Can You Keep A Secret?
Leonardo DiCaprio's portrayal of Howard Hughes in "The Aviator" might never have made it to the screen if the true life protagonist had not had a father who understood a truism about human nature--the best way to keep something confidential is to tell no one about it.
Leonardo DiCaprio’s portrayal of Howard Hughes in “The Aviator” might never have made it to the screen if the true life protagonist had not had a father who understood a truism about human nature–the best way to keep something confidential is to tell no one about it.
Popular legend has it that Howard Hughes’s father made a modest fortune that descended to Howard, which Howard built upon to become “The First Billionaire.” The elder Mr. Hughes created an oil drilling bit that leapfrogged all existing technology used and useful in such work in the pioneering days of the early 20th century. He would drive over the oilfields of Texas and Oklahoma in his old Model T, his famous bit wrapped in a tow sack. When he reached on oil derrick whose owners wanted to drill for oil expeditiously and economically, Mr. Hughes would take his sack out of his car, go to the drilling platform and shoo bystanders away from the site. In solitude, he would attach his bit to the drill shaft, insert it into the hole so it could not be seen, remove the sack and let the drilling commence. When the drilling was finished, and it came time to remove the bit, the process was the same: all bystanders were expelled, Mr. Hughes in isolation removed the bit, wrapped it in his sack, threw in it in the back of the old Ford and went to the next derrick.
The bit wasn’t complicated, as it turned out, and anyone who saw it or used it and was familiar with drilling holes in the ground could have told his local blacksmith how to copy it and use it in competition with Mr. Hughes or sell it to other drillers. Had he wished to do so, Mr. Hughes undoubtedly could have obtained a patent on his bit, but if he had done that, he would have had to disclose to the world all of the features of his revolutionary tool, complete with drawings and instructions so it could be precisely duplicated by anyone “skilled in the art,” and with that particular art, our hypothetical village blacksmith could replicate Mr. Hughes’s drilling bit perfectly and go into competition. Mr. Hughes would have had a finely embossed piece of paper from the United States Patent and Trademark Office purporting theoretically to give him a monopoly on the ability to make and use the bit. But, as a matter of practical reality, having an eye to the cold, impersonal facts of human cupidity, economics and litigation, he simply could not have effectively policed his patent and sued, restrained and collected damages from all the infringers. There would just be too many operators, both of the “mom and pop” variety and probably larger well-known companies, and Mr. Hughes wouldn’t have had time to pursue his oil drilling operation or to establish Hughes Tool Company. (Most businesses make money from conducting business; few do so from litigation.) Caught between a rock and a hard place–keeping it completely out of sight, or publishing the details to obtain a patent of dubious economic viability–Mr. Hughes opted for the more secure, and simpler, route of declining to let anybody see or use it, or know just what it was.
The Evolution of Trade Secrets
While the right to obtain patents is prominently featured in the United States Constitution, Mr. Hughes was able to avoid that process and thereby set his son up for the future. Mr. Hughes had, in this particular instance, a far more valuable asset–the awareness that has application to many situations–if you don’t tell anybody about it, they won’t know it, and can’t use it for themselves or against you.
Other tools in the arsenal of intellectual property protection go the opposite way from secrecy. As we have just seen, patents must be fully and completely described and disclosed to the public. Similarly, copyrights (affording exclusive rights to the expression of ideas), and trademarks and service marks (affording exclusive rights to use identifying words and emblems) must all be expressed in full and complete detail on the public record to give the world notice of what precisely is claimed to be protected under federal statutes.
The doctrine and practice of trade secrets, however, has followed a different evolutionary path. It originated with the courts at common law, and now, by statutes in most states, “trade secrets” are protected and protectable from wrongful exploitation and use by preserving their secrecy.
There are many instances in the world of manufacturing, business and the like where it is more efficient and effective to rely upon secrecy to protect a product or a process than to seek patent or other protection, which may in fact not be available. Patents, for example, must embody “novelty,” among other requirements, but a “trade secret” is not so conditioned. As pointed out above, the two concepts operate as polar opposites–the trade secret is not disclosed, whereas the patent is disclosed in exquisite detail. The secrecy concept has illustrations in the private world as well: who has not had the experience of asking a cook for his recipe for a particularly delicious dish only to be met by the somewhat inhospitable response that “it’s a family secret,” or something similar? As a consequence, if one wishes to enjoy that dish again, she must receive an invitation to the reticent cook’s home, and hope that the dish will be on the menu.
That precise situation, in the commercial world, incidentally, is the factual premise for one of the leading legal precedents in the trade secrets field. A bakery obtained a court order precluding its former employee from going to work for a competitive bakery because the departing baker knew his former employer’s trade secrets for making a particular product, and there was no way that he could work for the new employer without unavoidably using and disclosing those trade secrets. That particular example (exemplifying the “inevitable” or “unavoidable disclosure” doctrine) indicates how the law of trade secrets can be used to limit competition by a former employee.
While it is basic folklore law that a worker cannot be deprived of the right to use whatever knowledge she has gained on her job, that principle must be qualified by the caution that she cannot use information she learned on the job that constitutes a trade secret, and she is obligated, whether by explicit agreement or by legal principles, to preserve that secret. “Did she learn it on the job?” is only a preliminary inquiry. “Is what she learned a trade secret?” is the crucial issue.
Another advantage, frequently, of a trade secret over a patent is that a patent has a finite time limit whereas a trade secret is entitled (at least in theory; in practice, the courts sometimes do something different) to trade secret protection as long as it remains a trade secret, which can be forever.
Perhaps the paradigmatic illustration of a “trade secret” (and related intellectual property doctrines) in action is found in the formula for the carbonated beverage developed in the Atlanta, Georgia area more than 100 years ago and which is now world famous. The lines between fact and myth here are indistinct, but it is local legend that only three persons at any given time know the formula, whose printed embodiment is locked in the vault of a leading Atlanta bank, and no one else knows how to make it or is allowed to see the recipe. In fact, of course, that formula has been modified a number of times and a competent chemist familiar with analyzing liquids could in all probability determine the constituents of that particular syrup, especially in view of the fact that many of its components are imported from abroad, and records are publicly available identifying and quantifying such imported components. Such “reverse engineering” is a legitimate method for learning a trade secret belonging to another and is not an unlawful “misappropriation” of the trade secret. Some cynical observers believe that such replication has in fact been achieved and that the precise product may actually be available from another source (or sources) under another name (or names). Be all that as it may, any competitor gaining such knowledge by “reverse engineering” would be inhibited from attempting to exploit the fact (if it should be a fact) that it knows the secret formula by the laws of trademark protection, a related intellectual property subject beyond the scope of this article, but which, for present purposes, may be summarized here as precluding the use by any other person of the trademarks–principally names and logos–owned by the manufacturer of the authentic product. The Bard was wrong: a rose by any other name would not smell as sweet, and the claim that it’s just as good as “the real thing” doesn’t bring customers flocking to the door.
As previously indicated, legal protection of trade secrets is not commanded by the Constitution and does not implicate a federal right.1 It is a product of the common law of the states, developed by judges, although lately incorporated into the statutory law of most states.2 Different states have different versions and different interpretations of these trade secret laws. By contrast, patents, copyrights and trademarks are creatures of federal law and generally receive more or less uniform interpretation throughout the several states. However, in broad terms, the law of each state protects the owner of a trade secret from the loss of that trade secret through “misappropriation” by third parties. Injunctive relief, damages and attorney fees are available from courts to restrain trade secret theft. Additionally, one who misappropriates a trade secret can be prosecuted criminally and, if convicted, may be sentenced to prison and to a potentially heavy fine. In practice, prosecutors generally figure they have more significant criminal activity to punish and that the aggrieved trade secret owner can obtain adequate relief in the civil courts. But the possibility is always there.
The “value” exalted here (we live in a value-fixated society) is the familiar commandment expressed in most cultures and hardly limited to those in the western tradition–“thou shalt not steal.” Although broadly defined, the term “misappropriation” is simply a more polite substitute for “steal.”
The Law of Trade Secrets
A typical articulation of the law of trade secrets is the Georgia Trade Secrets Act (GTSA) (O.C.G.A. Â§Â§ 10-1-760 through 10-1-767), which is modeled closely, but not precisely, on the Illinois Trade Secret Law, which in turn is an adaptation of the Model Uniform Trade Secrets law, which has been widely adopted in more or less identical form by most of the states of the United States. Once again, breadth and depth are the hallmarks of the antisocial activities described, and condemned later, in statutes such as the GTSA, portions of which are set forth in another section of this article. Both acts of piracy by third parties, and disloyalty and deception by one having originally acquired knowledge by legitimate means, are proscribed. However, lawful strivings without chicanery or misbehavior are permitted, such as “reverse engineering” and “independent development.” (Note that patent protection would not permit duplication efforts by those means.)
Other operative sections of the GTSA provide for injunctive relief to prevent actual or threatened misappropriation, and allow both actual and, in some circumstances, punitive, damages to the owner of the misappropriated trade secret, as well as attorney fees, in appropriate circumstances. Additionally, a court is required to take appropriate steps to preserve the secrecy of alleged trade secrets during litigation. Finally, while trade secrets can last forever, actions for misappropriation must be brought within five years after the misappropriation is discovered, or with the exercise of reasonable diligence should have been discovered. Thus, failure to take timely action can result in the loss of trade secret protection, and of the trade secret (O.C.G.A. Â§Â§ 10-1-762 through 10-1-767).
The statutes of most jurisdictions typically go far beyond common law in defining a “trade secret,” as the legislation takes an expansive view of the types of data and information that may be economically valuable to its owner and should be protected from misappropriation by wrongful means–an illustration, perhaps, of the principle that lawmaking is better done by legislators than by judges. For example, at common law, the concept of “trade secret” in most states did not extend much beyond formulas, patterns, technical data and the like. Financial data, financial plans, product plans and lists of actual or potential customers or suppliers represent an expansion of the common law doctrine, a recognition that as a matter of practical business reality, such information may be the most valuable data in the possession of the trade secret holder. However, in Georgia at least, the “list” of customers or suppliers must, in fact, be a printed (or computerized) “list” to qualify as a “trade secret,” and a defecting employee is not guilty of a trade secret violation if, in the absence of such a “list,” she discloses to her new employer the names imprinted in her memory of the customers or suppliers. Please note, however, that a well-drawn employment agreement will contain a recital that the employee may become privy to “confidential information,” such as customer and supplier data, which the employee agrees not to disclose for a reasonable period of time. That written agreement should, for the duration of its term, preclude her from disclosing such confidential information that is not a “trade secret.” Note, too, as stated above, a trade secret can theoretically last forever, so long as it is not disclosed or revealed by legitimate means; the protection against disclosure of “confidential information” that for some reason (such as not being in written “list” form) does not rise to the dignity of a trade secret can be restricted only when the restriction is “reasonable” within the purview of laws governing agreements in restraint of trade, including, importantly, for a time that is “reasonable” under the law of restrictive employment covenants, frequently no more than two years.
A typical employment agreement will probably recite that the new employee acknowledges that she is bound by the GTSA. Regardless of whether or not such a provision is included or, indeed, whether or not there is any written agreement, the employee is subject to that law just as is any other person. As a subset of that doctrine, Georgia law makes it an implied term of any employment relationship that the employee may not disclose trade secrets, even if there is no written agreement to that effect.
The Law in Operation
A “trade secret” must indeed be a “secret,” not commonly known by or available to the public. Let us return to our example of the defecting baker who knew his former employer’s trade secrets, and therefore could not go to work for a competitor because he was under an obligation not to disclose those trade secrets (which he would unavoidably do in his new position with the competitor). The baker probably could not be prevented from telling his new employer that egg whites should be beaten in a copper vessel in order to speed up and improve their transformation into meringue, because it is commonly known that copper ions stimulate and accelerate the congealing of egg whites into meringue. However, that publicly available datum when coupled with everything else the cook knew about his former employer’s processes–including what ingredients to use; from what vendors; in what proportions; in what sequence to mix them; whether or not to allow the mixture, or some portion of it, to cool, or be frozen, or sit, or rise before baking; how many times the concoction was to be baked or steamed; at what temperatures, etc.–would create a trade secret, even though every separate component of the process might be well known to the public, because the combination (“compilation” or “formula,” to use the statutory terms) was not generally known or available to the public. A “trade secret” does not have to be “unique,” only not “generally known,” and subject to reasonable efforts to preserve the secrecy. The fact that another person actually has developed the same “trade secret” does not qualify as being “publicly available” so long as the other trade secret owner takes reasonable steps to preserve its secrecy. Both are entitled to protection of their trade secrets.
Accordingly, the bakery employee remains under an obligation to treat the information he learned from his old employer confidentially and to preserve it from disclosure to others.
One practical device for avoiding the danger of “involuntary disclosure,” while still allowing employees to change jobs, is an agreement between the old employer and the new employer that the employee will work in a different area of the new employer’s company where she will not be exposed to the risk of utilizing her trade secret knowledge. She will, of course, acknowledge that she is bound by the laws of trade secrecy. (As seen above, she is obligated by law to preserve them, but she may not be aware of that obligation, so it should be explicitly called to her attention at her exit interview and reinforced by having her sign an appropriate document.) Such agreements obviously are fraught with practical difficulties obvious to all, but one is reminded that even among thieves there is honor, and the technique probably works very well in practice. An additional practical consideration, applicable not only to the transitory employee situation but to the subject of trade secrets generally, is that frequently a trade secret may have a limited useful life and will be discarded or replaced by better and more useful trade secrets. For example, unless the trade secret owner is a Howard Hughes with a paranoid obsession for secrecy, there probably is little economic value attached to, for example, a company’s debt-to-equity ratio of 10 years ago.
Note that a key component of a “trade secret” is the requirement that its owner must use efforts “reasonable under the circumstances to maintain its secrecy.” Typical devices for that purpose include fences, gates, locks, locked doors, locked cabinets, frosted glass and curtains, enclosed machinery, restriction of access to information for employees on a “need to know” basis, complicated computer passwords, restrictions on removing documents, computer data and the like from the premises, confidentiality agreements signed by employees, training sessions for employees on trade secrets issues, confidentiality agreements signed by third parties as a condition of obtaining a visitor’s pass to visit a facility, simply refusing to allow outsiders access to certain portions of a plant or business and prohibitions on photographs or bringing recording equipment or photo-capable cell phones and the like onto the premises. Where technology licensing is part of the company’s business, the licensor/owner will require the licensee and its employees to execute appropriate documents undertaking to maintain the secrecy of the licensor’s trade secrets.
Once a product is sold, the purchaser is free to analyze, test and generally examine the product to figure out, if it can, how it was made, and what techniques went into it, etc. As indicated above, that procedure is accorded the term of “reverse engineering,” and is not an “improper means.”
The term “known to the public” can cause confusion. Although it appears relatively straightforward, it is certainly conceptually possible that a trade secret, just like Poe’s Purloined Letter, can exist in public view. Suppose engineers designing a factory to manufacture a particular product have figured out the optimum placement, size, configuration and components of windows to make sure light and ventilation in the plant are ideal, to make the manufacturing process more profitable and efficient, and such windows are installed in the building according to the design and they are unavoidably exposed to public view. If the factory owner doesn’t identify to the world those particular windows as contributing to the economic success of its manufacturing processes, and has impressed upon its architects, engineers, contractors and employees the significance of the status of such trade secrets, then the information should be protectable as a trade secret, and relief should be available to restrain any disclosure or use. Even a skilled and experienced engineer, without being tipped off, might walk through a plant and not realize that she is seeing trade secrets. It all appears normal and typical, and as long as those knowing the true nature keep their mouths shut and don’t write articles about it, then the secret is safe and protectable. Again, if you have a secret, keep it to yourself. Our hypothetical visiting engineer will probably have executed a gate pass requiring her not to disclose anything she observed during the visit; if she violates that agreement, perhaps asking a colleague if there is any significance to the fact that the visited factory assembly line utilizes two items “A” whereas her own factory uses only one such item, she and those acting with her can be dealt with under the law, and the trade secret should not be lost.
Articles submitted to trade journals, advertising media and the like, boasting of a company’s new product and new technique, etc., must be carefully reviewed by someone sensitive to the concern for trade secrets lest the publication divulge the details and commit the “secret” to the public domain. A similar concern arising out of patent law impacts the publication of technical articles about products or procedures prior to filing a patent application.
Trade Secrets — A Valuable Legal Right
Old spy movies depicting industrial espionage, where the cat burglar sneaks into the chief engineer’s office with his Minox camera and photographs secret drawings for the new weapon, illustrate only the tip of the iceberg of the trade secret issue. Such conduct is clearly a misappropriation of a trade secret and can be specifically restrained and subjected to damages claims or even criminal prosecution in that national security hypothetical context. Far more likely to occur is the hiring away of a key employee, the hacking of a computer (or downloading of computer information by a disloyal defecting employee), the inadvertent publication of an article, carelessness or simply loose talk. The old World War II caution “loose lips sink ships” is appropriate in the environment of trade secrets.
Trade secrets contribute enormously to the economic health of any business entity or any country and its legal system. Trade secret statutes, which in most jurisdictions came into effect in the decade of the 1980s and early 1990s in their current form, are being fleshed out in particulars by the courts. They are broad and inclusive (as well as exclusive) and expansively designed to protect and encourage the development and the advancement of science, technology, business, trade and commerce. The best technique for achieving economic benefit from trade secrets is that practiced by the senior Mr. Hughes–just keep it secret.
Note, however, that in appropriate circumstances, a federal court can enforce a state’s trade secret laws. ↩
To avoid latent confusion, it may be noted that similar principles are found in civil law jurisdictions as well, so the concept is not limited to countries whose jurisprudence derives from the traditions of the English legal system. For that matter, most industrial nations have protection for other forms of intellectual property similar to that in the United States, including patents, copyrights and trademarks. This article is concerned principally with the laws of the United States. ↩