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7/28/2019 Case for a Federal TSA

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V o l u m e 8 , N u m b e r 2 S p r i n g 1 99 5T H E C A S E F O R A F E D E R A L

T R A D E S E C R E T S A C T

C h r i s t o p h e r R e b e l J . P a c e "

I N T RODUC T I ON

C o m p a n i e s r e g u l a r ly s e e k t o m a i n t a i n t h e i r m o s t v a l u a b l e i n f o r m a t i o ni n c o n f i d e n c e . T h e i r r e a s o n f o r d o i n g s o is s i m p l e : a c o m p a n y t h a t c a nk e e p i t s v a l u a b l e i n f o r m a t i o n s e c r et c a n t he n u s e th e i n f o r m a t i o n - - a n d t h er e su l ti n g i n n o v a t i o n s - - t o g a i n an a d v a n t a g e o v e r t h o s e o f i ts c o m p e t i to r st h at l a c k s r c h i n si g h ts . ~ O f c o u r s e , t o p r e v e n t t h is s i t u a t io n , a c o m p a n y ' sc o m p e t i t o r s w i l l s ee k t o u n c o v e r i ts p r o p r i e t a r y i n f o r m a t i o n i n o r d e r t oe l i m i n a t e t h e c o m p a n y ' s a d v a n t a g e . :

I n t h i s o n - g o i n g b a t t l e o v e r i n f o r m a t i o n a n d i n n o v a t i o n , n u m e r o u ss ta te l a w s p l a y a n i m p o r t a n t ro l e b y p r o v i d i n g a r e m e d y f o r t h e m i s a p p r o -p r ia t io n o f a c o m p a n y ' s m o s t v a lu a b l e c o n f id e n t i a l i n f o r m a t i o n - - i t s t r a d es e c r e t s . T h i s c a u s e o f a c t i o n f o r t h e m i s a p p r o p r i a t i o n o f t r a d e s e c re t sp r o te c ts a c o m p a n y f r o m h a v i n g i ts c o n f i d e n t ia l i n f o r m a t i o n t a k e n f r o mi t b y t h e i m p r o p e r a c t i o n s o f i ts c o m p e t i t o r s . I n li m i t e d c i rc u m s t a n c e s ,t h is a c ti o n e v e n f o r g i v e s a c o m p a n y ' s m i s ta k e n d i s c l o s u r e o f i ts v a l u e di n f o r m a t i o n t o it s c o m p e t i t o r s a n d f o r b i d s th e c o m p e t i t o r s f r o m u s i n g i t .A t t h e sa m e t i m e , h o w e v e r , t h is c a u s e o f a c t io n d o e s n o t e m p o w e r ac o m p a n y t o d i sc o u r a g e i ts c o m p e t i to r s f ro m i n d e p e n d e n t l y d e v e l o p i n g t h es a m e i n f o r m a t i o n o r g a i n i n g a c c e ss t o o n e a n o t h e r ' s i n f o r m a t i o n b yp r o p e r m e a n s .

T h e c a u s e o f z c t i o n f o r t r a d e s ec r e t m i s a p p r o p r i a t i o n w a s i m p o r t e df r om E n g li sh c o m m o n l a w t o A m e r i c a n c o m m o n l a w i n a s e r ie s o f m i d -n i n e t e e n t h c e n t u r y d e c i s i o n s b y t h e h i g h e st c o u r t s o f s e v e r a l e a s t er n

* AssistantUnited States Attorney, Southern Disuict o f Florida. J.D ., University ofPennsylvania Law Scho ol, 1990; B.B.A., Southern M ethodist University, 19 87. The viewsexpressed in this article do not necessarily ex pr ess the v iew s oL the U nite d StatesDepartment of Justice. Th is article s dedicated to Jo hn Dem psey and Debb ie Russell Pace,proud ad ditions to the family.1. See, e.g., M ichae l A . Eps te in & Sm ar t D . Levi, Protecting Trad e SecretInformation: A Plan fo r Proactive Strategy, 43 BUS. LAW . 887, 887 (1988).2. See R/CHARDS. F. EEIA~ & PETER R. NEHEMKIS, CORPORATE INTELLIGENCEAND

ESPIONAGE: A BLUEPRINT FOR EXECUTIVE DECISION MAKING 118 (1984); RICHARD M.GREENE, BUSINESS INTELLIGENCEAND ESPIONAGE4-5, 13 (1966).


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4 2 8 H a r v a r d J o u r n a l o f L a w & T e c h n o lo g y [ V o l . 8s ta t e s. 3 A l t h o u g h c o m m o n l y r e f e r r e d to a s a to r t ( a t re n d t h i s A r t i c l e w i l lc o n t i n u e ) , t h is c a u s e o f a c t i o n m o r e c l o s e l y r e s e m b l e s a p r o p e r t y r ig h tt h a n a n o r d i n a r y to r t. I n i ts f u n d a m e n t a l f o r m , th e t r a d e s e c r e t m i s a p p r o -p r i a t io n a c t i o n p r o v i d e s a r e m e d y f o r a n y b u s in e s s t h at a t t e m p t s t o p r o t e c ti ts c o m m e r c i a l l y v a l u a b l e i n f o r m a t i o n b u t t h a t, n e v e r t h e l e s s , h a s s u chi n f o r m a t i o n r e v e a l e d t o it s c o m p e t i t o r s a s a re s u l t e i t h e r o f i m p r o p e ra c t i o n ( su c h a s e s p i o n a g e o r b r e a c h o f a c o n f i d e n t i a l r e l a t io n s h i p ) o ra c c i d e n t . T h e t r i g g e r o f t h e a c t i o n , t h e r e fo r e , is a n i n f r i n g e m e n t o f at r a d e s e c r e t " o w n e r ' s " r i g h t t o e x c l u d e o t h e r s f r o m u s i n g t h e i n f o r m a t i o n ,w h i c h is m o r e s im i l a r t o a n el e m e n t o f p r o p e r t y t h a n o f t o r t . M o r e o v e r ,t h e p r e v a i l i n g m o d e r n j u s t i f i c a t i o n f o r p r o t e c t i n g a g a i n s t t r a d e s e c r e tm i s a p p r o p r i a t i o n i s t h a t s u c h p r o t e c t i o n p e r m i t s b u s in e s s e s t o r e a p t h eb e n e fi ts o f t h e ir a c t i v i ti e s - - a g a i n a p r o p e r t y c o n c e p t d i s t i n g u i s h a b l e f r o mth e u s u a l t o r t j u s t i f i c a t i o n o f r e q u i r i n g p e r s o n s t o b e a r t h e c o s t s o f t h e i rh a r m f u l a c t i v i ti e s . 4

W h e t h e r c la s s i f ie d a s a p r o p e r t y r ig h t o r a t o r t , t r a d e s e c r e t m i s a p p r o -p r i a t i o n i s a n i m p o r t a n t c o m p o n e n t o f th e l e g a l r e g i m e t h a t s h e lt e r sc o m m e r c i a l i n t el l ec t u a l i n v e s tm e n t s . A s s e t fo r t h i n S e c t i o n I b e l o w , t h et r a d e s e c r e t m i s a p p r o p r i a t i o n r e m e d y f i ll s a g a p i n f e d e r al i n t e l le c t u a lp r o p e r t y l aw b y p r o v i d i n g l e g a l s h e lt e r f o r n o n - p at e n ta b l e , n o n - c o p y r i g h t -a b l e i n n o v a t i o n s , b u t o n l y o n th e c o n d i t i o n th a t th e o w n e r o f t hei n n o v a t i o n t a k e a d e q u a t e s t e p s t o s a f e g u a r d t h e in n o v a t i o n . 5 W h e n t h eo w n e r u n d e r t a k e s s u ch s a f e g u a r d s , t h e l a w o f m i s a p p r o p r i a t i o n p r o v i d e sa n a d d i t i o n a l l a y e r o f p r o t e c t i o n a g a in s t i m p r o p e r o r a c c i d e n t a l d i s c l o s u r e ,w h i c h e n h a n c e s t h e t r a d e s e c re t o w n e r ' s a b i l i ty t o c a p tu r e t h e b e n e f i t s t h a tf l o w f r o m e x p l o i t i n g h e r i n n o v a t i o n . I n t u r n , th i s a b i l i t y i n c r e a s e s th eo w n e r ' s i n c e n t iv e to in v e s t i n o t h e r i n n o v a t i o n s , s e c u r e i n t h e k n o w l e d g et h at s h e c a n r e c o u p h e r i n v e s t m e n t i n th o s e i n n o v a t i o n s . 6

O f c o u r s e , t h e m i s a p p r o p r ia t io n o f tr a d e s e c r et s c a u s e o f a c t i o n i s n o tw i t h o u t i ts l im i t s . S o m e r e s t r ic t io n s s t e m f r o m t h e d e f i n it io n o f t h e a c t i o ni t s e lf . F o r e x a m p l e , o n e c a n n o t p r o t e c t a t r a d e s e c re t f r o m b e i n g

3. See Vickery v. W elch, 36 M ass. 523 (1837); Jarvis v. Pe ck, l0 Paig e Ch. 118(N.Y. Ch. 1843); M eGowin v. R emington, 12 Pa. 56 (1849); Ham m er v. Barnes, 26 Ho w.Pr. 174 (N.Y. Su p. Ct. 1863); Taylor v. Blanchard, 95 M ass. 370 086 6); Peabody v.Norfolk, 98 Mass. 452 (1868).

4. Cf. Wendy J . Gordon, Toward a Jurisprudence o f Ben efi ts: The Norms o fCopyright and the Problems of Private Censorship, 57 U. Cltl. L. REV. 1009, 1048-49(1990) (stating that both co pyrig htand tort law share com mon aim s of com pensating victimsand providing incentives for socially beneficial activities).5. See infra text accompanying notes 39-44.6. See infra text accompanying notes 44-47.


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N o . 2 ] T h e C a s e f o r a F e d e r a l T r a d e S e c r e t s A c t 4 2 9i n d ep e n d e nt ly d i s c o v e r e d o r r e v e r se e n g i n e e r e d b y a c o m p e t i to r . O t h e rl i m i t s a r i se b e c a u s e t h e c a u s e o f a c t i o n is g o v e r n e d b y s ta t e l a w , n o tf e d e r a l l a w , w h i c h e n s u r e s t h a t t h e c o n t o u r s o f t h e a c t i o n v a r y s i g n i f i-can t l y am o n g t h e s t at e s. Sec t i o n I I b e l o w ex p l o re s h o w t h i s s t a t e -b y - s t a t ev a r i a t i o n l imi t s t h e e f fec t i v en es s o f t h e ac t io n b ecau s e i t i mp o s es a s p e c i a lb u r d e n o n t ra d e s e c re t o w n e r s t o d e t e r m i n e w h a t l e v e l o f p r o t e c t i o n w i l lb e a f f o r d e d t h e i r t r a d e s e c r e t s . 7 S e c t i o n I I a l s o a d d r e s se s r e c e n ti n t e r n a t i o n a l a g r e e m e n t s p r o t e c t i n g t r a d e s e c re t s a n d e x p l a in s h o w t h el a w s o f v a r i o u s s t a te s a r e n o t i n a c c o r d w i t h t h e se a g r e e m e n t s . 8

T h e r e s t r i c t i o n s o n t r ad e s ec re t p ro t ec t i o n t h a t o r i g i n a t e f ro m t h e v e ryd e f i n i ti o n o f t r ad e s ec re t m i s ap p ro p r i a t i o n a r e , a s d i s cu s s ed i n Sec t i o n I ,a p p r o p r i a t e l i m i t a t i o n s d e s i g n e d b o t h t o e n c o u r a g e o p t i m a l i n v e s t m e n t i ni n n o v a t i o n a n d t o a v o i d i n f r i n g i n g o n t h e d o m a i n o f p a t e n t l a w . 9 T h ere s tr i c ti o n s t h a t o ri g i n a t e f ro m t h e v a r iab i li ty o f s ta t e l aw s o n t r ad e s ec re tp r o t e c t i o n , h o w e v e r , a r e le s s d e f e n s i b l e , a s d i s c u s s e d i n S e c t i o n II .T h u s , S e c t i o n I I I s e ts f o r t h a n d e x p l a i n s a p r o p o s a l f o r a f ed e r a l t r a d es e c r e t s a c t , o n e th a t is n a t i o n a l l y u n i f o r m a n d i n c o m p l i a n c e w i t hi n te r n a ti o n a l a g r e e m e n t s o n t r a d e s e c r e t p r o t ec t io n . ~ T h e p r o p o s e d a c tis m o d e l e d a ft er t he U n i f o r m T r a d e S e c r e ts A c t - - s o m e v e r s i o n o f w h i c hp r e v a i ls i n t h e m a j o r i t y o f s t a t e s - - b u t i s a d a p t e d t o t h e u n i q u e o p p o r t u n i -t ie s a n d r e q u i r e m e n t s o f f e d e ra l l e g i sl a t io n . ~'

I. AN OVERVIEW OF STATE LAWSADDRESSING THE

MISAPPROPRIATION OF TRADE SECRETS

A . G e n e r a l E l e m e n t s o f T r a d e S e c r e t M i s a p p r o p r i a t i o n

E v e ry s t a t e p ro t ec t s , t o v a ry i n g extents ~ t h e r i g h t s o f b u s i n es s e s t od e v e l o p a n d e x p l o i t p r o p r i e t a r y i n f o r m a t i o n i n a c o n f i d e n t i a l s e t t i n g f o rt h e s a k e o f c o m p e t i t iv e a d v a n t a g e. T h e m o s t c o m m o n f o r m o f s u c hp r o t e c t i o n is t h e s ta t e l a w c a u s e o f a c t i o n f o r m i s a p p r o p r i a t i o n o f t r a d es e c re t s, w h i c h p r o v i d e s a b u s i n e s s w i t h a n i n j u n c t iv e o r d a m a g e r e m e d yi n t h e e v e n t i_hat a c o m p e t i t o r w r o n g f u l l y , o r i n s o m e c a s e s a c c i d e n t a l l y ,

7. See infra text accom panyingnotes 67-69.8. See infra text accom panyingnotes 70-85.9. See infra text accom panying notes 46-47.10 . See infra text accom panying notes 91-127.11. See infra text accom panying notes 95-100.


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4 3 0 H a r v a r d J o u r n a l o f L a w & T e c h n o l o g y [ V o l , 8a c q u i r e s o n e o f t h e b u s i n e s s ' t r a d e s e c r e t s . W h i l e s t a t e l a w s o nm i s a p p r o p r i a t i o n o f t r a d e s e c r e ts d i f fe r in i m p o r t a n t r e s p e c t s , a s e x p l a i n e db e l o w i n S e c t i o n II ( A ) , a l l a r e f a s h i o n e d a f t e r o n e o r b o t h o f t w o s i m i l a rm o d e l s : t h e R e s t a t e m e n t o f T o r ts S e c t i o n 7 5 7 a n d t h e U n i f o r m T r a d eS e c r e t s A c t .

1 . S e c t i o n 7 5 7 o f t h e R e s t a t e m e n t o f T o r t s

T h e f i r s t t r a d e s e c r e t s m o d e l i s f o u n d i n S e c t i o n 7 5 7 o f t h e R e s t a t e -m e n t o f T o r t s, e n t i t l e d M i s a p p r o p r i a t i o n o f T r a d e S e c r e ts . 12 A c c o r d i n gt o t h e R e s t a t e m e n t , a t r a d e s e c r e t " m a y c o n s i s t o f a n y f o r m u l a , p a t t e r n ,d e v i c e o r c o m p i l a t i o n o f i n f o r m a t i o n w h i c h i s u s e d i n o n e ' s b u s i n e s s , a n dw h i c h g i v e s h i m a n o p p o r t u n i t y t o o b t a i n a n a d v a n t a g e o v e r c o m p e t i t o r sw h o d o n o t k n o w o r u s e i t. "13 I n a d d i t i o n t o r e q u i r i n g t h a t t h e t r a d e

12 . -RESTATF2dENT F TORTS 75 7 (19 39 ). Co urts r ely o n the fi rs t Restatement o f Tortsrathe r than the second , w hich d ro ps the to r t o f t rade sec re t misapprop r ia t ion . The d ra f te rso f t h e Restatement (Second) o f Torts reasoned tha t t rade sec re t misappropr ia t ion and s imi la rt o r t s b a s e d o n u n f a i r t r a d e p r a c t i c e s h a d d e v e lo p e d i n to a n a r e a o f l a w d e s e r v in gind iv idua l ized t rea tment . See R ES'rATEMENT(SECOND)OF TORTS, in t ro , no te to Div is ionNin e ( 1 97 9 ) . T r a d e s e c r e t m i s a p p r o p r i a t i o n h a s r e a p p e a re d in the Restatement o f U nfairCompetition. See RF:.STATEMENT(TtIIRD) OF UNFA IR COMPETITION 88 39-45 (1995).Courts general ly tend to ignore th is recent re incarnation and s t i l l re ly on the Restatement o fTorts 8 7 5 7 f o r d e f in in g o r i n t e rp r e t in g t h e t o r t o f t r a d e s e c r e t m i s a p p r o p r i a t io n .

On ly e l e v e n s t a t e s h a v e n o t e n a c t e d t r a d e s e c r e t s t a tu t e s mo d e l e d , i n s o me f o r m o ra n o th e r , a f t e r t h e Un i f o r m T r a d e S e c r e t s Ac t : M a s s a c h u s e t t s , M ic h ig a n , M is s o u r i , Ne wJ e rs e y , Ne w Yo r k , Oh io , P ~ " ~ sy lv an ia , T e x a s , T e n n e s s e e . Ve r m o n t , a n d W y o m in g . Seeinfra note 17 ( l i s t ing s t :~cs wi th t rade sec re t s ta tu tes pa t te rned a f te r the Uni fo rm TradeS e c r e t s Ac t ) . Of t h e s e s t a t e s, a t l e a st n in e - - M a s s a c h u s e t t s , M ic h ig a n , M is s o u r i, Ne wJ e r s e y , N e w Y o r k , O h i o , P e n n s y l v an i a , T e x a s , a n d T e n n e s s e e - - h a v e re li ed o n t heRestatement of Torts 8 757 approach to t rade sec re ts . See M E L VI N F . JAGER,TRADESECRETS LAW 8 3.0111], a t 3-16.5 to -22 (1994); Dan iel J . G leason & Mich ael J .E n g e l b e r g , Can Yo ur Client Keep a (Trade) Secret?, 40 PRAC. LAW . 37, 39 (1994).

Ev en in s ta tes tha t have enac ted s ta tu tes spec i f ica l ly de f in in g the to r t o f t rade sec re tmisappropria t ion and i ts remedies , Restatement of Torts 8 757 i s f requen t ly re l ied upon byc o u r t s a d ju d i c a ti n g t r a d e s e c r e t m i s a p p r o p r i a t i o n c a s e s . As M e lv in J a g e r n o t e d i n h i sau thor i ta t ive tex t on t rade sec re ts :

The Restatement c o n t in u e s t o b e c i te d a n d u s e d f o r g u id a n c e e v e n i n c a s e sin v o lv in g t h e Un i f o r m T r a d e S e c r e t s Ac t . T h e Restatement t r e a tme n t o ft rade se c re ts has b eco m e so un iversa l tha t it is d i f f icu l t to f ind a mo dernt r a d e s e c r e t s c a s e t h a t d o e s n o t c i t e , a n d r e ly h e a v i l y u p o n , s o me o f i t sr u le s o r c o m m e n t s .

JAGER,supra, 8 3.01[1] , a t 3-4 (foomote omitted) . See also W il l ia m E . H i l t o n , What Sorto f Improper Condu ct Constitutes Misappropriation of a Tra de Secret, 30 IDEA J. L . & TE CII.287 , 288 (1990) .13. RESTATEMENT OF TORTS 8 757 cm t . b (1939) . The com m en t exp la ins tha t t rades e c r e t s c o m p o s e a c l a s s n a r r o we r t h a n all i n f o r ma t io n h e ld b y a b u s in e s s in s e c r e t :


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No. 2] The Case for a Federal Trade Secrets Act 431secret is used in business and provides competitive advantage, theR e s t a t e m e n t a l s o requires that a trade secret be kept, as the name implies,secret:

[A] substantial element of secrecy must exist, so that, exceptby the use of improper means, there would be difficulty inacq uir ing the information. An exact definition of a tradesecr et is not possible. Some factors to be considered indetermining whether given information is one 's trade secretare: (1) the extent to which the information is known outsideof his business; (2) the extent to which it is known byemployees and others involved in his business; (3) the extentof measures taken by him to guard the secrecy of theinformation; (4) the value of the in formation to him and tohis competitors; (5) the amount of effort or money expendedby him in developing the information; (6) the ease ordifficulty with which the information could be properlyacqui red or duplicated by others. 14

Even if a business possesses information that can properly beclass ified as a trade secret, any possession of that informat ion by anoutsider is not necessar ily considered a misappropr iation. Instead, for atrade secret to be misappropriated, the R e s t a t e m e n t requires that the secretbe acquired either by improper means or with notice of its mistaken dis-closure. To this end, R e s t a t e m e n t Section 757 provides:

One who discloses or uses another's trade secret, without aprivilege to do so, is liable to the other if(a) he discovered the secret by improper means, or

/d.

[A trade secret] differs from other secret information n a business (see 759) in that it is not simply informationas to single or ephemeral eventsin the conduct of the businessas, for example, the amountor other termsof a secret bid for a contract or the salary of certain employees, or thesecurity investments made or contemplated, or the date fixed for theannouncementof a new policy or for bringingout a new model or the like.A trade secret is a process or device for continuoususe in the operation ofthe business.

14. Id . at 757 cmt. b.


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432 H a r v a r d J o u r n a l o f L a w & T e c h n o lo g y [Vol. 8(b) his disclosure or use constitutes a breach of confidencereposed in him by the other in disclosing the secret to him,or(c) he learned the secret from a third person with notice ofthe facts that it was a secret and that the third person discov-ered it by improper means or that the third person's disclo-sure of it was otherwise a breach of his duty to the other, or(d) he learned the secret with notice of the facts that it wasa secret and that disclosure was made to him by mistake,15

As a corollary to Section 757, Res ta tement Section 758 addresses the useof another's trade secret originally acquired without notice of its wrongfulor mistaken disclosure. Section 758 thus provides:

One who learns another's trade secret from a third personwithout notice that it is secret and that the third person'sdisclosure is a breach of his duty to the other, or who learnsthe secret through a mistake without notice of the secrecyand the mistake,(a) is not liable to the other for a disclosure or use of thesecret prior to receipt of such notice, and(b) is liable to the other for a disclosure or use of the secretafter the receipt of such notice, unless prior thereto he hasin good faith paid value for the secret or has so changed hisposition that to subject him to liability would be inequi-table. 16

2, Uni form Trade Secre t s Ac tThe second model for trade secret protection is the Unifo rm Trade

Secrets Act ("UTSA"), adopted by the National Conference of Commis-sioners on Uni form State Laws.17 The National Conference's intent in

15./d. at 757.16. Id. at 758.17. There are actually two versions of the UTSA. one originally approved by theNational Conferenceof Commissioners n 1979, and an amended version approved by theNational Conference of Commissioners n 1985. See 14 U.L.A. 433 (1985). The 1985amendmentswere to sectionsof the UTSA addressing injunctive elief, damages, the effectof the Act on other laws, and the pmspectivityof the Act. CompareLINIF.TRADESECRETSACT 2, 3, 7 & 11 (1985)with UNIF.TRADESECRETSACT 2, 3, 7 & I 1 (1979). Theywere intended mainly to clarify certain provisionsof the 1979 version and to add to the


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No. 2] The Case for a Federal Trade Secrets Act 433proposing the UTSA was not to revolut ionize the s tandards for t radesecret misappropriation, but to codify existing co mm on law standards andto provide a uniform approach to trade secret misappropriation amon g thestates, ta The enac tment by numerous states of some ve rsi on o f the UT SAreprese nted the first major attempt to legislate trade secrets mis app ropr ia-tion rather than to leave i t in the hands of the courts and the commonlaw . ,9

The UTSA expands the R e s t a t e m e n t ' s definit io n of "trade secret" andsimplif ies the s tandard for determining whether information is kept

remedies available for trade secret misappropriation. S ee James C. Lydon, The DeterrentEffect of the Uniform Trade Secrets Act, 69 J. PAT. & TRADEMARKOFF. SOC'Y 427,439-40(1987). Unless otherwise specified, references in this article to sections of the UTSA areto sections that are the same in both the 1979 and 1985 UTSA versions, and will be citedsimply as UNIF. TRADE SECRETS ACT [section number[.Either the 1979 or 1985 version of the UTSA has been used as a model, at least in part,for fashioning statutory trade secret misappropriation remedies in the following states:Alabama, ALA. CODE 8-27-1 to 8-27-6 (1993)". ,2aska, ALASKASTAT. 2 45.50.910 to45.50.945 (1994); Arizona, ARIZ. REV. STAT. ANi 44-401 to 44-407 (1994); Arkansas,ARK. CODE ANN. 4-75-601 to 4-75-607 (Mici,~ 1993); California, CAL. CIr. CODE 3426 to 3426.11 (West Supp. 1995); Colorado, COLO. REV. STAT. 7-74-101 to 7-74-110 (1986); Connecticut, CONN. GEN. STAT. ANN. 2 35-50 to 35-58 (West 1987);Delaware, DEL. CODEANN. tit. 6, 2001 to 2009 (1993); Florida, FLA. STAT. ANN. ch. 688.01 to 688.09 ('West 1990 & Supp. 1995); Georgia, GA. CODE ANN. 10-1-760 to10-1-767 (Michie 1994); Hawaii, HAW. REV. STAT. 482B-1 to 482B-9 (1992); Idaho,IDAHO CODE 48-801 to 48-807 (1994); lllinois, 765 ILL. COMP. STAT. ANN. 1065/1 to1065/9 (West 1993); Indiana, IND. CODE ANN. 24-2-3-1 to 24-2-3-8 (Burns 1987 :Supp. 1994); Iowa, IOWACODE ANN. 550.1 to 550.8 (West Supp. 1994); Kansas, KA~q.S'rAT. ANN. 60-3320 to 60-3330 (1994); Kentucky, KY. REV. STAr. ANN. 365.880to 365.900 (Michie/Bobbs-Merrill 1994); Louisiana, LA. REV. STAT. ANN. 51:1431 to51:1439 (West 1987 & Supp. 1995); Maine, ME. REV. STAr. ANN. tit. 10, 1541-1548(West 1994); Maryland, MD. CODE ANN., Com. Law. 1I 2 11-1201 to 11-1209 (1990);Minnesota, MINN. STAT. ANN. 325C.01 to 325C.08 (West 1981 & Supp. 1995);Mississippi, MISS. CODE ANN. 2 75-26-I to 75-26-19 (1992); Montana, MONT. CODEANN. 30-14-401 to 30-14-409 (1993); Nebraska. NElL REV. STAT. 87-501 to 87-507(1988 & Supp. 1993); Nevada, NEV. REV. STAT. 600A.010 to 600A.100 (1991); NewHampshire, N.H. REV. STAT. ANN. 350-B:1 to 350-B:9 (1994); New Mexico, N.M.STAT. ANN. 57-3A-1 to 57-3A-7 (Michie 1994); North Carolina, N.C. GEN. STAT. 66-152 to 66-157 (1994); North Dakota, N.D. CENT. CODE 47-25.1-01 to 47-25.1-08(1993); Oklahoma, OKLA. STAT. tit. 78, 85 to 94 (1991); Oregon, OR. REV. STAT. 646.461 to 646.475 (19")3); Rhode Island, R.I. GEN. LAWS 6-41-1 to 6-41-11 (1992);South Carolina, S.C. CODEANN. 2 39-8-I to 39-8-11 (Law. Co-op. 1993); South Dakota,S.D. CODIFIED LAWSANN. 37-29-I to 37-29-11 (1994); Utah, UTArl CODE ANN. 13-24-1 to 13-24-9 (1992); Virginia, VA. CODE ANN. 59.1-336 to 59.1-343 (Michie 1992);Washington, WAStt. REV. CODE ANN. 19.108.010 to 19.108.940 (West 1989); WestVirginia, W. VA. CODE 2 47-22-I to 47-22-10 (1992); and Wisconsin, WIS. STAT. ANN. 134.90 (West 1989). The District of Columbia has also enacted a trade secretmisappropriation statute modeled after the UTSA. D.C. CODE ANN. 48-501 to 48-510(1990)

18. See UNIF. TRADE SECRETS ACT, 14 U.L.A. 369 prefatory note (1985).19. See Linda B. Samuels & Bryan K. Johnson, The Uniform Trade Secrets Act: TheStates ' Response, 24 CREIGIITON L. REV. 49, 49-50 (1990).


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4 3 4 Harvard Journal of Law & Technology [V o l . 8s u f f ic i en tl y co n f i d en t i a l t o q u a l i fy fo r t r ad e s ec re t p ro t ec t i o n . T h u s , t h eU T S A d e f i n e s a t r a d e s e c r e t a s :

i n f o rm a t i o n , in c l u d in g a f o r m u l a , p a t t e rn , c o m p i l a t i o n , p r o -g r a m , d e v i c e , m e t h o d , t e c h n i q u e , o r p r o c e s s , t h a t:(i) d e r iv e s in d e p e n d e n t e c o n o m i c v a l u e , a c t u a l o r p o t e n t ia l ,f r o m n o t b e i n g g e n e r a l ly k n o w n t o , a n d n o t b e i n g r e a d i lya s c e r t a i n a b l e b y p r o p e r m e a n s b y , o t h e r p e r s o n s w h o c a no b t a i n e c o n o m i c v a l u e f r o m i ts d is c l o su r e o r u s e , a n d( ii ) is th e s u b j ec t o f e f fo r ts t h a t a r e r e a s o n ab l e u n d e r t h e c i r -c u m s t a n c e s t o m a i n t a i n i ts s e c r e c y . 20

T h e U T S A a l s o p r o v i d e s a r e l a t i v e l y c o m p a c t d e f i n i t i o n o f m i s a p p r o p r i a -t i o n :(i) a c q u i s i t io n o f a t ra d e s e c r e t o f a n o t h e r b y a p e r s o n w h ok n o w s o r h a s r e a s o n t o k n o w t ha t th e t ra d e s e c r et w a sa c q u i r e d b y i m p r o p e r m e a n s ; o r( i i) d i s c l o s u r e o r u s e o f a t r a d e s e c r e t o f a n o t h e r w i t h o u te x p r e s s o r i m p l i e d c o n s e n t b y a p e r s o n w h o( A ) u s e d im p r o p e r m e a n s t o a c q u i re k n o w l e d g e o f t h e t ra d es e c r e t ; o r( B ) a t t h e t im e o f d i s c l o s u r e o r u s e , k n e w o r h a d r e a s o n t ok n o w t ha t h is k n o w l e d g e o f th e t r ad e s e c r e t w a s

( I ) d e r i v e d f r o m o r t h r o u g h a p e r s o n w h o h a d u t i l i z e di m p r o p e r m e a n s t o a cq u i re i t;( I I ) a cq u i r ed u n d e r c i r cu ms t an ces g i v i n g r i s e t o a d u t y t oma i n t a i n i t s s ec recy o r l i mi t i t s u s e ; o r( II I) d e r iv e d f r o m o r t h r o u g h a p e r s o n w h o o w e d a d u t yt o t h e p e r s o n s e e k i n g r e l i e f t o m a i n t a i n i t s s e c r e c y o rl i mi t i t s u s e ; o r

( C ) b e f o r e a m a t e r i a l c h a n g e o f h is [ o r h e r ] p o s i t i o n , k n e wo r h a d r e a s o n t o k n o w t h a t i t w a s a t r a d e s e c r e t a n d t h a tk n o w l e d g e o f i t h a d b e e n a c q u i r e d b y a c c i d e n t o r m i s t a k e . 21

20. UN1F.TRADESECRETSAcr 1(4).2 1 . I d. a t 1 ( 2 ) .


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No . 2 ] The Case fo r a Federa l Trade Secre t s Ac t 435U n l i k e t h e Restatement, t he U T S A e x p l a i n s t h e m e a n i n g o f t h e p h r a s e" i m p r o p e r m e a n s , " t h o u g h it d o e s so m e r e l y b y w a y o f e x a m p l e , n o td e f i n i t i o n . H e n c e , t h e U T S A s t at e s t h at " [ i ] m p r o p e r m e a n s " i n cl u d es" t h ef t, b r i b e r y , m i s r e p r e s e n t a t i o n , b r e a c h o r i n d u c e m e n t o f a b r e a c h o fa d u t y t o m a i n t a i n s e c r e c y , o r e s p i o n a g e t h r o u g h e l e c t ro n i c o r o t h e rm ean s . "22

B. The Importance of State Law on Misappropriation of Trade SecretsT h a t e v e r y st at e m a i n t a i n s l a w s p r o v i d i n g f o r in j u n c ti v e o r m o n e t a r y

re l ief in the event that a person m isappropr ia tes a t rade secre t i s , o f i t se l f ,a r e l iab le ind ica t ion tha t t r ade s ec re t l aws a re impor tan t . Bu t even i ff ewer s ta t e s r ecogn ized the to rt o f t rade s ec re t m isappro pr ia t ion , i t wo u ldnever theless be deserv ing of s ignificant a tten tion . By a l low ing co m pa nie st o m a i n t a in th e c o n f i d e n t ia l i ty o f t h e i r v a l u a b l e c o m p e t i t iv e i n f o r m a t i o nb u t p e r m i tt in g c o m p e ti to r s to d e v e l o p l ik e i n f o r m a t i o n b y p r o p e r m e a n s ,the to r t s t r ikes a c ruc ia l ba lance be tween encourag ing each ind iv idua lbus ines s to dev e lop va luab le new uses o f in fo rm at ion , and no t undu~.yd i s courag ing the bus ines s ' compe t i to r s f rom l ikewise deve lop ing va luab leuse s . 23 In do ing so , the t r ade s ec re t misappropr ia t ion to r t f i l l s as ign i f i can t gap in the f edera l l aw o f in te l l ec tua l p roper ty by enab l ingc o m p a n i e s t o s a f e g u a r d t h e i r v a l u a b l e b u t n o n - p a t e n t a b l e i n n o v a t i o n s .

22. Id . at 1(1).23. Properly speaking, an innovation is a new idea, method, process or device, Whenused in this Article, it is meant to cover any commercially valuable idea, method, processor device that is new to a particular business (even if not new in an absolute sense) and isat least not widely known among the business' competitors.

The trade secret misappropriat ion tort does more than encourage innovation. Byimposing liability on a party that acquires someone else's innovation by improper means,the tm't discourages such improper conduct from being undertaken. It thus helps enforcea sort of commercial morality among business competitors. Indeed, the early Americancases on trade secret misappropriation emphasized this rationale over the encouragement toinnovation provided by the trade secret tort. S ee , e . g . , Eastman Co. v. Reichenbach, 20N.Y.S. 110, 116 (Sup. Ct. 1892). See also ICaML. SCtlEPPELE, LEGAL SECRETS: EQUALITYAND EFFICIENCYIN TIlE COMMON LAW 240-41 (1988). According to the United StatesSupreme Court, the trade secret tort "also furthers a non-economic interest of the trade secretholder. As the Court stated in both K e w a n e e O i l C o . v . B i c r o n C o r p . , 416 U.S. 470, 487(1973), and Bon ito Boats, lac. v . Thw zde r Craft Boats, In c. , 489 U.S. 141, 155 (1989), "[almore fundamental human right, that of privacy, is threatened when industrial espionage iscondoned or is made profitable." The discussion that follows, however, focuses solely onhow the trade secret tort encourages innovation.


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4 3 6 Harvard Journal of Law & Technology1. Federal Law and the Economics of blnovation

[ V o l . 8

T h e d y n a m i c s i ll us tr a ti n g t h e i m p o r t a n c e o f t ra d e s e c r e t p r o t e c t i o n t oi n n o v a t o r s a re r e la t iv e l y s t ra i g h t f o r w a r d . I f a n i n n o v a t i o n c o u l d b ed e v e l o p e d a t l itt le o r n o c o s t t o th e c o m p a n y d e s i ri n g t h e i n n o v a t i o n , t h e ne a c h c o m p a n y w o u l d h a v e a l l t h e in c e n t i v e i t n e e d e d t o u n d e r t a k e s u c hd e v e l o p m e n t . :4 T h i s , o f c o u r s e , i s n o t t h e c a s e . I n n o v a t i o n s a re o f t e nv e r y c o st ly t o d e v e l o p , r e q u i ri n g s ub s ta n t ia l i n v e s t m e n t s o f t im e , m o n e y ,an d e f fo r t, n o t t o m en t i o n p a t ien ce . -'5 In n o v a t i o n s a r e m ad e a l l th e m o rec o s t l y b y t h e r is k t h a t t h e i n n o v a t i o n m a y f ai l a n d e v e n l e a d t o p o t e n t i a ll i ab i li t y fo r t h e i n n o v a t o r . 26

O n c e a c o m p a n y r e c o g n i z e s t h a t it w i l l b e c o s t l y t o i n n o v a t e , i t isc o n f r o n t e d w i t h a n o b v i o u s p r o b l e m : i f i t c a n n o t p r o f i t b y e x p l o i t i n g i tsi n n o v a t i o n s , t h en it c an n o t r eco u p it s i n v es t me n t i n t h e i n n o v a t i o n s . I f aco mp an y can n o t r eco u p , t h en i t l o s e s i t s mo t i v a t i o n t o i n n o v a t e i n t h e f i r s tp l a c e . 27 T h i s r e s u l t w o u l d h a v e d i s a s t r o u s e f f e c t s o n t h e e c o n o m y ; a sm a n y e c o n o m i s t s , m o s t n o t a b l y J o s e p h S c h u m p e t e r , 2s h a v e a r g u e d f o rg e n e r a t i o n s , a n e c o n o m y ' s g r o w t h i s o f t e n l a rg e l y a fu n c t i o n o f i tsp a r t i c i p a n t s ' a b i l it y to i n n o v a t e , t o c r e a t e n e w , b e n e f ic i a l p r o d u c t s o rs e rv i ce s an d t o b r i n g t h o s e p ro d u c t s o r s e rv i ce s t o t h e mark e~ .p lace . T h i sr e su l t w o u l d a l s o h u r t c o m u m e r s , b y d e p r iv i n g t h e m o f n e w t e c h n o l o g i e s ,i m p r o v e m e n t s a n d e n h a n c e m e n t s . 29

R e c o g n i z i n g b o t h t h e b e n e fi ts o f i n n o v a t i o n a n d t h e n e e d t o a l l o wb u s i n es s e s t o r eco u p t h e i r i n v es t men t s i n i n n o v a t i o n , f ed e ra l l aw p ro v i d est w o p r im a r y e n c o u r a g e m e n t s t o i n n o v a t o r s - - p a t e n t l a w a n d c o p y r ig h tl a w ) T h e f o r m e r l a w a l lo w s o n e w h o " i nv e n t s o r d i s co v e r s a n y n ew

2 4 . S e e E.IAN MACK AAY, ECONOMICS OF INFORMATION AND LAW 110 (199 2).2 5 . S e e G . S . R a s m u s s e n & A s s o c s . v . K a li tt a F l y i n g S e r v ., I n c . , 9 5 8 F . 2 d 8 9 6 , 9 0 0

( 9 t h C i r . 1 9 9 2 ) ( K o z i n s k i , J . ) .2 6 . S e e i d .2 7 . S e e RICI-IARD A . POSNER , ECONOMIC ANALYSIS OF LAW 36 (3d ed . 1986) ; 3

WILLIAM BLACKS'rONE, COMMENTARIES *4 .2 8 , S ee , e . g . , JOSEPH A . SCHU MPET ER, CAPITALISM , SOCIALISM AND DEMOCR ACY (3d

ed . 1950); JOSEPH A . SCt lUMP ETER, TIlE TIIEORY OF ECONOMIC DEVELOPMENT (191 2).2 9 . S e e P E T E R N A N Y E N Y A -T A K IR A M B U D D E , T E C tlN O L O G Y T R A N S F E R A N D

INTERNATIONAL L A W 3 ( 1 9 8 0 ) .3 0 . B o t h o f t h e s e l e g a l r e g i m e s w e r e s p e c i f ic a l l y c o n t e m p l a t e d b y t h e d r a f t e r s o f t h e

U n i t ed S ta te s Co n st it ut io n , w h o in c lu d ed am o n g Co n g re ss" p o w e rs t h e p o w er " [ t l o p r o m o tet h e P r o g r e s s o f S c i e n c e a n d u s e f u l A r t s , b y s e c u r i n g f o r li m i te d T i m e s to A u t h o r s a n dI n v e n to r s t h e e x c l u s i v e R i g h t to t h e i r r e s p e c t iv e W r i t i n g s a n d D i s c o v e r i e s . " U . S . C O N S T.a r t. I, 8 , el . 8 . T h e F i r s t C o n g r e s s s e i z e d o n t h i s p o w e r a l m o s t im m e d i a t e l y a n d e n a c t e dp a t e n t a n d c o p y r i g h t l a w s i n 1 7 9 0 . S e e A c t o f A p r . 1 0 , 1 7 9 0 , o h . 7 , 1 S t a t . 1 0 9 ( f i r s tp a t en t a c t ) ( r e p e a l e d 1 7 9 3 ) ; A c t o f M a y 3 1 , 1 7 9 0 , o h . 1 5 , 1 S ta t . 1 2 4 ( f i rs t c o p y r i g h t a c 0


11/44

N o . 2 ] T h e C a s e f o r a F e d e r a l T r a d e S e c r e t s A c t 4 3 7

a n d u s e fu l p r o c e s s , m a c h i n e , m a n u f a c t u r e , o r c o m p o s i t i o n o f m a t t e r , o ra n y n e w a n d u s e f u l i m p r o v e m e n t t h e r e o f t o o b t a in a g o v e r n m e n t - g r a n t e dr i g h t " t o e x c l u d e o t h e r s f r o m m a k i n g , u s i n g , o r s e l l i n g t h e i n v e n t i o nt h r o u g h o u t t h e U n i t e d S t a t e s " f o r a l i m i t e d p e r i o d . 3~ T h e l a t t e r l a w g r a n t st h e a u t h o r o f a n " o r i g i n a l w o r [ k ] . . . f i x e d i n a n y t a n g i b l e m e d i u m o fe x p r e s s i o n " t h e e x c l u s i v e r i g h t t o r e p r o d u c e , a d a p t , d i s t r i b u t e , p e r f o r ma n d d i s p l a y t h e w o r k f o r t h e l i f e o f t h e a u t h o r p l u s f i f t y y e a r s . 32

W h i l e b o t h o f t h e s e s o u r c e s o f l a w p r o m o t e i n n o v a t i o n , n e i t h e r isw i t h o u t i t s m a j o r l i m i t a t i o n s . T h e p a t e n t p r o c e s s i s s l o w a n d r a t h e rc o s t ly . I n a d d i t i o n , p a t e n t l a w ' s r e q u i r e m e n t s t h at a n i n v e n t i o n b e n o v e l 33a n d n o n - o b v i o u s , 34 a n d t h a t t h e i n v e n t i o n f it w i t h i n o n e o f t h e l a w ' sd e s i g n a t e d s u b j e c t m a t t e r a r e a s , 35 f u r t h e r r e s t r i c t t h e s c o p e o f p r o t e c t i o na f f o r d e d a b u s i n e s s s e e k i n g t o e x p l o i t a r e c e n t i n n o v a t i o n . 36 T h e

( repea led 1802) .3 1 .3 5 U .S .C . 1 0 1 , 1 5 4 ( 1 9 8 8 ). F o r a n i n s ig h t f u l a n a ly s i s o f h o w th e p a t en t l a ws

f o s te r i n n o v a t i o n , s e e Ke n n e th W . D a m , T h e Economic Underpinnings o f Patent Law , 23J . LEO . STUD. 247 (1994) .

32 . 17 U .S . C . 102(a ), 302 (a ) (1988) .3 3 .3 5 U .S .C . 1 02 (1 9 8 8 ) . T h e mo s t s i g n i f i c a n t n o v e l t y h u r d l e s a p a t e n t a p p l i c a n t

mus t c lea r am the requi rement in 102(a) tha t the app l ic an t ' s inve n t ion was n o t " kn ow n oru s e d by others i n t h i s c o u n t r y , o r p a t e n t e d o r d e s c r ib e d i n a p r i n t e d p u b l i c a ti o n i n t h i s o ra f o r e ig n c o u n t r y , b e f o r e t h e i n v e n t io n t h e r e o f b y t h e a p p l i c a n t f o r p a t e n t , " ( e mp h a s i sa d d e d ) a n d th e r e q u i r e me n t i n 1 02 (b ) t h a t th e a p p l i c a n t ' s i n v e n t io n wa s n o t "p a t e n t e d o rdesc r ibed in a p rinted pu b l ica t ion in th i s o r a fo re ign coun t ry o r in p ub l ic use o r on sa le inth is cou n t ry [by anyone, including the applicant], m o r e t h a n o n e y e a r p r i o r t o t h e d a t e o ft h e a p p l i c a t io n f o r p a t e n t . "

34 . 35 U.S .C . 103 (1988). A n invent ion is obv ious, and h ence no t the p ro pe r sub jec to f a p a t e n t , i f t h e ~ s u b j e c t ma t t e r s o u g h t t o b e p a t e n t e d a n d t h e p r io r a r t a r e s u c h t h a t t h es u b je c t m a t t e r a s a w h o l e w o u l d h a v e b e e n o b v i o u s . . , t o a p e r s o n h a v i n g or d in a r y s ki llin the a r t to whic h sa id sub jec t m a t te r pe r ta ins ." Th e sk i ll l eve l a t i s sue i s no t me re ly thesk il l o f the average pe rson , o r e ven the hypo the t ica l " reaso nab le ma n ," bu t the sk il l o f onewi th e x p e r t i s e i n t h e a p p l i c a b le " a r t . " See D a n n v . J o h n s t o n , 4 2 5 U . S . 2 1 9 , 2 2 9 ( 19 7 6 ).

W h i le i t ma y a p p e a r t h a t t h e n o v e l t y a n d n o n - o b v io u s r e q u i r e me n t s a re r e d u n d a n t , o rt h a t o n e i s s u b s u m e d wi th in t h e o th e r , t h i s i s n o t t h e c a s e . A n in v e n t io n ma y b e n o v e lb e c a u se n o o n e o th e r t h a n t h e p a t e n t a p p l i c a n t h a d d e v e lo p e d i t t o d a t e , b u t t h e k n o w le d g en e e d e d t o c r e a t e t h e i n v e n t io n ma y h a v e b e e n r e a d i ly a v a i la b l e p r i o r t , . t h e i n v e n t io n ' sd e v e l o p m e n t . S u c h a n i n v e n t io n w o u l d b e n o v e l b e c a u s e it h a d n o t b e e n d e v e l o p e dp r e v i o u s l y , b u t o b v i o u s b e c a u s e i t c o u l d h a v e b e e n d e v e l o p e d b y o n e p o s s e s s i n g t h eordinary level of skil l in the re levant fie ld . O n the oth er han d, a pat ent ap plic an t ' s inve ntio nma y b e n o n - o b v io u s b e c a u s e t h e p e r s o n w i th o r d in a r y s k i l l s i n t h e a p p l i c a n t ' s f i e ld c o u ldn o t h a v e d ev e lo p ed t h e i n v e n t io n , b u t s o m e o n e w i th e x t r a o rd in a r y s k i ll s ma y h a v e a l r e a d yd e v e l o p e d t h e i n v en t i o n o r e x p o s e d t h e b a s is f o r d e v e l o p i n g t h e in v e n t io n . T h e p a t e n ta p p l i c a n t ' s i n v e n t io n wo u ld t h e n b e n o n - o b v io u s b u t n o t n o v e l .

35 .3 5 U .S .C . 101 (1988). New a lgori thms a re a s ign i f ican t exam ple o f an inven t io nth a t d o e s n o t c o me wi th in t h e s c o p e o f t h e s u b j e c t ma t t e r o p e n t o p a t e n t p r o t e c t i o n . SeeGo t t s c h a lk v . B e n s o n , 4 0 9 U .S . 6 3 , 7 1 - 7 2 (1 97 2 ). C u s to m e r l i s ts a n d a d v e r ti s i n gcampaigns l ikewise a re g enera l ly no t c lass i f ied as pa ten tab le sub jec t ma t te r . See K e w a n e eOi l C o . v . B i c r o n C f , g . , 4 1 6 U .S . 4 7 0 , 4 8 3 ( 19 7 4) .

3 6 . P a t e n t l a w i s f u r t h e r l im i t e d b y t h e f a c t t h a t o n ly t h e i n v e n t io n i t s e l f , n o t t h e


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4 3 8 Harvard Journal of Law & Technology [Vol. 8copyr igh t sys tem is m uch f as te r and c heap er than the pa ten t p roc es s , bu ti t too has s e r ious limi ta tions on the en cou ragem en t i t g ives bus ines ses toinnova te. The mos t obv ious one i s i ts l imi ted sub jec t ma t t e r : cop yr igh tp r o t e c t i o n i s o n l y a v a i l a b le t o g u a r d " w o r k s o f a u th o r s h ip f i x e d in a n yt a n g i b le m e d i u m o f e x p r e s s i o n " a n d , e v e n w i t h re s p e c t t o t h e se w o r k s ,i t on ly p ro tec t s the fo r m o f expres s ion , no t the idea be ing ex pres sed . 37Copyr ight , in shor t , p ro tects innovat ions in express ion only , and providesno she l t e r fo r innova t ions if i p roces se s , p roce dures o r any o th e r ar ea .aS

2. Trade Secret Law and InnovationGive n the s a feguards p rov ided by f edera l pa ten t and c opyr igh t l aw , a

bus ines s cons ide r ing inves t ing in innova t ion has th ree op t ions : (1 ) workon ly on innova t ions tha t w i l l qua l i fy fo r f ede ra l she l t e r ; (2 ) wo rk oni n n o v a t i o n s t h a t , o n c e c r e a t e d , w i l l b e m a d e p u b l i c w i t h o u t f e d e r a lshe l t e r ; o r (3 ) work on innova t ions tha t l ack f edera l she l t e r , bu t , oncecreate d , wi l l be kept sec re t . 39 Fo r the reasons s ta ted abo ve, the f i r s top t ion i s no t en t i r e ly s a t i s f ac to ry . O ther than fo r innova t ions in expres -s ion , q ua l i fy ing fo r f ede ra l she l t e r is s low , cos t ly and uncer ta in . Th esecond op t ion is eve n l e s s appea l ing : i f com pe t i to r s a r e ab le to ob ta in abus iness ' i~movation a t less cos t than the bus iness incu rred in crea t ing t h einuovat ion , then the compet i tors are in a bet ter pos i t ion than the creat ingb u s i n e s s t o e x p l o i t t h e i n n o v a t i o n , b e c a u s e t h e y h a v e n o t " w a s t e d "va luab le r esource s on the c rea t ive p roce s s . 4 Th i s l eaves the th i rd

concre te idea beh ind the inven t ion , i s pa te n tab le . See P a r k e r v . F l o o k , 4 3 7 U . S . 5 8 4 , 5 9 3 -9 4 ( 1 9 7 8 ) .

3 7 . 1 7 U . S . C . 1 0 2 ( a ) ( 1 9 8 8 ) . " I t is a n a x i o m o f c o p y r i g h t l a w t h a t t h e p r o t e c t i o ng r a n t e d t o a c o p y r i g h t e d w o r k e x t e n d s o n l y t o t h e p a r t i c u l a r e x p r e s s i o n o f t h e i d e a a n dnev er to the idea i ts e lf ." S id & M ar ry Kr of f t T e le v i s io n P rods . v . ? .'I .cDonald 's C o o . , 562F . 2 d 1 1 5 7 , 1 1 6 3 (9 t h C i r . 1 9 7 7 ) .

3 g . T h e C o p y r i g h t A c t i s c l e a r o n t h i s p o i n t . I t s t a t e s , i n 1 0 2 (b ) :I n n o c a s e d c c s c o p y r i g h t p r o t ec t i o n f o r a n o r ig i n a l w o r k o f a u t h o r s h ipe x t e n d t o a n y i d e a , p r o c e d u r e , p r o c e s s , s y s t e m , m e t h o d o f o p e r a ti o n ,c o n c e p t , p r i n c ip l e , o r d i s c o v e r y , r e g a r d l e s s o f t h e f o r m i n w h i c h i t i sd e s c r i b e d , e x p l a i n e d , i l l u st ra t e d , o r e m b o d i e d i n s u c h w o r k .

1 7 U . S . C . 1 0 2 ( b ) ( 1 9 8 8 ) .3 9 . See J a m e s R . M c K o w n , Taking Prop erty: C onstitutional Ramifications o f LitigationInvolving Trad e Secrets, 13 REV. LING. 253 , 257 (1994) (c i t ing ~CH AR D I . MILLER, LEGAL

ASPECTS OF TECHNOLOGY UTILIZATION 12-14 (197 4)) .4 0 . " S u f f ic i e n t ly h i g h c o s t s o f i n n o v a t i o n a n d l o w c o s t s o f i m i t a t i o n . . , w i ll l e a d t o

t h e e v e n t u a l s ui .~ p re ss io n o f a ll f i r m s t h a t c o n t i n u e t o a t te m p t t o i n n o v a t e . " S i d n e y G .W in te r , Com petition and Selection, in THE NEW PALGRAV E: A DICTIONARY OF ECONOMICS


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N o . 2 ] T h e C a s e f o r a F e d e r a l T r a d e S e c r e ts A c t 4 3 9o p t i o n - - a b u s i n e s s i n v e s t i n g i n i n n o v a t i o n s t h a t i t c a n m a i n t a i n i n s e c r e c yw h i l e e x p l o i t i n g t h e i n n o v a t i o n s to r e c o v e r i ts e x p e n s e s a n d , i t i s h o p e d ,t u r n a p r o f i t f l

T r a d e s e c r e t l a w p l a y s a s i g n i f i c a n t r o l e i n c o n j u n c t i o n w i t h t h i s t h i r do p t i o n . 4~ W h i l e i t i s e x p e n s i v e t o i n n o v a t e , i t i s e v e n m o r e e x p e n s i v e t oi n n o v a t e , a n d e x p l o i t i n n o v a t i o n , i n s e c re c y .4 3 O f c o u r s e , a s s u m i n g i t i sm o r e p r o f i t a b l e f o r a c o r p o r a t i o n t o d e v e l o p o r e x p l o i t a n i n n o v a t i o n i ns e c r ec y t i m t o d o so p u b l ic l y , o n e c a n e x p e c t t h e c o r p o r a t i o n t o e x p e n dr e s o u r c e s o n m a i n t a i n i n g s e c re c y . A g a i n , h o w e v e r , a c o r p o r a t i o ne n c o u n t e r s a b a s i c e c o n o m i c p r o b l e m : i t m a k e s n o s e n s e t o s p e n dr e s o u rc e s o n c o n f i d e n t i a l i ty m e a s u r e s i f t h o s e r e s o u r c e s e q u a l o r e x c e e dt h e r e la t iv e v a lu e o f k e e p i n g a n i n n o v a t i o n a w a y f r o m c o m p e t i to r s . T h u s ,a c o r p o r a t i o n w i l l in v e s t in c o n f i d e n t ia l i ty m e a s u r e s u p t o t h e p o i n t w h e r et h e d i r e c t a n d i n d i r e c t c os t o f t h o s e m e a s u r e s e q u a l s t h e c o r p o r a t i o n ' sm a r g i n a l e x p e c t e d l os s i f i ts i n n o v a t i o n is d i s c o v e r e d b y t h e c o m p e t i t i o n . '~

545, 547 (John Eatwell et al . eds . , 1987). Fo r a furthe r explanat ion of this con cep t (albei ti n t he con t ex t o f copyr igh t ) , s ee Wendy J . Gordon , Asymmetric M ark et Failure an dPrisoner's Dilemma in Intellectual Property, 17 U . DAYTON L. REV . 853, 863 -64 (1992).See a/so J . Miles Hanisee, C om m ent, An Economic View of Innovation and Proper ty Righ tProtec t ion in the Expanded Regula tory S ta te , 21 PEPP. L. R EV . 127, 148-49 (1993)(expla in ing the innovat ion/ im i ta t ion d i lemm a in te rms of the bas ic econo mic theor ies of" f r ee r i de r s" and t he " t ragedy o f t he comm ons" ) .4 1 . S ee POSNER, supra no te 27 .

42 . Tra de secre t l aw a lso p lays an impor tant ro le in re la t ion to the f i r s toption--developing innovations that will qualify fo r federal shelter, an d in particular, pa ten tshe l te r . A t the incept ion of the innova t ion process , a com pany canno t know fo r cer ta inwhether any workable hmovation it de velo ps will be patentable, as patentability will depe ndon the unique features of the innovation an d the available sta, .e of knowledge at the t ime theinn ov ation is sou ght to be patented. Because of the special protect ion accorded tradesecre t s , however , the company can take some so lace in knowing tha t i f i t deve lops avaluable innovation that turn s ou t to b e un patenta ble, i t s ti ll ma y b e able to p rofi t f rom theinnovat ion by explo i t ing i t in secret .43 . Innovations, especial ly inno vativ e processes, can be ke pt secret by me asures suchas physical security, restricted access, non-disclosure ag reem en ts and employee non-com petecovenan ts . MICHAELA. ~ , MODERN INTELLECTUALPROPERTY 34 -46 (3d ed. 1995);D e r e k P . M a r t i n , C o m m e n t , An E mp loye r's Guide to Protect ing Trade Secrets fro mEmployee Misappropr ia ti on , 1993 B .Y .U .L . REV. 949 , 955 -56 , 968 -74 (1993) .

44 . See Note , Trade Secr et Misappropriat ion: A Cost-Benefit Resp onse to the FourthA m e n d m e n t A n a l o g y, 106 HARV. L. R EV. 46 1, 47 3 (1992). See a lso Rockwell GraphicsSys. v. DE V Ind us. , 925 F .2d 174, 180 (7th Cir . 1991) (Posn er, J . ) . In this contex t , themargina l expec ted loss i s " the loss of the t rade secre t to the owner mul t ip l ied by thede cre ase in the r i sk tha t the secre t wi ll be d i scovered by a com pet i tor brou ght abou t bytaking addi t iona l precau t ions ." Note , supra , a t 473. Fo r example , a ssume tha t cer ta ininfonm t ion i s wor th $150,009 to a com pany i f kept away f rom the com pan y ' s compet itors,but worth only $5 0,00 0 if disclosed to any on e competitor. Th e company in this s i tuat ioncan be expected to spend up to $10,000 in t ime, effort and m one y fo r a security option tha tdecreases by ten percent the chan ce tha t the co m pa ny 's secre t inform ation will be disclosedto i ts com pet i tors ( ($!5 0 ,00 0 - $50,000 ) x 10% = $10,000) .


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4 4 0 Harvard Journal of La w & Technology [ V o l . 8I f a c o r p o r a t i o n t a k e s th e s e r e a s o n a b l e p r e c a u t i o n a r y m e a s u r e s

e x p e c t e d o f i t , t h e t o r t o f t r a d e s e c r e t m i s a p p r o p r i a t i o n s t e p s i n t o p r o v i d ea n a d d e d l a y e r o f p r o t e c t i o n . T h e t o r t e n a b l e s t h e c o r p o r a t i o n t o e x c l u d ea n o u t s i d e r f r o m u s i n g i t s i n n o v a t i o n , s o l o n g a s t h e o u t s i d e r k n e w i t h a da c q u i r e d t h e i n n o v a t i o n t h r o u g h s o m e t y p e o f i m p r o p e r c o n d u c t o r a s ar e su l t o f a b r e a k d o w n i n t h e c o r p o r a t i o n ' s c o n f i d e n t i a l i t y p r o g r a m . A t i t sr o o t , t h e n , t h e t o r t p r o v i d e s t h a t i f a c o r p o r a t i o n t a k e s r e a s o n a b l ep r e c a u t i o n a r y m e a s u r e s t o p r o t e c t i ts i n n o v a t i o n , i t n e e d n o t s p e n d o ne x t r a o r d i n a r y p r e c a u t i o n a r y m e a s u r e s t o p r e v e n t d i s c l o s u r e ; t h e l a w ,i n s t e a d , w i l l i n s u r e a g a i n s t c o m m e r c i a l l y u n d e s i r a b l e d i s c l o s u r e s , a n d w i l le v e n f o r g i v e t h e c o r p o r a t i o n ' s m i s t a k e n d i s c l o s u r e s i n a p p r o p r i a t ec i r c u m s t a n c e s . 45 T h i s d e c r e a s e s t h e a m o u n t o f r e s o u r c e s t h e c o r p o r a t i o n

Thi s example is overly s imp l i f ied becau se i t do es not f ac to r in : (1) the dec rease d va luet o t he ow ner o f i t s t r ade s ec r e t due t o t he r i s k t ha t t he s ec r e t w i l l be " d i s cove r ed" by acompeti tor through independent e ffor t or r eve r se en ginee r ing; (2) the dec reased va lue to theow ner o f a s ecu r i t y op t i on becaus e o f t he r i s k t ha t t he s ec r e t w i l l be " d i s cove r ed" by acompeti tor through indep end ent e f for t or r ev er se en ginee r ing; (3) the var i ance in the va lueto t he ow ner o f i ts tr ade s ec r e t depen d i ng on how m any o f i t s com pe t i t o r s w i ll even t ua l l yrece ive i t s t r ade secre t i n the event the secre t i s i n i t i a l ly acqui r ed by jus t one compet i tor( e . g . , i f the co m pe t i t o r se l l s t he s ec r e t) ; and ( 4 ) the va r i ance i n the va l ue t o t he ow ner o fi ts t rade secre t depend ing on ho w va luable i ts i nform at ion i s i f kno w n by a ll i t s com pet i tor sversus som e small er s e t o f com pet i tor s . I t m ay be the case , h ow ev er , t ha t these addi t ionalf ac tor s cancel each o ther out. Fo r exam ple , the d i sco un t ra t e appl i ed to the va lue o f a wades ec r e t due t o t he r i s k o f i ndep end en t d i s cove r y o r r eve r s e eng i nee r i ng p r obab l y ( bu t no tne ce s s a r i l y ) w i l l equa l t he d i s cou n t r a te app l i ed t o t he s ecu r it y op t i on due t o t he r is k o fi ndep end en t d i s cove r y o r r eve r s e eng i nee r i ng . A l s o , t he ri sk t ha t a d i s c lo s u r e to onecom pe t i to r w i ll l e ad t o a d i s c l o s u r e t o an o t he r com pe t i t o r is i nve r s e l y p r opo r t iona t e t o t hed r op i n va lue o f a t rade s ec r e t i f kno w n t o on e com pe t i t o r ve r s us t w o com pe t i t o r s , becaus et he f i r s t com pe t i t o r ha s an i n t e r e s t s i m i l a r t o t he ow ner i n avo i d i ng a f u r t he r d r op i n t heva lue o f t he t r ade s ec r e t . A l l t o l d , t he r e f o r e , the r ea s onab l e com pany m ay s i m p l y a s s um ethat t hese addit ional fac tor s ba lance out to ze ro bec ause the co s t of ca l cu la t ing the se f ac tor sis g r ea t e r t han t he va l ue o f t he i nc r ea s ed accu r acy t hey p r ov i de t o t he co m pan y ' s s ecu r it yca lcula t ions .

4 5 . See Note, supra note 44 , a t 473 . On ce aga in , t he ac tua l econ om ics of th i s s itua t iona r e no t qu i te s o s im p l e . A s s u m i ng a m i s app r op r i a t o r , a f t e r a cqu i r i ng a com pan y ' s t r adesecret , would i t sel f keep the secret conf ident ial , i t may be di f f icu l t for the t ra de sec ret ow ne rto r ea lize tt m t it s s ec r e t i n f o r m a t i on has be en m i s app r op r i a t ed , s ee i ng a s ~ [o ]ne o f t h e . . .p ropert ies o f information i s t ha t many peop le can s imul t aneo us ly p osse s s i t wi thout k now ingwh o e lse has i t . " SCHEPPELE,supra no t e 23 , a t 241 -42 n . 36 . A n d even a ft e r l e a r n ing o ft he m i s app r op r i a t i on , t he ow ner w i l l i ncu r costs i n enforc ing i t s l ega l f ight s aga ins t t hemisappmpriator . In sum, despit e the pro tec t ion prov ided by t r ade secre t l aw, a t r ad e secre tow ne r w i l l i nves t in ex t r a p r ecau t i ona r y m eas u r e s (1 ) t ha t a r e m or e expen s i ve than t hem ~ i n a l expec t ed l os s o f its tr ade s ec r e t , see supra no t e 44 , bu t a r e ( 2 ) l e s s expe ns i ve t hant he m arg ina l expec t ed l o s s p / us t he " en f o rcem en t co s t ' - - t ha t i s , t he app r op r i a te l y d i s coun t edcos t o f de tec ting aa .5 prosecuting any m isappro pr i a t ions tha t m ight oc cu r due to the abs enc eo f t h e e x t r a p r e c a u t i o n a ry m e a s u r e s .

Whi le there i s no em pi r i ca l da ta on ho w high th i s "en forc em en t co s t " i s , i t i s l ike ly tobe r e la tive ly low for the fo llowing r easons : ( l ) p rose cut ion o f t r ade secre t misappro pr i a t ioncases i s m ade l es s cos i ly by the genera l ava il ab il it y o f a t torney f ees and pu ni t ive dam ag es


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N o . 2 ] T h e C a s e f o r a F e d e r a l T r a d e S e c r e ts A c t 4 4 1m u s t sp e n d o n p re c a u t io n a r y m e a s u r e s , t h e r e b y i n c r e a s i n g t h e a m o u n t o fr e s o u rc e s a v a i la b l e t o t h e c o r p o r a t i o n f o r i n n o v a t i o n , t h e p r o f i t a b i l i t y o fi n n o v a t i o n s , a n d t h e o v e ra l l i n v e s t m e n t i n i n n o v a t i o n .

O b v i o u s l y , t h e p r o t e c t i o n a f f o r d e d b y t ra d e s e c r e t l a w i s l es s t h a na b s o l u t e . I n d e e d , i f t h e g o a l o f t h e t r ad e s e c r et t o r t w a s t o p r o v i d ea b s o l u t e p r o t e c t i o n to th e f ir st c o m p a n y t o d e v e l o p a n i n n o v a t i o n , i t f a ll sf a r s h o r t o f t h e m a r k , I t d o e s n o t a l l o w t h e fi rs t c o m p a n y t o p r e v e n to t h e r c o m p a n i e s f r o m l a te r in d e p e n d e n t l y d i s c o v e r i n g , a n d u s i n g , th ec o m p a n y ' s i n n o v a t i o n . I t a ls o d oe s n o t e n a b l e t h e fi rs t c o m p a n y t o b a ro th e rs f ro m u n c o v e r i n g th e c o m p a n y ' s i n n o v a t i o n b y p r o p e r m e a n s , s u c ha s r e v e r s e e n g i n e e r i n g o r p e r m i s s i b l e d i s c l o s u r e .

T h e g o a l o f t h e t r a d e s e c r e t t o r t , h o w e v e r , i s n o t s o l e l y t o g u a r d t h ei n t e r e s t s o f thef irs t c o m p a n y to d e v e l o p a n i n n o v a t i o n , b u t t o e n c o u r a g eth e m a x i m u m b e n e f ic i a l a m o u n t o f i n n o v a t i o n b y all c o m p a n i e s . T h u s ,w h i l e a ff o r d in g e a c h c o m p a n y e x t r a p r o t e c t io n f o r i ts i n n o v a t i o n s a g a i n s td i s c l o s u r e b y i m p r o p e r m e a n s a n d m i s t a k e , t h e t r a d e s e c re t t o r t s t il la l l o w s a l l o t h e r c o m p a n i e s a n e q u a l o p p o r t u n i t y t o d i s c o v e r t h e s a m ei n n o v a t i o n i n d e p e n d e n t l y o r b y a c c e p t a b le c o m m e r c i a l m e a n s . T h i s t r a d e -o f f le a d s t o s e v e r a l d e s i r a b l e e f f e c ts , e a c h o f w h i c h i s re l a t e d t o t h e o t h e r .F i r s t, t h e t r a d e - o ff e n c o u r a g e s c o m p a n i e s t o i n v e st i n c o m p l e x i n n o v a t i o n st h a t a r e n o t e a s i l y d u p l i c a t e d b y i ts c o m p e t i t o r s , a n d d i s c o u r a g e s t h e mf r o m o v e r - i n v e s t in g i n s i m p l e i n n o v a t io n s . S e c o n d , i t p r e v e n t s c o m p a n i e sf r o m o b t a i n i n g m o n o p o l i e s o v e r i n n o v a t i o n s t ha t d o n o t q u a l i f y f o r p a t e n tp r o t e c t io n a n d p r o v i d e s a s t ro n g i n c e n t iv e f o r c o m p a n i e s t o p u r s u e p a t e n tp r o t e c t io n f o r i n n o v a t i o n s t h a t d o s o q u a l i f y . T h i s p r e s e r v e s t h e c e n t r a lr o l e o f th e p a t e n t l a w s i n c o n t r o l l i n g t h e c r e a t i o n a n d d u r a, '. io n o fm o n o p o l i e s o v e r i n n o v a t i o n s .46 F i n a l l y , t h e t r a d e s e c r e t t r a d e - o f f a l l o w s

to the prevailingplaintiff, (2) the costs of detection and prosecution are discounted becausethey are future expenditures, and (3) the costs of prosecution and some of the costs ofdetection are further discounted by the fact that they will ne ver arise if no misappropriationOCCHTS.46. See Bonito Boats v. T hun der Craft Boats, 489 U.S. 141 , 150-51 (1989); Kew aneeOil Co. v. Bicron Corp., 416 U.S. 470, 481-89 (1974). The term "m onopoly" is used herein a lay sense and is not intended to connote a mon opoly as understood by econom ists andlawyers. A patent gives its holder a right to prevent others from duplicating its patentedprocess or invention, but it does not prevent others from com peting w ith the holder by usingdifferent processes or inventions. Thu s, a patent does not ne cessarily con fer any significantpower on its holder in any relevantproduct or service market unless th ere are no reasonablesubstitutes in that market for the patented proce ss o r innovation. Absent significant marketpow er in a relevant market, there is no legal/econom ic mon opoly. See Dam, supra note 31,at 249-50. See also Abbo tt Labs. v. Brennan, 952 F .2d 13 46 , 1355 (Fed. Cir. 1991), cert.denied, 112 S. Ct. 2993 (1992); Am erican Hoist & Derrick C o. v. So wa & Sons, In c., 725F.2d 1350, 1367 (Fed. Ci r . ) , cert. denied, 469 U.S. 821 (1984).


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4 4 2 H a r v a r d J o u r n a l o f L a w & T e c h n o lo g y [ V o l , 8e a c h c o m p a n y t o s e a r c h f o r n e w , n o n - p a t e n ta b l e i n n o v a t i o n s s e c u r e i n t h ek n o w l e d g e t h a t i t w i l l b e a b l e t o u s e a n y i n n o v a t i o n i t f i n d s e v e n i f i t i sn o t t h e f i rs t a c q u i r e r o f t h e i n n o v a t i o n . 47

II. T H E C A S E F O R AF E D E R A L T R A D E S EC R E T L A W

I t m a y b e t h at a l l C o n g r e s s n e e d s t o m o t i v a t e i t t o f e d e r a l i z e a ne x i s t i n g b o d y o f st a te l a w is p r o o f th a t t h e b o d y o f l a w i s c r i t ic a l f o rc o m p e t i t io n . I n t ha t e v e n t , t h e d i s c u s s i o n i n t h e p r e c e d i n g s e c t i o n is a l lt h a t is n e c e s s a r y t o j u s t i f y f a s h i o n i n g a f e d e r a l t r a d e s e c r e t s a c t .H o w e v e r , t o t h e e x t e n t t h a t t h e c o n c e p t o f f e d e r a l i s m is o f c o n c e r n t of e d e r a l l e g i s l a t o r s , t h e f a c t t h at th e t o r t o f m i s a p p r o p r i a t i o n o f t r a d es e cr et s e n c o u r a g e s s o c i a l l y b e n e f i c ia l i n n o v a t i o n d o e s n o t a lo n e e x p l a i nw h y t h i s to r t s h o u l d b e f e d e r a l i z e d . I n s t ea d , s o m e i n d e p e n d e n t b a s is ,r e l e v a n t t o t h e f re e f l o w o f c o m m e r c e a m o n g s ta te s o r t o t h e o p e r a t i o n o ri n t e r e s t s o f a n a t io n a l g o v e r n m e n t , i s n e e d e d t o s u p p o r t a c a l l f o rt r a n s f o r m i n g a t r a d i t i o n a l a r e a o f st a te l a w i n to a n e w b o d y o f fe d e r a ll a w . T h i s s e c t i o n p r o v i d e s t w o s u c h i n d e p e n d e n t b a s e s fo r a d o p t i n g af e d e ra l l a w o f tr a d e s e c r e t m i s a p p r o p r i a t i o n .

A . V ar i ance s A m ong t he S t a t es and t he N e e d f o r U n i f o r m it yT h e b e s t re a s o n f o r e n a c t i n g f e d e r a l l e g i s l a t i o n t o d i s p l a c e s ta t e l a w

o n t ra d e s e c r e t m i s a p p r o p r i a t i o n i s t h e n e e d f o r n a t i o n a l u n i f o r m i t y i n t h i sa r e a o f la w . A s n o t e d i n S e c t i o n I ( A ) , e v e r y s t a te p r o te c t s a b u s i n e s s 't ra d e s e c r e ts f r o m m i s a p p r o p r i a t i o n , a n d t h e v a s t m a j o r i t y d o s o v i a t h e

47. Cf. Wendy J. Gordon, On Ow ning Information: Intellectual Property and theRestitutionary Impulse, 78 VA. L. REV . 14 9, 157-58 (1992).Th e impo rtance o f this last point should not be understated. Patent law, unlike tradesecret law, provides the patent holder with protection against subsequent independentdiscovery of her patented invention. 35 U.S.C. 154 (1988). Thus. others wh o pursue thesame invention but are slower than the holder to complete the invention or obtain patentprotection for the invention essentially lose their investment. Th e patent system minimizessuch losses in two way s: (1) it is designed to encourage potential patent h olders to ap ply forpatents at the earliest possible stage, thus leading to the issuance of patents as quickly aspossible (given the adm inistrative confines o f the system), and (2) the process of issuing apatent reveals the patented invention to the public, so others are notified that they shouldcease investing in the same (or equivalent) invention. See Dam. supra note 31, at 264-65.In this wa y, only those working on the same invention as the future patent holder at roughlythe same time are in serious risk of having invested substantial am ounts in an invention thatthey will lose by not being the first to the Patent Office.


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No. 2] The Case for a Federal Trade Secrets Act 443adoption of state statutes based on the UTSA. Yet, despite this universalrecognition and near-universal origin of trade secrets protection, statesvary widely in their treatment of trade secret misappropriation.

1 . A B r i e f S a m p l e o f S t a t e M i s a p p r o p r i a t i o n L a w s

Part of the lack of uniformity results, of course, from the fact that notall states have adopted trade secret statutes modeled after the UTSA.Some states, most notably New York, Pennsylvania, and Texas, continueto prefer the R e s t a t e m e n t approach to trade secret misappropriation.4gAlso, two versions of the UTSA are in circulation: the original 1979ve rs io n and the amended 1985 version. 49 Several states, inc lud ingArkansas, 5 Delaware, 51 and Washington ,52 enacted trade secret statutesfollowing publication of the original UTSA but prior to pub lica tion of thecurrent, amended UTSA; many of those states have not amended theirtrade secret statutes to conform to the curren t UTSA. Other states,inc lud ing F lorida, s3 Nevada, 54 and Rhode Island, 5s did not enact theirtrade secret statutes until after 1985, and hence used the current UTSAas their legislative model.

However, even if one considers only states that borrowed from theUTSA and only those parts of the UTSA that are the same in both the1979 and 1985 versions, there is still a serious lack of uniformi ty. Thisis due, in part, to the tact that many states modified the UTSA when theydraf ted their trade secret statutes. The statutes of Alabama and NorthCarolina, for example, differ substantially from both the 1979 and 1985UTSA. Alabama's trade secret statute provides less protection than theUTSA, while North Carol ina 's statute provides more. 56 Less ser ious , but

48. See supra note 12.49. See supra note 17.50. S e e AP,X. CODE AttN. 4-75-601 to -607 (Michie 1993).51. See DEL. CODEANN. tit. 6, 99 2001 to 2009 (1993).52. S e e WASH. REV. CODEANN. 99 19.108.010 to .940 (West 1989).53. See FLA. STAr. ANN. 9 688.001 to .009 (West 1990 & Supp. 1995).54. S ee NEV. REV. STAT. 99 600A.010 to .100 (1991).55. S ee R.I. GEN. LAWS 6-41-1 to -It (1992).56. See Thad G. Long. TheAlabama Trade Secrets Act , 18 CUMB. L. REV. 557 (1988);Joseph E. Root & Guy M. Blynn,Aba ndon men t o f Common-Law Principles: The North

Carolina Trade Secrets Protection Ac t, 18 WAKEFORESTL. REV. 823 (1, ;2). Alabama'sstatute was intended to retain some of the features of theRestatement approach to tradesecrets. ALA.CODE 9 8-27-2 cmt. (1993). To that end, Alabamadefines a trade secret asinformation hat:a. Is used or intended for use in a trade or business;


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444 Harvard Journal of Law & Technology [Vol. 8s ti l l n o t e w o r t h y , d e p a r t u r e s f r o m th e U T S A m o d e l c a n b e s e e n i n m a n yo t h e r s t at e tr a de s e c r e t s t at u te s . F o r e x a m p l e , a n u m b e r o f s t a t es h a v e n o ta d o p t e d t h e U T S A ' s c e n tr a l d e f i n i t i o n o f " tr a de s e c r e t ." C a l i fo r n i ad r o p p e d t h e U T S A r e q u i r e m e n t t ha t a t ra d e s e c r e t n o t b e " r e a d i lya s c e r t a i n a b l e b y p r o p e r m e a n s . "sT I n N e b r a s k a , i n f o r m a t i o n i s n o td e s e r v i n g o f t r ad e s e z r e t p r o t e c t io n s i m p l y i f it i s " k n o w n t o" o r" a s c er t a in a b le b y p r o p e r m e a n s b y" o t h e r s ) s C o l o r a d o w e n t s o f a r a s t oe l i m i n a t e t h e b u l k o f th e U T S A ' s d e f i n i ti o n o f a t ra d e s e c r e t , o p t i n gi n st e ad f o r a m o r e a m o r p h o u s t e s t w h e r e b y i n f o r m a t i o n i s d e s e r v i n g o ft ra de s e c r e t p r o te c t io n w h e n " th e o w n e r t h e r e o f . . . [ ta k e s] m e a s u r e s top r e v e n t t h e s e c r et f r o m b e c o m i n g a v a i la b l e t o p e r s o n s o t h e r th a n t h o s es e l e c t e d b y t h e o w n e r t o h a v e a c c e s s t h e r e to f o r l i m i t e d p u r p o s e s . "59S i m i l a r d e p a r t u r e s f r o m th e U T S A c a n b e fo u n d in v a r i o u s s ta t e s'd e f i n i t i o n s o f " m i s a p p r o p r i a t i o n " 6 a n d " i m p r o p e r m e a n s ," 6 1 o r i n t h er e m e d i e s s t a te s p r o v i d e f o r m i s a p p r o p r i a t io n s . 62

b . I s i n c l u d e d o r e m b o d i e d i n a f o r m u l a , p a t t e r n , c o m p i l a t i o n , c o m p u t e rs o f t w a r e , d r a w i n g , d e v i c e , m e t h o d , t e c h n iq u e , o r p r o c e s s ;c . I s n o t p u b l i c l y k n o w n a n d i s n o t g e n e r a l l y k n o w n i n t h e t r a d e o rb u s i n e s s o f t h e p e r s o n a s s e r t i n g t h a t it is a t r ad e s e c r e t ;d . C a n n o t b e r e a d i l y a s c e r t a i n e d o r d e r i v e d f r o m p u b l i c l y a v a i l a b l ei n f o r m a t i o n ;e . I s t h e s u b j e c t o f e f f o r t s th a t a re r e a s o n a b l e u n d e r t h e c i r c u m s t a n c e s tom a i n t a i n i t s s e c r e c y ; a n df . H a s s i g n i f i c a n t e c o n o m i c v a l u e .

ALA, CODE 8 -27-2 (1 ) (1993) .5 7 . C A L . ClV. CODE 342 6 .1 (d ) (1 ) (W est Supp . 1995).58. NEB. REV. SWAT. 87-502(4) ( a ) (Supp . 1993) .59. COLO. REV. SWAT. 7 - 7 4 - 1 0 2 ( 4 ) ( 1 9 8 6 ) . .~ .6 0 . S ee , e .g . , W IS. STAr. ANN. 134 .90(2 )(b) (2 )(d) (W est 1989) . W isco ns in cons id e r s

t h e a c q u i s i t i o n o f a t r a d e s e c r e t b y a c c i d e n t o r m i s t a k e a m i s a p p r o p r i a t i o n , e v e n i f t h ea c q u i r e r d i d n o t , a s t h e U T S A r e q u i r e s , " k n l o w ] o r h a [ r e ] r e a s o n t o k n o w t h a t i t w a s at r ad e s e c r e t a n d t h a t k i i o w l e d g e o f i t h a d b e e n a c q u i r e d b y a c c i d e n t o r m i s t a k e . " U N IF .TRADE SECRETS ACT I (2) (C ) .

6 1 . S ee , e .g . , 76 5 ILL . COI~fP. SWAT.ANN. 1065 /2 ( a ) (West 1993) ( chang ing the UTSAl a n g u a g e o f " b r e a c h o r i n d u c e m e n t o f a b re a c h o f d u ty t o m a i n ta i n c o nf i de n t ia l it y " t o" b r e ac h o r i n d u c e m e n t o f a b r e a c h o f a c o n f id e n t i a l r e l a ti o n s h i p o r o t h e r d u t y t o m a i n t a i nsec re cy o r l imi t use" ) ; NEB. REX/. SWAT. 87-50 2(1) (S upp . 1993) ( cha ng in g the U TS Al a n g u a g e o f " ' i m p r o p e r m e a n s ' i n c l u d e s " t o " i m p r o p e r m e a n s s h a ll m e a n " ) .

62 . Subs tan t ive depar tu r es f rom bo th the 1979 and 1985 U TS A prov i s ions fo r i n junc t iver e l ie f , c o m p e n s a t o r y d a m a g e s , p u n i t iv e d a m a g e s , o r a t t o r n e y ' s fe e s c a n b e f o u n d i n th et r a d e s e c r e t l a w s o f A l a b a m a , A l a s k a , C a l i f o r n i a , C o l o r a d o , H a w a i i , I d a h o , I ll in o i s ,In dia na , L o u i s ia n a , M o n t a n a , N e b r a s k a , N o r t h C a r o l i n a , O r e g o n , V i r g i n i a , W e s t V i r g i n i a ,a n d W i s c o n s i n . S e e S a m u e l s & J o h n s o n , s u p r a n o t e 1 9 , a t 7 0 - 8 4 . T h e i n j u n c t i v e a n dd a m a g e s e c t i o n s o f G e o r g i a ' s t ra d e s e c r e t s ta t u te , w h i c h w a s e n a c t ed i n 1 9 9 0 a f te r t heSamu el s and John son a rt ic le was wr i t t en , s e e i d . a t 9 5 n : 3 3 0 , a l s o s u b s t a n t ia l l y d e p a r t f r o mt he U T S A m o d e l . S e e GA. CODE ANN. 10-1 -762 t t: - 763 (1994 ) .

T h e s e d i v e r g e n c e s a r e e v e n m o r e s i g n if i c a n t b e c a u s e t h e i n ju n c t iv e r e l ie f a n d d a m a g e7% ~i I~:


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N o . 2 ] T h e C a s e f o r a F e d e r a l T r a d e S e c r e ts A c t 4 4 5M o v i n g b e y o n d s t a tu t o ry d i f f e r e n c e s , u n i f o r m i t y i n s t a te t r a d e s e c r et

p r o te c t io n is a ls o u n d e r m i n e d b y t h e n u m e r o u s d i s a g r e e m e n t s a m o n g t hec o u r t s o f d i ff e r e n t s t a t e s a s to th e a p p l i c a t i o n a n d i n t e r p r e t a t i o n o fc o m m o n e l e m e n t s o f t ra d e s ec re t m i s a p p ro p r i a ti o n , M a n y i m p o r t a n tc o n c e p t s i m p l i c a t e d i n s t a te t r a d e s e c r e t s s t a tu t e s , t h e R e s t a t e m e n t a n d t h eU T S A - - s u c h a s w h a t c o n s t i tu t e s " im p r o p e r m e a n s " a n d " re a s o n a b l e "s e c u r i ty p r e c a u t i o n s a n d w h a t s t a n d a rd s h o u l d b e u s e d f o r g r a n t i n gi n j u n c t i v e r e l i e f - - a r e i l l - d e f i n e d o r u n d e f i n e d , T h i s l e a v e s th , c o u r t s o fe a c h s ta te w i t h th e ta s k o f p r o v i d i n g e i t h e r a p r e c i s e d e f i n i t i o n f o r t h o s ec o n c e p t s o r a t le a st s o m e g u i d i n g p r i n c i p le s f o r u s e i n a p p l y i n g t h ec o n c e p t s . N o t s u r p r i s i n g l y , a s s ta t e c o u r t s h a v e f le s h e d o u t t h e s ec o n c e p t s , t h e y h a v e n o t a ll b u i l t t h e s a m e b o d y o f l a w . 63 O t h e r d i s a g r e e -m e n t s a r e le s s e x p l i c a b l e , s u c h a s s p l it s i n j u d i c i a l a u t h o r i t y o v e r w h e t h e rt h e re is a s p e c ia l " n o v e l t y " r e q u i r e m e n t f o r i n f o r m a t i o n t o b e c o n s i d e r e da t ra d e s ec r e t o r w h e t h e r c u s t o m e r l is ts a n d o t h e r n o n - t e c h n i c a l i n f o r m a -t i o n s h o u l d b e c o n s i d e r e d a t r a d e s e cr et . 64 T h a t th e c o u r t s o f d i f f e r e n ts ta te s a r e in t e r p r e t i n g o r a p p l y i n g s i m i l a r s t a t u t o r y o r c o m m o n l a w t r a d es e c r e t s t a n d a r d s d i f f e r e n t l y s i m p l y i n j e c t s fu r t h e r d i s c o n t i n u i t y in t o t h ec o l l e c t i v e b o d y o f s t a te t r a d e s e c r e t l a w .

2 . T h e S p e c i a l P r o b l e m s C r e a t ed b y a L a c k o f U n i f o r m i t y i n t h e A r e a c -T r a d e S e c r e t s .

D i s u n i f o r m i t y a m o n g t h e fi ft y s t a t e s ' l a w s o n a g i v e n s u b j e c t i s t o b ee x p e c t e d . I n d e e d , i n m a n y c i r c u m s t a n c e s t h i s v a r i e t y i s n o t o n l y a c c e p t -a b l e , b u t p r e f e r a b l e , r e f l e c t i n g e a c h s t a t e 's m o d i f i c a t i o n o f b a s i c le g a ls c h e m e s t o t h e u n i q u e n e e d s a n d d e s i re s o f i ts c i t i z e n r y . 65 T h e v a r i e t y

provisions in the 197 9 and 1985 versions of the U TSA already differ from each other. Thisleads to three classes of injunctive elief and dam age provisions in UT SA -based trade secretstatutes: those closely followin;r the 19 79 UT SA , th ose closely following the 1985 U TSA ,and those departing from both the 197 9 and 1985 UTS A.63. See EPSTEIN, upra note 43, 2.04[A] (improper me ans); JAGER,supra note 12, 7.02, at 7-4 to -54.4 (injunctions); Note, supra note 44, at 464 (reasonable securityprecautions). See also David D. Slaby et al . , Tra de Secret Protection: An Analysis o f theConcept "Efforts Reasonable U nd er the Circumstances to Maintain Secrecy, " 5 SANTACLARA COMPUTER& HIGIITEC II. L.J. 321 (198 9); Hilton, supra note 12, at 292-96.64. See EPSTEIN,supra note 43, 1.02[E ][3] (additional nove lty requirem ent); JAGER,supra note 12, 3.0112], at 3-8 to -16.5 (non-technical information).65. See New State Ice Co. v. L iebmann, 285 U.S. 262, 311 (1 932 ) (Brandeis, J. ,dissenting) ("It is one o f the happy incidents of the federal system that a single courageousState m ay, if its citizens choose, serve as a laboratory; and try novel social and econ om icexperiments without risk to the rest of the country."); Fed. Energy Regulatory Comm'nv. Mississippi,456 U .S. 74 2, 788 (1982) (O'Connor, J ., concurring and dissenting) ("[T]he


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4 4 6 H a r v a r d J o u r n a l o f L a w & T e c h n o l o g y [ V o l . 8a m o n g s ta te s o f te n " a l lo w s a b e t te r m a t c h i n g o f p r e f e r e n c e s a n d p o l i c i e sb e c a u s e l c i ti z e n s ] c a n c h o o s e th a t [ s ta t e] w h i c h o f f e r s t h e m o s t p r e f e r r e dp o l i c y p a c k a g e . T h a t i s , c i t iz e n s m a y ' v o t e w i th th e i r f e e t , ' s e a r c h i n g o u tt h e [ s ta t e] o f f e r i n g t h e m o s t a t t r a c t i v e s e t o f p o l i c i e s . " ~

I n t h e c o n t e x t o f t r a d e s e c r e t p r o t e c t i o n , h o w e v e r , i t is c l e a r t h a tu n i f o r m i t y d e s e r v e s p r e c e d e n c e o v e r s ta te a u t o n o m y a n d e x p e r i m e n t a t i o n .T h e p r i m a r y j u s t i f i c a t i o n f o r t h is p re f e r e n c e a r i s e s o u t o f t h e f r e e - f l o w i n gn a t u r e o f i n f o r m a t i o n a n d t h e r e s u l t in g h a v o c t h is c re a te s f o r t h e t r a d es e c r et o w n e r t ry i n g to d e t e r m i n e i n w h i c h s ta te i ts s e c r e t w i l l , o r m a y , b em i s a p p r o p r i a t e d . A s i n f o r m a t i o n , a t r a d e s e c r e t h a s n o o n e s e t l o c a t i o n ;i n st e a d, i t " e x i s t s " w h e r e v e r t h e tr a d e s e c r et i s b e i n g u s e d o r w h e r e v e rs o m e o n e w h o k n o w s th e s e c r et i s l o c a t e d . I n t h e c a se o f a c o m p a n y t h a tu s e s i ts t r a d e se c r e t in i ts m u l t i s ta t e o p e r a t i o n s , t h e r e f o r e , t h e c o m p a n y ' ss e c r e t e x i s t s i n e a c h s ta t e o f o p e r a t i o n a n d , m o r e i m p o r t a n t l y , i sv u l n e r a b l e t o d i s c l o s u r e i n e a c h s u c h st a te . F u r t h e r m o r e , d e p e n d i n g o nt h e t y p e o f t ra d e s e c r e t a t i s s u e , t h e s e c re t m a y w e l l b e u s e f u l t ob u s i n es s e s o p e r a t in g i n s ta te s o th e r th a n a c o m p a n y ' s s ta te s o f o p e r a t i o n .I n s u m , t h e t ra d e s ec r et s o f a c o m p a n y , e s p e c i a l l y a m u l t is t a t e c o m p a n y ,m a y b e s u s c e p ti b le to d i s c l o s u r e i n a l ar g e n u m b e r o f s ta te s a n d c a P a b l eo f b e i n g e x p l o i te d i n a n e v e n l a rg e r n u m b e r o f s ta te s .

T h i s n e a r l y b o u n d l e s s fe a t u re o f t ra d e s e c r e ts c a u s e s s e r i o u s p r o b l e m sf o r a c o m p a n y t r y i n g t o p ro t e c t i ts t r a d e s e c re t s b e c a u s e i t b e c o m e s n e a r l yi m p o s s i b l e f o r t he c o m p a n y t o k n o w i n a d v a n c e o f a m i s a p p r o p r i a t io nw h i c h s ta t e ' s la w w i ll g o v e r n . U n d e r p r e v a i l i n g c h o i c e - o f - l a w s t a n d a r d s ,a c o u r t f a c e d w i t h a m i s a p p r o p r i a t i o n o f t ra d e s e c r e ts c a s e w i l l o f t e n ,t h o u g h n o t a lw a y s , a p p l y t h e l a w o f t h e s t at e w h e r e t h e m i s a p p r o p r i a t i o no c c u r r e d - - t h a t i s, e i t h e r w h e r e t h e t r a d e se c r e t w a s d i s c l o s e d o r w h e r et h e t r a d e s e c r e t w a s u s e d b y t h e d e f e n d a n t a f t e r d i s c l o s u r e . 67 H o w e v e r ,

50 Sr.ltes serve as laboratories for the d evelopment o f new social, econom ic, and politicalideas ." ) . B u t s e e Susan Rose-Ackerman, Ris k Taking an d Reflection: Do es FederalismPromote Innovation?, 9 J. LEG . STUD. 593 (1980) (questioning Brandeis' conclusion thatstates serve as laboratories for experimen tation).66. J. Robert S. Prichard, Secttrtng the Canadian Economic Union: Federalism andb~ternal Barriers to T rade, in FEDERALISM AND TI lE CANADIAN E CO N O M IC U N IO N 3 , 17(Michael J. Tm bilcock et al. ed s., 198 3). See also Charles M. Tiebout, A Pu re 17~eory o fLocal Expenditures, 64 J. POL. ECON. 416, 418 (1956) ("[T]he consum er-voter mo ves tothat com mun ity w hos e local governm ent best satisfies his set of preferences. The greaterthe number of communities and the greater the variance among them, the closer theconsum er w ill come to fully realizing his preference position.").67. Th e two choice-of-tort-law te sts that prevail in the United S tat es are the" t radi t iona l" 1~ loc i de l ic t i (place of the tort) tes t and the "modern" mo st significantrelationship est. See Conflic t o f Laws, 16 Am . Jur. 2d 99, at 1 64-66, and 10 2, at 168-


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No. 2] The Case for a Federal Trade Secrets Act 447as noted above, it is nearly impossible for a company to know, ex ante,in which state such disclosure or use will occur. This forces the companyinto a difficult position: it must either adopt a different confidenti alityprogram for each region of the country in which it operates--a programadapted to the unique aspects of the trade secret laws of that region--orit must adopt one confidentiality program designed to satisfy the mostrestrictive aspects of the trade secret laws of all the states where theco mp an y' s secret may be disclosed or employed. Neither approach isparticularly efficient. The former greatly increases the cost of designingand administering confidentiality programs, while the latter increases thecost of operating confidential ity programs. Additionally, each requiresa company to expend significant resources on acquiring info rmat ion aboutwhich states' laws might apply to its trade secret and what those laws are.In both situations, therefore, the net value of a trade secret is diminishedby the fact that it is more costly to maintain the secret's confidentiality.

A troublesome byproduct of this confusion over which state 's law willgovern a trade secret misappropriation is that it partially undermines thevery purpose of the trade secret remedy. An innovator is entitled to tradesecret protection only after first investing in developing the innovationthat can qualify as a trade secret, and then invest ing in safeguarding theconfidentiality of the innovation. To know whether these inves tments areworthwhile, the innovator needs to know the legal conditions foreval uati ng these investments, such as the type of innovat ion that canqualify as a potential trade secret and the cost of the confidentialitysafeguards required to transform a potential trade secret into an actualtrade secret. Given the uncertainty over which law will apply in theevent of a subsequent misappropriation, it is nearly impossible for theinnovator to predict accurately the legal conditions that will govern itsinvestments. This is likely to lead the innovator to use overly pessimis tic

70. Under he former test, a court focuses solely on the state where the act causing injuryoccurred, which in misappropriationcases is generallyconsidered to be the state where thetrade secret was disclosed or subsequentlyused. See JAGER,supra note 12, 4.02[3], at4-29 to -32. Under he later test, a court is to evaluate a number of factors, see Restatement(Second) of Conflict of Laws 145 (1969), but in the misappropriationcontext the statewhere the trade secret was disclosed or subseq

case for a federal tsa

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