Securing, Preserving, and Enforcing Intellectual Property In Trade Secrets in the Plastics Industry

Stephen D. Milbrath, Esq. •  smilbrath@addmg.com

Robert H. Thornburg • rthornburg@addmg.com

Allen, Dyer, Doppelt, Milbrath & Gilchrist, P.A.

PROTECTION OF TRADE SECRETS IN THE PLASTICS INDUSTRY

A.   What Constitutes a Common Law Trade Secret?

“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.” Restatement (Second) of Torts, §757.

1. Types of Common Law Trade Secrets: “It may be a formula for a chemical compound, a process for manufacturing, treating or preserving materials, a pattern for a machine or other device or a list of customers.” Restatement (Second) of Torts, §757

2. The 1979 Uniform Trade Secrets Act: Sought to create a uniform trade secret act to replace common law.

B.   What defines a “Trade Secret?”

Trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process that:

1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

C.   The Key Elements of An Enforceable Trade Secret

In litigation involving trade secrets, the threshold question is this: does the secret meet the necessary criteria for legal protection. It is not enough to say that you have a trade secret; the information in question must meet established legal criteria for protection. A trade secret is information that derives economic value from not being generally known to and not being readily ascertainable by other persons. As such, a trade secret has certain essential attributes without which there is no cause of action for its misappropriation. These attributes have been defined this way:

1. First, the claimed secret must consist of qualifying information; that is, one must be able, at least in general terms, to articulate what it is in such a way that it may be distinguished from general knowledge and skill. In other words, can you take this secret and compare it against the public domain and search against the secret to determine if it is in fact known? This has been defined as the test of concreteness.

2. Second, the subject matter of the secret must be secret in the sense that it is not well known or easy to compile. It need not be secret from all others; but it must be not generally known.

3. Third, the owner must have made reasonable efforts to preserve the secrecy of the information. The information need not be protected by perfect means, but the means must be reasonable.

4. Fourth, the secret must have value as reflected in some competitive advantage that the plaintiff can establish. See Restatement of the Law (3rd) of Unfair Competition ¶39 and comments and reporter notes.

D.   Meeting the Test of Concreteness

The secret must be able to be described concretely enough so that it can be distinguished from what is already in the public domain, for “that which is in the public domain cannot be removed therefrom by action of the States.” Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481 (1974). This is because once an item is in the public domain, it is fair game for exploitation by anybody and ceases to be eligible for protection as an alleged “secret”, in which case, “only a patent can eliminate the inherent risk of competition and then but for a limited time.” Bonito Boats, Inc. v. Thunder Craft Boats, 515 So. 2d 220, 222 (Fla. 1987), affirmed with opinion, 489 U.S. 141, 109 S. Ct. 971 (1989).

E.   Proving Secrecy

The trade secret must indeed be secret in the sense that it is not known generally. Thus, an item a manufacturer once sold or showed publicly may lose its protection as a trade secret. See, e.g., Bonito Boats, Inc. v. Thunder Craft Boats, 489 U.S. 141, 109 S. Ct. 971 (1989). Trade secrets “are of value only before the products embodying them are commercially available.” Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1363 (Fed. Cir. 1999). Thus information disclosed in publications or just in the general knowledge of a trade or profession is also no longer eligible for protection. See, e.g., Restatement of Unfair Competition ¶39, Comment F; Milgrim on Trade Secrets §1.07[1]. Similarly, matters of common knowledge, professional judgment, skill, or expertise cannot be protected as alleged trade secrets. See Restatement of Unfair Competition §42, Comment D, AMP, Inc. v. Fleischhacker, 823 F.2d 1199, 1205 (7th Cir. 1987). For this reason, an employer cannot take away an employee’s or a competitor’s right to exploit that employee’s own knowledge, judgment or expertise by labeling the use of such expertise as the misappropriation of a trade secret. See, e.g., Templeton v. Creative Loafing Tampa, Inc., 552 So. 2d 288, 290 (Fla. 2d DCA 1989) (former employee may use contacts, expertise, and skills to compete with a former employer.)

F.   Mere Ideas to be Protectible Need be Novel

If the alleged trade secret is merely an idea and nothing more than that, the law usually requires proof that the idea is in fact novel in order to accord it protection. Take for example a naked idea as opposed to a concrete chemical formula, process or technique. The law has long resisted protection of a mere idea as such. See, e.g., Milgrim on Trade Secrets at §9.05[1] [a] at page 9-334 (“Although there is authority recognizing a right of property in an abstract idea, it would appear that the majority view rejects such a conclusion.”) The courts that do recognize idea-based claims require that novelty be proven in order to ensure that the idea is not already resident in the public domain and that the idea has value because it is in fact not generally known. See, e.g., Restatement of Unfair Competition at §39, Comment H. Novelty in this sense is not “merely an innovative representation or adaptation of existing knowledge.” Garrido v. Burger King Corp., 558 So. 2d 79, 84 (Fla. 3rd DCA 1990). It is something not known before, and clearly not already in the public domain. See, e.g., Hudson Hotels Corp. v. Choice Hotels Int’l, 995 F.2d 1173, 1179 (2d Cir. 1993) (“non-novel ideas are not protectible as property[;] they cannot be stolen”).

G.   Proving that the Owner Exerted Reasonable Efforts to Preserve Secrecy

As a general rule, a plaintiff need prove only a level of secrecy sufficient to ensure that it has a competitive advantage. It is enough to show that it will be hard to get this information or expensive to do so because the trade secret owner has exerted sufficient control over its knowledge to keep it relatively secret. Restatement of Unfair Competition §39, Comment F. Certainly, an employer may share its secrets with employees and others in a confidential relationship, although the confidentiality of that relationship must be protected to some degree.

H.   Multiple Users

It is possible that many people may own the same type of trade secret and yet independently protect it. See, e.g., E.I. Dupont de Nemours & Co. v. United States, 288 F.2d 904, 911 (Ct. Cl. 1961) (“[a] plurality of individual discoverers may have protectible, wholly separate, rights in the same trade secret”). In other words, suppose a number of plastics companies gradually developed the same secret, and each company exerts control over the disclosure of that secret. It is possible that each such company owns a right that is protectible at least up to a point where every industry player knows about the subject matter of the secret such that it may be said to have entered general knowledge. See Milgrim on Trade Secrets §1.07[2] (“as a plurality of independent use begins … the secret erodes. At some point there will be a sufficient number of independent users to correspond to trade use. At such time the matter is no longer secret.”)

I.   Fact-Specific Details of Protection

Every trade secret case must turn on its own facts as to whether the efforts to maintain the secrecy of the secret are indeed reasonable. “What may be reasonable measures in one context may not necessarily be so in another.” In re Innovative Constr. Systems, Inc., 793 F.2d 875, 884 (7th Cir. 1986). The test is whether the plaintiff has exerted reasonably prudent measures under the circumstances, which may involve weighing the risk of loss against the cost and effectiveness of preventive measures. Restatement (3rd) of Unfair Competition §43, Comment C.

J.   Protecting Secrecy by Confidentiality Agreement

Every employer in the plastics industry should have a confidentiality agreement, at the minimum, with all employees who are or may be exposed to any trade secret the employer wishes to protect. Employees inherently have a confidential relationship with an employer in this setting, but the execution of such an agreement ensures that there is no question about the confidentiality of the relationship and that the employer is endeavoring to protect its confidential information. “When other evidence establishes secrecy and the existence of a confidential relationship, courts are properly reluctant to deny protection on the basis of alleged inadequacies in the plaintiff’s security precautions.” Restatement (3rd) of Unfair Competition, §39, Comment G, Reporter’s Note.

However “merely obtaining secrecy agreements from employees may not be enough to protect a secret.” See, e.g., Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 901-902 (Minn. 1983) (“[w]e acknowledge that ECC took minimal precautions in screening its Handbook and publications for confidential information and by requiring some of its employees to sign a confidentiality agreement, but these were not enough”). A wise employer would, in addition to using confidentiality agreements, provide specific notice to employees, in writing, of important trade secrets and of the employer’s intended vigilance in protecting them. But see Vermont Microsystems v. Autodesk, Inc., 88 F.3d 142, 150 (2d Cir. 1996) (“employer had no need to provide an itemized list of secrets when the employee leaves”).

K.   Inadvertent Disclosure

An inadvertent or accidental disclosure does not ordinarily defeat the secrecy of a trade secret. This is particularly the case where reasonable efforts to reclaim the secret inadvertently disclosed have occurred. E.g., Gates Rubber Co. v. Bando Chem. Indus., 9 F.3d 823, 849 (10th Cir. 1993) (information published outside the court records was then sealed promptly upon disclosure and deemed protectible).

L.   Intended Disclosure to Third Parties

Where a trade secret owner does disclose to third parties, for example, persons with whom it is in contract, or customers, or consultants, the trade secret owner must make clear that the information being disclosed is disclosed under a duty of confidence. Ordinarily this means that the trade secret owner must, prior to the disclosure, disclose that the information is indeed confidential so that the recipient of the information has an opportunity to object to the imposition of the confidence. What is required, therefore, is fair notice to the party to whom the information is disclosed that confidential and proprietary information is about to be imparted, coupled with a reasonable opportunity to object to the imposition of the confidence on the part of the recipient. See, e.g., Restatement (3rd) of Unfair Competition §41, Comment B and Reporter’s Notes; Milgrim on Trade Secrets §3.03. Confidentiality must be created at the time of the disclosure to the third party, not afterwards. Smith v. Snap-On Tools Corp., 833 F.2d 578 (5th Cir. 1987) (attempt to establish a special relationship with a disclosee party after the disclosure comes too late).

M.   Ready Ascertainability

Obviously something well known cannot be secret. The same holds true for self-evident variations or modifications of known processes, procedures, or methods, since these “lack the secrecy necessary for protection as a trade secret.” Restatement (3rd) of Unfair Competition §39, Comment F. Equally clear is that a formula or process that cannot be revealed by simply examining the end product can in fact be a secret. The real difficulty in trade secret litigation is drawing a line between the unprotectible and the clearly protectible. The only standard in this area is the standard that if it is really easy to ascertain the secret, then it is not a matter of secrecy at all. See, Wilson Certified Foods, Inc. v. Fairbury Food Products, Inc., 370 F. Supp. 1081, 1086 (D. Neb. 1974) (where a process could be duplicated in eight to ten hours, there was no secret to it). Certainly as the information becomes more difficult to reverse engineer, the easier it is to show that the information is indeed secret and has value because of its secrecy. This same point is important also in protecting a trade secret by injunction: the more difficult it is to capture the secret through reverse engineering or other means, the greater the likelihood the court will grant a long injunction. See, Restatement (3rd) of Unfair Competition §39, Comment F, reporter’s note. Thus the “relative secrecy of information claimed as a trade secret is measured by the difficulty in acquiring the information by proper means.” Restatement, Comment F, reporter’s note.

A trade secret owner can prove that the information in question is not readily ascertainable by proper means by using circumstantial evidence, such as: precautions taken to protect it, the inability of other competitors to obtain the information, the existence of licensees or prospective purchasers for the information, and the fact that others have had to obtain it by improper means. See, Restatement (3rd) of Unfair Competition ¶39, Comment F (“when a defendant has engaged in egregious conduct in order to acquire the information, the inference that the information is sufficiently inaccessible to qualify for protection as a trade secret is particularly strong”).

N.   Proving That the Secret Has Value Because it is Secret

A true trade secret is one that affords its owner a competitive advantage because of its secrecy. Thus the Uniform Trade Secrets Act requires that a plaintiff prove that the alleged secret “derives independent economic value, actual or potential, from not being generally known”). Uniform Trade Secrets Act §1(4)(i). The information in question thus must afford some real advantage to the owner over what is generally known in the industry; slight variations will not suffice. See, e.g., Cudahy Co. v. American Laboratories, Inc., 313 F. Supp. 1339, 1345 (D. Neb. 1970) (slight variation over those of other manufacturers gave no competition advantage). On the other hand, a “slight competitive edge” will suffice so long as it is truly competitively valuable. Telerate Systems, Inc. v. Caro, 689 F. Supp. 221, 232 (S.D.N.Y. 1988). In addition, a defendant’s decision to use improper means of acquisition could itself support a finding of value – why else steal it? Restatement (3d) of Unfair Competition §483, Comment D.

O.   Pursuing Injunctive Relief

In the event of trade secret litigation, a key goal of the employer or plaintiff would be to obtain temporary and thereafter permanent injunctive relief preventing the use of the secret information. A court may be asked to grant an injunction that lasts for long enough to prevent the defendant from benefitting in any way from the use of the technology. The plaintiff would ordinarily be required to show irreparable injury, probably that the plaintiff will succeed on the merits of the claim, that the public interest is not dis-served by the injunction, and that the balance of equity and harm between the parties weighs in favor of the plaintiff. E.g., Ferrero v. Associated Materials, Inc., 923 F.2d 1441, 1448 (11th Cir. 1991). Where a defendant has acquired notice of the trade secret only after it has been put to use in a process or product, a defendant may be able to continue use of the product thereafter, by payment of a reasonable royalty. Restatement (3d) of Unfair Competition §44; Uniform Trade Secrets Act §2(b). As a general rule, a court will not enjoin a defendant for any longer than it would take to deny the defendant the ill-gotten gains from the misappropriation. This is sometimes referred to as granting a head start injunction. See, e.g., Restatement (3rd) of Unfair Competition §44(3).

P.  Damages Along with an Injunction

Where the trade secret owner seeks damages as well as a permanent injunction, the damage claim is often limited by the amount of ill-gotten gain or profit the defendant has made in the interim. This is referred to as obtaining unjust enrichment damages. Uniform Trade Secrets Act §3; Restatement (3rd) of Unfair Competition §45(a). Punitive damages and attorneys’ fees are often also remedies allowed by a particular version of the Uniform Trade Secrets Act in the state of the misappropriation.

Q.   Examples of Trade Secrets Common in the Plastics Industry:

1. Chemical formula for a resin (incapable of easy reverse engineering);

2. Process for creating a resin (incapable of reverse engineering);

3. Method of cross-bonding a polymer strand;

4. Your product pricing list (mfg price vs. wholesale vs. retail);

5. Who you get your raw materials from, and related pricing;

6. List of where your distributors are located; and

7. Customer list.

R.   Uniform Trade Secrets Act (U.T.S.A.) has now been Adopted in about 45 states: The U.T.S.A. governs trade secret law, defines what a trade secret is, and provides remedies for misappropriation.

1. U.T.S.A. can be used to Redress Improper Control and Domination over Confidential Proprietary Information Stored on Computers: Cases have applied the F.U.T.S.A. to redress the improper exercised dominion and control over a portable computer containing confidential and proprietary information. Control Ctr. L.L.C. v. Lauer, 288 B.R. 269 (M.D. Fla. 2002).

2. Taking of Software from Computer Programmers Actionable: The taking of proprietary computer software from a developer has been found actionable under the Uniform Trade Secrets Act. Beck v. Dumas, 709 So. 2d 601 (Fla. 4th DCA 1998).

3. U.T.S.A. Allows for Injunctive Relief: Either an “actual or threatened misappropriation” may be enjoined.

4. U.T.S.A. Provides Damages to Recover Actual Loss and Unjust Enrichment Caused by Misappropriation: The owner of a trade secret is entitled to recover two forms of damages (i) actual loss caused by the misappropriation; or (ii) the unjust enrichment caused by the misappropriation.

5. Calculation of Damages “May” Be Measured by a Reasonable Royalty: Damages for the misappropriation of a trade secret may be based upon a reasonable royalty.

6. Damages Double Upon Finding of Willfulness: Under the Uniform Trade Secrets Act, if a court finds that a misappropriation was willful and malicious, it may award “exemplary damages” not to exceed twice an award of actual loss or unjust enrichment.

7. Statute of Limitations is Three Years: The Uniform Act requires all claims to be brought within three years after discovery of the misappropriation or when the misappropriation should have been discovered.

8. U.T.S.A. Displaces Common Law: The Uniform Trade Secrets Act displaces conflicting tort, restitutory, and other state civil remedies.

S.   Proactive Measures to Secure and Protect Trade Secrets in the Workplace:

• (a) limit access to your computer databases;

  (b) maintain revolving passwords on databases;

  (c) provide USB ports and CD burners only to those that require data transfer;

  (d) require employees only to use company computers;

  (e) use encryption software, scrubbers, and appropriate firewalls;

  (f) educate your employees on importance of confidentiality;

  (g) limit physical access to the plant and formulas and other secrets, using badging and other security means;

  (h) use employee handbooks and other well known procedures within the company to encourage prompt reporting of suspected misappropriation;

  (i) take care to mark as confidential all documents that relate to protected information–including computer accessible documents;

  (j) conduct an annual audit with your general counsel and key management personnel, taking care to remind all employees of the diligence of the company in protecting secrets and pursuing violators.

1. Performing Yearly Audits to Identify Trade Secrets: Unlike the patent grant that has a presumption of validity based upon review by the US Government whether the idea is novel and non-obvious, there is no review to ascertain whether something constitutes a trade secret.

Accordingly, companies should perform yearly internal audits to identify and categorize the potential trade secrets they should protect and enforce.

2. Trade Secret Maintenance Program to Ensure Protection of Information

T.  Drafting Proper Employee/Confidentiality Agreements in the Plastics Industry:

• (a) Appropriate geographic scope of these agreements;

  (b) Appropriate terms of years;

  (c) Non-Compete provisions during employment tenure; and

  (d) Non-Compete provisions for after employment has been completed.

1. Defining what is “Confidential.”

2. Provisions relating to employee “Duty of Loyalty.”

3. Provisions relating to employee “Fiduciary Duty.”

4. Non-Compete Agreements:

III. RELATED FORMS OF PROTECTION FOR THEFT OF DATA

A.  Computer Crimes and Abuse Act: Most states have some version of the Federal Computer Crimes and Abuse Act to provide both criminal and civil penalties for improper access to computer based information.

• (a) the first protects against acquisition of or access to intellectual property, namely information which would be defined as a trade secret; and

  (b) the second protects the ultimate computer owner (i.e., the consumer).

1. Governs Alteration and Destruction of Computer Files: A state computer crimes and abuse act governs improper alteration or destruction of computerized information or files, and the stealing of financial instruments, data, and other assets.

2. Creates Causes of Action to Protect Consumers, Intellectual Property, and Hardware: The state act protects two specific and different classes of improper access to computer data:

3. Allows for a Civil Remedy: While the predominant focus and application of the Act is to create criminal guidelines for computer misconduct, the Act does provide a civil remedy to financially compensate for computer abuse.

4. Compensatory Damages May be Awarded to Redress the Civil Wrong:

5. Provides Attorneys’ Fees to Prevailing Party: “the court may award reasonable attorneys’ fees to the prevailing party.”

B. Unfair and Deceptive Trade Practices Act:

• (a) Civil Damages Capped At $10,000 Per Unfair Act: Under the uniform act, civil damages are capped at $10,000 per instance of conduct that is unfair or deceptive against a corporation, partnership, or business entity.

  (b) Civil Damages against Consumer Not Capped: A consumer is entitled to seek actual damages, attorney fees, and costs against a retailer of manufactured goods (i.e., computer systems). (allows cause of action to occur at retail level, instead of manufacturer level).

1. Introduction: Most states have some version of §5 of the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive trade practices.

2. Importance to Plastics Industry: When misconduct between two competitors in the plastics industry does not rise to the level of trade secret misappropriation (i.e., resin composition is capable of reverse engineering), but the overall conduct is improper, a state cause of action under this theory may be the best method to seek redress.

3. Commercial Disparagement or Trade Libel: Some state causes of action will allow redress when one competitor disparages the quality of another’s products or services.

4. Directed to Regulate “Consumer Transactions”: Most state versions of the Uniform Deceptive and Unfair Trade Practices Act focus on protecting consumers against deceptive trade practices.

5. Civil Penalty Protects only Against Willful Conduct: Any entity who is willfully using or has willfully used a method, act, or practiced to complete an unfair or deceptive trade practice, is liable under the civil portion of the uniform act.

6. Attorneys’ Fees Are Awarded to Prevailing Party: Attorneys’ fees and costs are awarded to the prevailing party. Thus, this act is a double-edged sword, and requires upfront investigation of claims.

Note: While the act is typically used in general business litigation, with emphasis in consumer and franchise law, the act has been used in the context of theft of computer data.

C.  Common Law Theory of Trespass to Chattels:

1. Introduction: This common law tort is routinely used in the Second, Fourth, Ninth, and Eleventh Circuits to redress improper access or attacked computer networks and software.

2. Restatement (Second) of Torts §217(b) (1965): Under the Restatement, an actionable trespass occurs through the intentional use or intermeddling with a chattel in the possession of another . . . where the chattel is impaired as to its condition, quality, or value. City of Amsterdam v. Daniel Goldreyer, Ltd., 882 F. Supp. 1273, 1281 (E.D.N.Y. 1995).

3. Multiple Courts Have Found that Data, Computer Systems, Networks, Software, and Hardware Constitute Chattels. Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004).

4. Diminishing Value of Database Information, Network, or Computer Service Sufficient: A trespasser is one who diminishes the value of personal property, even in the absence of physical damage to a computer, network, or underlying data. Sherwood 48 Assocs. v. Sony Corp. of Am., 76 Fed. Appx. 389 (2d Cir. 2003).

5. A claim of Trespass to Chattels Often Complements a Claim under Computer Fraud and Abuse Act: Physicians Interactive v. Lathian Sys., 2003 U.S. Dist. LEXIS 22868 (E.D. Va. Dec. 5, 2003).

6. As Information on a Database is Not Copyrightable, Trespass Often Provides Only Remedy: As information stored in a database is often not an original expression, the common law tort of trespass often is the most direct means of seeking redress. Nihon Keizai Shimbun, Inc. v. Comline Bus. Data, Inc., 166 F.3d 65, 70 (2d. Cir. 1999).

7. Actionable to Redress Use of Software Programs to Limit Capacity of Networks: The use of “search robots,” or other software programs performing multiple automated queries to limit the capacity of a computer system or network constitutes a trespass to chattel. Register.com v. Verio, Inc., 356 F.3d 393 (2nd Cir. 2004).

8. Act of Access or Limiting Computer System Need Not Cause Physical Harm to System: In order to recover under a trespass to chattels theory, the owner of the computer system or database, or entity with an interest in equipment, bandwidth, or server capacity, need not show physical harm to equipment. Specht v. Netscape Communs. Corp., 306 F.3d 17 (2d Cir. 2002).

9. Conspiracy to Improperly Access or Use a Computer Network or Computer-Related Service Actionable: Case law has suggested that mere conspiracy or assistance of another to improperly access a computer service or network may be actionable under a trespass to chattels theory. Microsoft Corp. v. Neoburst.Net, LLC, 2004 U.S. Dist. LEXIS 18733 (N.D. Cal. Aug. 30, 2004).

10. Arguing Insufficient Usage Restrictions is Improper: A defendant cannot argue that a claim of trespass to chattels is barred, based upon a computer network owner’s failure to create sufficient usage restrictions. Physicians Interactive v. Lathian Sys., 2003 U.S. Dist. LEXIS 22868 (E.D. Va. Dec. 5, 2003).

To read the entire brief, please download TradeSecrets-Plastics