goal was not to seek “punishment” of the misappropriator but to prevent the use or disclosure of, or to recover, the trade secret.¹⁰⁰

It was against this background that U.S. legislative bodies initiated a federalization of the civil aspects of trade secret law.¹⁰¹ The goal was, a commentator has remarked, to create “narrowly drawn federal legislation for trade secret misappropriation that provides clear rules and predictability, the ability for victims to move quickly to protect their trade secrets before dissemination”.¹⁰² By the same token, the newly introduced federal legislation was intended, though its wording lacks clarity, to have extraterritorial reach. Extending the Act’s applicability beyond the U.S. jurisdictional lines aimed to provide a mechanism to respond more effectively to the challenges trade secret owners were facing in a modern global society such as, for instance, the actions of rogue employees and cyber espionage falling outside the reach of state law. However, the challenges pertinent to the lack of uniformity of a trade secret definition were not resolved given that, as discussed below, the DTSA’s definition was again different from the definitions introduced under the UTSA and EEA.

To avoid conflict in the interpretation of the state and federal law definitions, the drafters attempted to resolve those aspects that might be a source of ambiguity. As to the problem of the EEA’s definition being broader than the UTSA, the solution was to replace the term “public” at the end of paragraph (B) with the phrase “another person who can obtain economic value from the disclosure or use of information”, which wording derived from the UTSA definition. In its current form, the DTSA definition stipulates:¹⁰³

[T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if – (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

Even after the amendments, the federal “trade secret” definition remains broader than its UTSA counterpart. But that is not necessarily the case when the former definition is compared to state-specific definitions. As noted above, some state-based laws, for instance, the California Uniform Trade Secrets Act’s (CUTSA) definition, are broader than the DTSA, in omitting the requirement that the trade secret “not be readily ascertainable”.¹⁰⁴

The challenges that the existence of parallel regimes might create in practice were recognized by both lawyers and academics,¹⁰⁵ who have advocated for amendment of the DTSA to enable its pre-emption over the state law. After all, the lack of pre-emption requires trade secret owners to comply with both state and federal laws, adding inconvenience and cost.¹⁰⁶ Lack of pre-emption could also function negatively on the choice of law: the opportunity for plaintiffs to file both federal and state trade secret claims increases, and indeed incentivizes, the prospect of forum shopping.¹⁰⁷ A non-pre-emptive statute is, in any event, hardly an avenue to foster a “uniform and predictable jurisprudence”.¹⁰⁸ It has been suggested that the non-pre-emptive character and absence of federal precedents will ultimately turn the courts towards interpreting the DTSA “through the lens of pre-existing UTSA precedents”¹⁰⁹ rather than in accordance with the statutory language construed in line with the purpose of the Act. Any practice where courts rely too heavily on state-enacted UTSA versions could thereby spawn “discrepancies at the federal level”.¹¹⁰

One might wonder why pre-emption was not supported by lawmakers in the first place. According to the U.S. trade secret scholar and practitioner James Pooley, Congress saw pre-emption as a “nonstarter” because its message would have been that Congress dictates “to the states what to do”.¹¹¹ That would have required the states to adhere to or adjust their laws to the new federal law provisions. By 2015, most U.S. states had already enacted trade secret statutes and well-developed jurisprudence based on their application which could potentially contain solutions conflicting with the one under the proposed statute. The same would have necessitated lengthy negotiations when drafting the DTSA text causing unnecessary delay in enacting the urgently needed Act. Since the pre-emption avenue was exhausted, the alternative that eventuated was that the DTSA added “another layer of protection”¹¹² over the existing regimes. Congressional leaders hoped that this might, if not completely unify the law, to some extent pave the way towards greater predictability of the law for businesses operating both nationally and internationally. Yet it remains unclear whether or how Congress’s expectations will be met when the courts apply the law in practice. Generally speaking, the non-pre-emptive character of the DTSA has made this intervention a “non-perfect” solution to a perfectly known problem.

2.5 Trade Secret Definition – Remaining Challenges

The preceding overview revealed some of the challenges that the U.S. judiciary, regulative and legislative bodies faced in the process of framing the definition for the concept of a trade secret. The Aleynikov case perhaps best illustrates how the abstract and highly factual nature of trade secrets impedes lawmakers’ ability to precisely draft provisions pertinent to their definition and how some nuances in which the provisions are interpreted can prevent the courts from applying the law and lead towards detrimental consequences for trade secret owners. While the U.S. regulative and legislative bodies were reactive to the need to adapt trade secret definitions to modern needs, it appears that to date this has not resolved the definitional issues entirely. The fact that the DTSA is not pre-emptive means that now there are two core “trade secret” definitions in the U.S., the DTSA and the UTSA, which can conflict given the varying application of the UTSA’s definitions and the unpredictability of the law that might apply in cases.

3 Trade Secret Definitional Parameters

The analysis in Sect. 2 elucidates a conclusion, which all definitional sources under the UTSA, EEA and DTSA articulated, that the trade secret subject matter, or more precisely the information, must fulfil certain criteria to be given such legal status. By setting the definitional criteria, the law aims to filter out or distinguish trade secrets from other subsets of information that fall outside this category. Such subsets include information of a confidential character of a governmental or private nature; information related to the general skill and knowledge of an employee; and information that has no confidential character by reason of being trivial or publicly known.

The preliminary inquiry into the matter illustrates that despite some variations in terminology, and the extent of their application, three criteria are common across the U.S. trade secret definitional sources in distinguishing information as trade secrets amenable to legal protection. The state and federal laws attach trade secret status to information that is secret, has some economic value because of its secrecy and is subject to reasonable efforts or precautious by its “owner” to preserve its secrecy.

The “known” nature of the parameters, however, does not make the process of their application in practice immune to difficulties. One of the difficulties stems from the fact that all trade secret definitional sources list the foregoing criteria as mandatory but without guidance on how they should be applied in practice. Practical application instead rests on judicial references and scholarly comments, which can prove challenging. For instance, judges not infrequently subsume the analysis of one requirement under another, making it difficult to distinguish how and to what extent the requirements have been evaluated and applied in each case.

The initial point for analysis is the secrecy requirement. After all, information that is not secret but a matter of general knowledge is unlikely in any case to have special economic value or to be a subject of reasonable efforts for protection by its owner.¹¹³

3.1 Secrecy

Trade secret definitional sources are united on the point that secrecy is a mandatory criterion for qualifying information as a trade secret. In spite of this commonly accepted stance, and as discussed in greater detail in the following sections, U.S. laws exhibit some differences in terms of how the secrecy requirement is applied in practice.

The inquiry as to whether the information is sufficiently secret to qualify as a trade secret under U.S. trade secret law requires analysis of two discrete criteria. The first is whether the information is “generally known”, and the second whether the information is “readily ascertainable”.¹¹⁴ The specific wording and recognition of each requirement received judicial imprimatur in Kewanee Oil Co. v. Bicron Corp.,¹¹⁵ where the U.S. Supreme Court noted that: “[t]he subject of a trade secret must be secret, and must not be of public knowledge, or a general knowledge in the trade or business”.¹¹⁶ This in turn translated to the “trade secret” definitions in the UTSA, EEA and DTSA.¹¹⁷ The ensuing subsections illustrate the way these legal sources assist U.S. judges in the process of the assertion of the above requirements on the merits of each case.

3.1.1 Inquiry into “Not Generally Known”

As foreshadowed above, the language of both the UTSA and the DTSA characterize as trade secrets any information 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”.¹¹⁸ Even though the requirement that information needs to “not be generally known” is an integral part of the statutory definition of these instruments, no specific parameters against which this criterion can be evaluated are supplied. Some guidance as to what is “not generally known” is, however, contained in the comments to the UTSA original text, where the Commissioners specified the scope and the breadth of the criteria as follows:¹¹⁹

The language “not being generally known” … by other persons does not require that information be generally known to the public for trade secret rights to be lost. If the principal persons who can obtain economic benefit from information are aware of it, there is no trade secret. A method of casting metal, for example, may be unknown to the general public but readily known within the foundry industry.

The wording of the above comment indicates that the secrecy requirement has a relative, not an absolute, dimension. This stems from the fact that its evaluation targets the knowledge of persons who might benefit from the information, that being knowledge confined within a specific industry, not the public in general. It is only by comparison of these two variables – the knowledge of a person who might benefit from its use and knowledge in a field of industry – that one can determine that the trade secret owners’ information is “not generally known”.¹²⁰

This fact-dependent inquiry resembles the process of “prior art” applicable in patent law.¹²¹ But when translated into the domain of trade secret law, the inquiry has a narrower scope, because the plaintiff does not need to prove that the trade secret is absolutely novel as is the case with a patent.¹²² There is nonetheless a requirement imposed on the plaintiff to demonstrate that there is “something at least modestly ‘special’ about the information – the law will not intervene to protect matter that is only trivially different from known art”.¹²³ The fact that the information has been disclosed to a certain group of people in confidence does not mean that it has become “generally known”, since limited disclosure may not per se destroy secrecy.¹²⁴

3.1.2 Inquiry into “Readily Ascertainable”

A further step in evaluating whether the information is, in fact, secret is to see if it is “readily ascertainable”. Again, in answering the question, some illustrative guidance can be found in the UTSA’s commentary, rather than in its text, which specifies that:¹²⁵

Information is “readily ascertainable” if it is available in trade journals, reference books, or published materials. Often, the nature of a product lends itself to being readily copied as soon as it is available on the market. On the other hand, if reverse engineering is lengthy and expensive, a person who discovers the trade secret through reverse engineering can have a trade secret in the information obtained from reverse engineering.

It appears that evaluating this criterion, as well as the phrase “not generally known”, rests on circumstantial evidence. Unlike the previous inquiry, which assessed whether the information is knowledge of an industry and among persons who might benefit from its use, the inquiry here is to determine “the ease with which a trade secret could have been independently discovered”.¹²⁶

Judicial references have couched the evaluation of “not readily ascertainable” by examining various factors. In some instances, their query targeted whether the duplication or acquisition of the information presupposes a substantial investment of time and resources.¹²⁷ On other occasions, the courts linked the willingness of others to pay for the information as a proxy for not being “readily ascertainable”.¹²⁸ Finally, the mere fact that the defendant used “improper means” to obtain the information could substantiate that it is “not readily ascertainable”.¹²⁹

Despite judicial guidance, commentators find the borderline between “not generally known” and “readily ascertainable” indistinct,¹³⁰ because courts often subsume the “readily ascertainable” query into that of “not generally known”. This judicial trend may have contributed to some U.S. states omitting the “readily ascertainable” criterion from their statutory definition, limiting the inquiry into whether the trade secret is secret to investigate if it is “not generally known”.¹³¹

At the time when the EEA was enacted in 1996, the secrecy criterion was given a broader scope than that prescribed under the UTSA which required that the information is “not generally known or readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use”.¹³² Conversely, under the EEA, the trade secret owner needed to prove that their trade secret is “not generally known” or “readily ascertainable” by the public,¹³³ meaning that the formulation of the criterion extended to an absolute and not a relative dimension. The scope of the criterion, however, became a subject of “modification” in 2016 when the DTSA was enacted. As foreshadowed above, the fact that the DTSA intended to bring conformity between the federal (EEA) and state law (UTSA) led inter alia to intervention in relation to the definition of trade secrets that particularly affected the wording of this criterion. That the DTSA’s amendments advanced the UTSA’s definitional view on the secrecy criterion – resulting in its specification at a relative level – means that under the former Act the information can qualify as secret if it is not “generally known” or “readily ascertainable” by a person who might benefit from its use.¹³⁴

3.2 Economic Value

The U.S. trade secret definitional sources require that the information derive economic value out of its secrecy in order to be recognized as a trade secret. This is hardly surprising because secret information in the commercial sphere, as distinct from personal and governmental information, matters in law as long as it has some economic value.¹³⁵

The economic value requirement is incorporated in the definitions under the UTSA, EEA and DTSA. They all profess that a trade secret presumes information, 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”.¹³⁶ There is nonetheless no definitional guidance specifying what criteria might give an actual or potential economic value to information, or the proof that the plaintiff needs to provide so that the value might be estimated. Again, in the absence of statutory guidance, a logical step is to turn to judicial and scholarly observation.

3.2.1 Inquiry into Actual or Potential Value of the Information

The language of both the UTSA and the DTSA specifies that the value of the secret information might be actual or potential.¹³⁷ This requirement was initially incorporated into the UTSA text not to serve as a definitional “accessory” but to assist in overcoming some of the issues arising from litigation based on the application of the similar definitional requirement prescribed under the Restatement (First) of Torts.¹³⁸ The fact that the Restatement defined “trade secret” as information that derives its economic value by being in continuous use omitted information with a single use and information that has not yet been commercialized.¹³⁹

The UTSA’s drafters sought to overcome this “drawback” by ignoring the foregoing formulation and allowing for information that has actual or potential value to qualify as a trade secret.¹⁴⁰ Its wording allowed for single-use information, as well as information yet to be commercialized,¹⁴¹ to meet the requirement of having economic value and thus to qualify as a trade secret.

At the same time, both the UTSA and the DTSA definitions are sufficiently elastic to include negative information – i.e. information indicating, for instance, that something does not work – as economically valuable.¹⁴² Yet some division of judicial opinions has surfaced in this regard.¹⁴³ While most courts protect some negative information as economically valuable under the theory that knowing what does not work could help a competitor to avoid mistakes,¹⁴⁴ others disagree.¹⁴⁵ The prevailing view, however, is that such information derives independent economic value “if the disclosure of what does not work leads a competitor to what does work or shortens the owner’s lead time advantage in the marketplace, such information will usually be protected”.¹⁴⁶

3.2.2 Proof of Economic Value

The USTA and the DTSA’s texts do not specify any precise quantum in terms of the economic value that information must possess or the type of proof that is needed for information to be deemed economically valuable. The lack of further guidance on these parameters mandates judicial resolution in the case of a dispute.¹⁴⁷ Over the years, the judicial decisions have given significance to various circumstantial factors to demonstrate economic value. One approach to proving and demonstrating value is linked to investment in research and development of new information.¹⁴⁸ That is not to say that the plaintiff must show an enormous investment in research tools as, on occasion, economic value can derive from the use of obvious means or an accidental discovery.¹⁴⁹ Conversely, an immense investment in research and development is not per se proof of the economic value of the obtained information to qualify it as a trade secret.¹⁵⁰ Some judicial decisions illustrate that the value of the information need not be purely economic; it does need, though, to substantiate some “real advantage”.¹⁵¹ Illustrative guidance in this context can be found in Religious Tech Center v Netcom On-Line Comm.¹⁵² In adjudicating upon the case, the court held that religious texts (which one would presume do not serve as a source that derives economic value) derived economic value because they significantly affected the Church’s donations being one of the sources that funded its operating expenses.¹⁵³ Finally, in some cases courts have affirmed that (mis)use by competitors suffices as proof of economic value of the information alleged to be a trade secret.¹⁵⁴

3.3 “Reasonable Efforts” to Maintain Secrecy

The final threshold requirement imposed by the law on a plaintiff who seeks legal recognition of information as a trade secret is to show that he or she made “reasonable efforts” to maintain the secret character of their information. This requirement appears to be not just legally but also morally necessary since the trade secret owner “cannot require other people to exercise secrecy which he does not observe himself”.¹⁵⁵

In the U.S. the answer to the query of what qualifies as “reasonable efforts” to maintain secrecy has been closely dependent on the principles that governed the U.S. trade secret regime at the time the grounds for a cause of action against the alleged act of misappropriation arose. While early cases reflected judicial tendencies to evaluate the criterion against the dominant common law doctrine at the time – the property theory or the theory of unfair competition – contemporary application of the criterion finds a statutory basis.¹⁵⁶ That common law doctrines and statutes rely on different legal grounds when providing protection against misappropriation explains why, as discussed below, diverse measures have to be taken by the plaintiff to demonstrate “reasonable efforts” in maintaining the secret character of the information.

3.3.1 “Reasonable Efforts” and Common Law

The earliest period in the application of the “reasonable efforts” criterion as part of trade secrecy date from the late nineteenth and early twentieth century (1860–1920). This was an era characterized by the dominance of the property theory. The core concept in protecting trade secrets under this theory resided in the exclusivity of the rights in possessing valuable information. This, in turn, signaled to others not to use the information without the owner’s permission.¹⁵⁷ The owner was then required to adduce evidence of the measures taken to physically secure their information from competitors in order to qualify for protection as a trade secret.¹⁵⁸ The generally adopted position was that the owner “who took no special precautions to preserve the secrecy in its information failed to exercise control or dominion over that information and therefore did not possess it”.¹⁵⁹

The property theory proved an inapt avenue to protect the interests of trade secret owners, leading towards gradual acceptance of the unfair competition theory. That, as a consequence, changed the way in which judges viewed the plaintiff’s efforts to maintain the secret character of the information. Under the emerging theory, judges no longer focused on possession of property but instead they grounded liability on an examination of “(t)he behaviour of the alleged abuser of trade secrets, and whether it fell below some standard, or was illegal or in breach of the obligation inherent in a confidential relationship”.¹⁶⁰ Against this backdrop, it was no longer necessary for the plaintiff to demonstrate physical measures for protecting the property, but rather to provide evidence that the information was secret and that the defendant misappropriated it in a manner contrary to commercial ethics. The doctrinal application of the unfair competition theory straddled the period from the 1920s to 1979, when the UTSA’s publication, as discussed below, again impacted the way in which this criterion was applied in practice.

3.3.2 “Reasonable Efforts” and the UTSA

The most important event for the legal recognition of “reasonable efforts” as a distinct requirement for qualifying information as a trade secret was its “incorporation” into the UTSA’s text. According to the UTSA, trade secret presumes information that “(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy”.¹⁶¹

The explicit formulation of this criterion, however, did not eliminate the problems surrounding its practical application, as the UTSA gave no further guidance in its official text on how it should be evaluated in practice. The Commissioners, however, included some illustrative guidance in the commentary section of the UTSA by stating that:¹⁶²

“Reasonable efforts” to maintain secrecy have been held to include advising employees of the existence of a trade secret, limiting access to a trade secret on “need to know basis”, and controlling plant access. On the other hand, public disclosure of information through display, trade journal publications, advertising, or other carelessness can preclude protection. The efforts required to maintain secrecy are those “reasonable under the circumstances”.

The requirement of efforts that are “reasonable under the circumstances” suggested that the standard for their evaluation is flexible.¹⁶³ Case authority indicates that the efforts taken need to be reasonable but not “heroic”.¹⁶⁴ The UTSA’s commentary also supports this premise, specifying that it is not required “that extreme and unduly expensive procedures be taken to protect trade secrets against flagrant industrial espionage”;¹⁶⁵ rather, it suffices to give employees notice that the information is a trade secret.

Courts have since qualified various types of security measures as “reasonable under the circumstances”. Non-disclosure agreements are usually the most common and compelling form for demonstrating efforts to maintain secrecy. Other measures include labelling or cataloguing information as confidential or proprietary;¹⁶⁶ securing and controlling the access of the location or the parties where the information is stored, in physical form;¹⁶⁷ or implementing electronic security measures to accessing Information Technology (IT) servers.¹⁶⁸

Given the flexible nature of this criterion, it is no surprise that courts do not always apply it consistently. By way of illustration, in Superchips Inc., v. Street & Performance Electronics Inc,¹⁶⁹ the court considered the combination of code encryption and integrated password protection of the system limited to an authorized group of people as sufficient evidence of “reasonable efforts”. But in Progressive Prod Inc., v. Swartz,¹⁷⁰ the court found that verbal instructions to employees not to disclose the ingredients of a specific formula to the public, and to cover up its ingredients when outsiders visited the plant, sufficed to prove “reasonable efforts” to maintain secrecy.

3.4 Definitional Parameters – Remaining Challenges

The above analysis focused on investigating the requirements that the law imposes if the information is to qualify as a trade secret. With some variations in the terminology, and the degree to which it needs to be applied, each of the catalogued definitions requires: i) that the information is secret, ii) has some economic value, and iii) “reasonable efforts” are implemented to ensure secrecy.

Challenges in this context remain, however, as the lack of a clear statute-like prescription leaves judges to make ad hoc determinations for their application on the merits of each case. It is therefore not surprising that the case law exhibits significant variations. For instance, courts assign different values to the factors that might be included in an assessment as to whether the information is secret or not. The judicial dicta are also not united on what type of efforts are needed to preserve the secret character of the information. That causes challenges, not only for judges faced with a need to make a decision but also for the trade secret owners. As to the latter, the divergent judicial references create confusion when attempting to make provisional assessments as to whether or not their assets can qualify as trade secrets. It is unclear, for instance, whether signed non-disclosure agreements are required or whether verbally given instructions will suffice to prove that reasonable efforts for maintaining secrecy have been made. The problem is exacerbated since those variations exist not just within jurisdictions but even more so in cross-border contexts. Before entering into an agreement to transfer their rights the parties lack certainty if the law they have prescribed will necessarily apply in that case or perhaps the rules regarding conflict of laws will prevail and subsequently attract an application of a different law. Should that be the case, the contracting parties might face a scenario where the asset that they have transferred will not qualify as a trade secret under the law.

4 Special Issue of Terminological Confusion Between Trade Secrets and “Know-How”

What brought further scope for confusion in conceptualizing the trade secret definition was that its notion became conflated with that of a concept being developed in parallel, similar in nature, but under the terminology of “know-how”. The confusion stemmed from the fact that know-how was frequently employed within commercial, technical and legal circles to designate a subject matter paralleling trade secrets but at the same time without an accepted legal meaning.¹⁷¹

Discussing the meaning of “know-how” is important given that at present the concept has been found to have a dual meaning: the one already mentioned, that aligns its scope with the concept of trade secret, and another used to designate the personal skills of an employee. Only the former category of know-how is protected under trade secret law. “Know-how” as “personal skills” designates knowledge that employees are free to use in the course of their subsequent employment. It is thus important to address how this concept originated, and how it developed a relationship with the concept of trade secrecy.

4.1 Trade Secret vs. Know-How

In U.S. legal terminology, the expression “know-how” first appeared in 1916.¹⁷² Thereafter the term became quite popular and was frequently employed in the literature and jurisprudence yet it was “seldom precisely defined”.¹⁷³ It appears that within U.S. law there was always a tendency to regard know-how as an “unruly concept”.¹⁷⁴ What has perhaps contributed towards this “unruliness” is that case law references that address know-how vary in context, thus generating little in the way of unanimity between scholars on this point.¹⁷⁵

Analyses of the definitional references that surface in the literature, jurisprudence and regulative instruments nonetheless exhibit some commonalities. First, they refer to know-how as a concept equal or similar to trade secrets, although consensus regarding the characteristics of the former concept remains elusive.¹⁷⁶ Second, they focus on defining know-how as a matter of corporate knowledge rather than manual skills.¹⁷⁷

4.2 Trade Secret Equals Know-How?

Various U.S. scholars conflate know-how with trade secrets. Rudolf Callmann, for example, simply suggests that “the definition which is recognized for trade secrets is equally applicable to know-how”.¹⁷⁸ Professor William D. Hawkland addressed this issue in a similar manner. In a report on the protection of know-how under U.S. law delivered before the Eighth Congress of Comparative Law, held at Pescara in 1970, he acknowledged the omnipresent tendency of treating know-how as a trade secret and so was unhesitant to use the terms “know-how” and “trade secret” interchangeably.¹⁷⁹

This view finds some judicial support. For instance, in Carboline v. Jarboe,¹⁸⁰ the court initially referred to imposition of an injunction on the plaintiff’s assets and enjoined defendants from using the plaintiff’s formulae and know-how. The ensuing text, though, made no reference to formulae and know-how. The term “trade secret” was instead used to refer to “the plaintiff’s damages for the misappropriation of trade secrets”.¹⁸¹ Similarly, in BF Goodrich v. Wohlgemuth,¹⁸² the judge initially used the terms “advanced know-how and techniques” but relied only on “trade secrets” thereafter.¹⁸³ One might get the impression that the interchangeable use of the words may be due to judicial imprecision; however, the case law furnishes a significant number of examples to perhaps oppose such a presumption.¹⁸⁴

4.3 Know-How as a Similar Concept to Trade Secret?

U.S. case law and scholarship also furnish examples where know-how is viewed as a concept similar to trade secrets,¹⁸⁵ but is perhaps broader in its scope. Stephen Ladas is among the scholars who support a broad definition of know-how.¹⁸⁶ He defines “know-how” by designating matters that the concept might encompass:¹⁸⁷

While this is a convenient term to denote a variety of different matters, it does not define protectable subject matter. Indeed, in ordinary use know-how may include tangible materials: recipes, formulae, designs, drawings, patterns, blueprints, technical records, specifications, lists of materials, technical product and process manuals, written instructions for operating the process and analytical means for checking and controlling the product and the process and the like; and intangible information consisting in practical procedures, details of workshop practice, technical training, personal visitation and inspection, etc. It also may include singly or in combination: information relating to a patented invention not included in a patent specification; inventions capable of being patented but not patented; inventions incapable of being patented in a particular country because of the subject matter being excluded in the patent law; inventions incapable of being patented by reason of lack of inventive height; industrial designs capable of being registered but not registered; industrial designs having functional characteristics; skill, experience and craftsmanship of technicians.

John F. Creed and Robert B. Bangs took a similar view stating: “[t]he term ‘know-how’ is not susceptible to exact definition. In the broadest sense, it may consist of inventions, processes, formulae, or designs which are either unpatented or unpatentable; it may be evidenced by some form of physical matter, such as blueprints, specifications, or drawings”.¹⁸⁸ They add that know-how “almost invariably includes trade secrets; and it may involve accumulated technical experience and skills which can best, or perhaps only, be communicated through the medium of personal services”.¹⁸⁹ There are parallel illustrations in the case law. In Nelson v. Commissioner,¹⁹⁰ for example, know-how was found to encompass a process that involved ingenious use of mechanical skills (acquired through experience) in a process which was of “particular use in controlling metal thicknesses on aircraft parts”.¹⁹¹

Finally, for whatever reason, the UTSA’s drafters did not attempt to elucidate the distinction between know-how and trade secrets with any precision. By way of comment, the UTSA reveals that the words “method” and “technique” in the UTSA’s trade secret definition were inserted to cover know-how. It seems that this acknowledged that know-how was distinct from trade secrets.¹⁹²

4.4 Trade Secrets vs. Know-How – Remaining Challenges

From a doctrinal perspective, the debate surrounding the terminological confusion between “know-how” and “trade secrets” seems to have largely surfaced in the course of the 1970s and 1980s. The trade secret legislation enacted thereafter that favored the use of the term “trade secret” perhaps suppressed the need to define “know-how” in a legal sense. Yet, in practice, contracting parties frequently adopt “know-how” terminology when transferring information that may generally be defined as a “trade secret”.¹⁹³ Legal commentators Louis Altman and Malla Pollack perhaps best described the above confusion when they made the following observation:¹⁹⁴

Some courts have complained that “know-how” is a very fuzzily defined area, used primarily as a short-hand device for stating the conclusion that a process is protectable or that it is so amorphous a concept that language is oftentimes inadequate to delineate the respective rights of the parties. The law has difficulty with the uncertainty that surrounds the concept of “know-how”. It has been said that “know-how”, in terms of content and legal status, is like a cloud in the sky that forms, dissolves, forms again, shapes and reshapes as the atmospheric conditions change.

It is, therefore, unsurprising that the use of the term when encountered in practice still challenges the minds of judges, lawyers and scholars.¹⁹⁵

5 The Way Forward?

The foregoing analysis demonstrates that the understanding of the trade secret concept in the U.S. has evolved considerably over the last two centuries. From being initially conceived and governed by common law, the trade secret definition can currently be found in the parallel application of the statutory provisions under the state-enacted UTSA versions and the federal provision under the DTSA. Yet the existence of statutory trade secret definitions does not mean that U.S. law is immune from challenges in their application. As mentioned earlier in the paper, the USTA’s non-binding and the DTSA’s non-pre-emptive character¹⁹⁶ have spawned a multi-tier trade secret definitional system, which may be counter-productive when it comes to definitional clarity and certainty.

Nevertheless, it seems that the U.S. Congress remains deaf to calls from scholars and practitioners to enact a pre-emptive legal instrument to articulate the definition and other principles of trade secret law within a unitary framework. Instead, the federal law has added another definitional layer to the already conflicting landscape. Whether or not judges will be able to navigate this easily and avoid the conflicts of application of multi-tier definitional layers is still too early to determine given the relatively recent enactment of the DTSA.

5.1 Is Pre-Emption the Ultimate Solution?

A question that remains is that even if Congress intervenes and makes the DTSA a pre-emptive statute, and if the law becomes uniform as a result of the amendment, will that necessarily resolve the issues pertaining to the trade secret definition? Uniformity of domestic law under one statute, although highly desirable, is no guarantee for the resolution of every problem towards which a statute is directed. For instance, uniform law will not necessarily be an answer to problems that arise and continuously surface in trade secret misappropriation cases that include an international component. These situations are particularly challenging for U.S. businesses that are often involved in international transfer agreements and/or supply chains, which as a result makes them more vulnerable and exposed to misappropriation of their trade secrets by foreign actors. Although in cases of misappropriation the U.S. trade secret owners can invoke and rely on the extraterritorial application of the DTSA,¹⁹⁷ the international element may in some cases impose an application of law other than the domestic one. If the rules on conflict of laws apply and lead to a situation where law other than the U.S. trade secret law is applicable, then whether the domestic law is uniform or not will be of limited value for those affected.

5.2 “Limited Value” of the Trade Secret Definition Under the TRIPS Agreement

Instances where the answer to the question of whether a particular asset should be recognized as a trade secret or not needs to be found outside the U.S. jurisdictional borders and might prove equally challenging for U.S. trade secret owners given that there is no consensus regarding what a trade secret is in the international context. The only international treaty touching on the subject is the 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), under the auspices of the World Trade Organization (“WTO”).¹⁹⁸ Pursuant to Art. 39, TRIPS obliged WTO members to protect “undisclosed information” (encompassing trade secrets) “for the purpose of ensuring effective protection against unfair competition”.¹⁹⁹ The Agreement in Art. 39(2) loosely defined “undisclosed information” and acknowledged the right of the owner to protect it against disclosure, acquisition or use by others “in a manner contrary to honest commercial practices”²⁰⁰ by stipulating that:²⁰¹

Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

(b) has commercial value because it is secret; and

(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

It should be noted that the U.S. was the major proponent for the “inclusion” of trade secrets under the TRIPS Agreement. Namely, the negotiation process preceding the inclusion of these provisions featured a controversy as to whether trade secrets should be recognized as IP rights or not and hence included within the realm of this Agreement.²⁰² Some developing countries, such as India, Peru, and Brazil, opposed such an idea on the basis that trade secrets are not IP rights.²⁰³ On the other hand, by the 1990s the U.S. was a well-developed country where trade secrets were already recognized as IP rights and played a major role in the economy. Consequently, the U.S. sought in TRIPS an avenue for establishing an international intellectual property regime that advanced their recognition and protection. Ultimately, the leading position of the U.S. in the negotiation process and the support by other countries²⁰⁴ worked in favor of including trade secrets under TRIPS. The U.S. submissions supplied during the negotiation process proposed a model trade secret definition that defined the concept as:²⁰⁵

Trade secret protection should be broadly available and cover items such as any formula, device, compilation of information, computer program, pattern, technique or process that is used in one’s business or that has actual or potential economic value from not being generally known.

Protection should be accorded both to technical information, such as technical drawings or operational specifications, and commercial information, such as price or customer lists or business methods, regardless of whether the trade secret is in a tangible form, such as a machine or written record, or is maintained without tangible means, for example, by memory.

Despite the U.S. proposal, the TRIPS’ drafters opted for a slightly different wording of the trade secret definition which was eventually included under the official text of Art. 39. When compared to the DTSA, the TRIPS definition appears less specific in detail. First, Art. 39(2)(a) of TRIPS simply defines the scope of subject matter protectable as a trade secret as information, while the DTSA’s definition provides further detail as to what this information might encompass or be related to.²⁰⁶ One might argue that the TRIPS trade secret definition was formulated to be elastic enough to encompass any form of secret information of commercial value, yet judicial references surfacing in cases such as Aleynikov perhaps might serve to oppose such presumptions.²⁰⁷

Further, the formulation of subparagraph Art. 39(2)(a) lacks clarity vis-à-vis the determination of the secrecy criterion. Some confusion may arise because Art. 39(2)(a) frames the parameters of the secrecy of the information against “not being known” among or “readily accessible” to persons within the circles that normally deal with the kind of information in question.²⁰⁸ It could be argued that the wording of this provision does not provide an answer as to whether the information that became “known” or “readily accessible” by lawful means or gross negligence to another person who can benefit from the disclosure will still qualify as a secret. Perhaps the definition should be amended to reflect better the relative level of secrecy but also afford protection of the information that becomes readily accessible to another by lawful means. This could be achieved by removing the phrase “or readily accessible to” after “generally known among” in line two and relocating the phrase in line three as follows:

Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among [or readily accessible to] persons within the circles that normally deal with the kind of information in question or readily accessible by another person who can obtain economic value from the disclosure or use of the information.

This would put the TRIPS definition on a par with the DTSA definition which appears to be more precise in this context and stipulates that the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.²⁰⁹ It appears that without further intervention in the TRIPS text the trade secret definition might be of limited value for those U.S. parties who seek recognition of their assets under the national regimes of foreign jurisdictions.

5.3 Further Intervention at International Level – A Necessity?

More than 25 years after TRIPS, a number of initiatives taken in each jurisdiction, the challenges for the judiciary, and the immense losses suffered from businesses resulting from the inconsistency of the laws within and beyond jurisdictional lines underscore the need for intervention at an international level. An increasingly global society provides little justification for trade secret protection to remain governed by state-based approaches.

The fact that other regimes within the IP law have been subject to harmonization raises the question of why the international IP bodies have left trade secret law as an “orphan child”.²¹⁰ The current challenges in the application of this law clearly indicate that the time has come for trade secret law to be taken under their auspices and be given adequate attention via the enactment of an internationally binding instrument.

5.4 Drafting an Internationally Binding Treaty: The DTSA – The Model to Follow?

Whether an initiative for harmonization will be pursued, and whether a consensus will be reached at an international level, remains uncertain. Implementing an international instrument is not an easy process, “not only because harmonization efforts are often seen as an affront to sovereignty but also because of differences of opinion about what the various provisions of the harmonized laws mean and how those laws should be applied and enforced”.²¹¹ Even if nations “adopt that law, there are always … other things that come into play, including other laws, other treaties, social norms, and so forth”.²¹²

It could, however, be argued that the importance of trade secrets for the U.S. economy²¹³ should be a signal for the U.S. regulative bodies to respond to the challenges arising from the lack of uniform law. The U.S. has to date demonstrated its ability to influence an international initiative during the TRIPS negotiation process and perhaps should consider embarking on and leading the initiative for harmonization of trade secret law in a global context.

If the road leads towards harmonization of trade secret law, then the U.S law, which under the DTSA propounds a comprehensive scheme governing both civil and criminal law aspects, could be used as a model for drafting an international treaty. The key provisions incorporated under the DTSA, including the “trade secret” definition, have been implemented and amended in time to address the current challenges in an effective manner.

The fact that trade secret laws of other states was modelled upon the DTSA, such as the recent EU Trade Secrets Directive of 2016/943,²¹⁴ and some provisions of the Australian Espionage Act of 2018²¹⁵ are also reminiscent of the provisions contained in the DTSA²¹⁶ speak in favor of such an outcome.

6 Conclusion

The foregoing analysis of the developments in the U.S. leads to a conclusion that the understanding of the concept of a trade secret and the way various states postulated the basic definitional principles of its scope varied, often influenced by the epoch in which the definition was formulated. Hence, having a uniform and preferably black-letter definition was of significant importance for parties involved in dealings with trade secrets, as a way of increasing clarity and predictability when delineating the scope of protectable subject matter. After several attempts to draft a precise definition and a few amendments, U.S. law currently has statutory trade secret definitions that are applicable at state and federal level in criminal and civil matters. This, however, did not solve the issues pertaining to the trade secret definition. Challenges arise given that interested parties when defining their trade secrets need to comply with 51 variations of the UTSA’s definition as well as the DTSA’s definition. The gravity of the situation exacerbates once trade secrets leave the U.S. borders.

This paper argues for a standardized statutory trade secret regime, in a domestic and global context. It can be argued that a pre-emptive statutory regime under the DTSA will be able to resolve most of the challenges that currently arise in terms of defining trade secrets in the U.S. However, in an increasingly global society where the use of trade secrets is rarely confined to jurisdictional borders, its application needs to be supported, i.e. coupled with an internationally binding treaty whose provisions should be complementary to, if not the same as, the DTSA. Only a combined domestic and international initiative could potentially achieve an outcome of clarity and predictability regarding the U.S. trade secret definition and trade secret law in general.