How Are Trade Secrets Protected? (Part 3 of Trade Secret Series)January 21, 2016

Filewrapper® previously introduced a new series of blog postings on the value and role of trade secrets, along with strategies to ensure protection. Previous posts first gave an overview of the role and value of trade secrets (available here), and then described how the value of trade secrets are commonly assessed (available here). In this third posting in the series, information on how trade secrets are protected are provided. Let’s dive into a deeper look at this unique type of intellectual property.

In the U.S., trade secrets are defined and protected under state laws. This state-specific protection scheme warrants a brief history lesson. State laws seeking to protect secret information of a business date back to the nineteenth century when the initial transition from largely farming and rural production and businesses into larger-scale industry took place. In order to expand into these larger-scale businesses it became necessary for information to be shared “outside the family” so to speak. As a result, the need to disclose information, including secrets relating to a businesses’ production, had to be disseminated. This ultimately resulted in states affording early protections for such “trade secrets” of a business. Whether the secret information related to a machine or a particular process for the business, courts began enforcing the confidential nature of these trade secrets. This triggered the common law origin of trade secrets in our country. This state-specific definition and enforcement of trade secrets is in clear contrast to federal laws, such as federal patent laws.

The significance of state laws defining and enforcing trade secrets rests largely on issues of consistency and transportability. Simply put, each state applies the law of that state. This is important because not all states have adopted consistent trade secret laws. Initially, the Restatement of Torts § 757 provided guidance to states for defining and enforcing trade secrets. The Second Restatement made additional recommendations, which were less-consistently adopted by states. As a result, in 1979 the National Conference of Commissioners on Uniform State Laws issued the first Uniform Trade Secrets Act (UTSA) in an effort to set forth harmonized rules for states to enforce trade secret rights. A majority of states have adopted the UTSA, with a few notable hold-outs, including New York. Unfortunately, despite a majority of states’ adoption of the UTSA the laws have failed to provide consistency and transportability as states continue to “customize”its trade secret laws.

For example, just this month the Texas Supreme Court heard oral arguments (available here) on a matter of first impression relating to the Texas Uniform Trade Secrets Act (TUTSA) that became effective in 2013.  The issue was how the state code would be upheld to interpret the phrase “preserve the secrecy of an alleged trade secret by reasonable means.”Tex. Civ. Prac. & Rem. Cod §134A.006.  In particular this state trade secret law was argued before the Texas Supreme Court to determine whether a gag order would be sufficient at a trial court to ensure a trade secret being litigated is kept secret, or whether the party be sued could actually be excluded from court room hearings when the alleged trade secrets are being discussed. This dispute provides a timely example of the many difficulties in having state laws for trade secret protections.

Based on this overview of the current U.S. protection scheme for trade secrets, a common question is “Should there be a federal trade secret law?” As previously reported on Filewrapper® (available here), legislation is pending which seeks to establish a federal Uniform Trade Secret Act. In December, the U.S. Senate Judiciary Committee held a hearing regarding the Defend Trade Secrets Act of 2015 (DTSA).

Based on the high value associated with trade secrets and the ever-present time-sensitive nature of enforcing trade secrets, there are persuasive arguments in favor of establishing a federal trade secret enforcement system as a result of the inconsistency and unpredictability experienced by those seeking to enforce trade secrets and experiencing the differing protections afforded by 50 distinct states and a federal criminal framework that has largely been underutilized.


Stay tuned for the next Filewrapper® posting on this topic where further pros and cons of establishing a federal trade secret law will be analyzed.

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