Posts Tagged: "Uniform Trade Secrets Act"

It was a hot August afternoon in 1984, and I had just finished testifying to the California Senate committee considering a new law, the Uniform Trade Secrets Act (UTSA). I had been sent to Sacramento to support this legislation, which was supposed to provide a “uniform” standard among the states. But some lawyers from the State Bar were pushing for changes that I thought might cause problems. One of these was to remove the requirement that a trade secret owner prove the information was not “readily ascertainable.” If you’re still reading, well done! You’ve demonstrated your intellectual curiosity. Please keep going; I promise this will not be a dry, academic rant about something that can’t possibly matter to you. Instead, this is a story about the unintended consequences of casual law-making and the ways that courts can amplify those effects without really understanding what they’re doing.

In January 2023, the Federal Trade Commission (FTC) unveiled a proposed ban on non-compete clauses that prohibits employees from joining or forming competitive firms following the termination of their employment. According to the FTC, non-compete clauses unfairly and unnecessarily stifle employees’ ability to pursue better employment opportunities. While this criticism may ring true in the case of lower-wage workers, such as restaurant and warehouse employees, even the staunchest critics of non-compete clauses will typically acknowledge that they can — and often do — play a legitimate role in the protection of trade secrets. This is why the FTC’s proposed rulemaking is causing consternation in the intellectual property community.

At this moment, there is a fellow riding a bus in London who will determine the fate of your secrets. To be more precise, he’s on the Clapham bus; but he has no name. In fact, he’s a fictional character originally imagined by 19th Century journalist Walter Bagehot, who thought that “public opinion” was best described as the “opinion of the bald-headed man at the back of the omnibus.” The idea was picked up by the English courts as a metaphor for the “reasonable person” standard that is applied in all sorts of cases, from criminal to personal injury to contract interpretation. It also has special application to trade secrets, which we’ll get to in a minute.

When people say that “data is the new oil,” they’re talking about new ways of creating wealth. No matter what business you’re in, success today depends on learning everything you can about your customers and competitors. And there’s so much information sloshing around the internet, every industry—from restaurants to manufacturers to sports teams—is busy extracting insights from “big data” analysis. But, like drilling for oil, prospecting for data sometimes gets your hands dirty. Recently, a court ruled that a startup company providing life insurance quotes to consumers had created its database – the engine of its busines – by taking data from an existing company (Compulife) that had built theirs from scratch.

Back in ancient times, in this case 1990, John Gray, an obscure “relationship counselor” with a correspondence degree in psychology, was perplexed. The communication problems of the heterosexual couples he worked with were so serious that he couldn’t explain them by individual circumstances. His clients seemed to be talking past each other, almost as if they were coming from different planets. With that tired metaphor in mind, he penned the book Men Are from Mars, Women are from Venus, generalizing what he thought were the universal, contrasting communication styles of the sexes…. In effect, [Gray] has become rich by talking about how incompatible men and women are, despite eons of evidence to the contrary. In our world of intellectual property, it once was like this between patents and trade secrets.

Part 1of this article addressed the Eleventh Circuit’s decision in Compulife Software, Inc. v. Newman, __ F.3d __, 2020 WL 2549505, (11th Cir. May 20, 2020) and the court’s dubious conclusion that information “scraped” from a public website could be a trade secret. In particular, on this issue, the court held that even if the “scraped quotes were not individually protectable trade secrets because each is readily available to the public…taking enough of them must amount to misappropriation of the underlying secret at some point. Part II will address the understanding of “improper means” under trade secret law and whether the Eleventh Circuit was correct in determining that the use of bots to scrape a very large amount of information from a website can constitute “improper means” for acquiring such information.

Trade secrets have become an increasingly valuable asset to many companies, but compared to other types of intellectual property, including patents, copyrights and trademarks, they are extremely “fragile,” and require that an owner undertake as many steps as possible to protect their information and be vigilant about the need to protect such information to the fullest extent possible. The failure to do so may lead to a court’s finding in a misappropriation case that the information in question is not protectable as a trade secret. As described below, it is very easy for trade secrets to lose protection under a variety of circumstances, even where the owner has taken what it believes are “reasonable measures” as required for trade secret protection under 18 U.S.C. § 1839(3)(A. In short, authorities in this area teach that the more steps a party undertakes to protect its trade secrets, the more likely that a court will find those steps to constitute “reasonable measures.”

Trade secret holders must take reasonable precautions to maintain the secrecy of their secrets, such as keeping such information on a “need-to-know” basis. Companies should have clear IP, confidentiality, and employment agreements describing which types of information are considered trade secrets. These agreements should also describe an employee’s responsibility for maintaining the secrecy of such information. In spite of reasonable precautions by a trade secret holder, bad actors may maliciously misappropriate trade secrets.

Although the amount of the settlement was far less than $2.7 billion in amount sought by Waymo, the settlement apparently did include a payment from Uber of 0.34% of Uber equity—or about $244.8 million in stock based on a $72 billion valuation of Uber… Both sides had a lot riding on the outcome of the trial. In addition to the billions in damages, Waymo was seeking an injunction to prevent Uber from using any technology that may have originated from Waymo, which would have been a huge set back for Uber’s program. Indeed, during his first day of being questioned, the former CEO of Uber, Travis Kalanick, agreed that developing autonomous vehicles amounts to an “existential question” for Uber, and that the market for driverless cars is likely to be “winner-take-all.”

The current extraterritorial reach of U.S. trade secret law may seem ironic given trade secret law’s “local” roots. In the United States, common law trade secret principles emerged through a diverse patchwork of state court decisions addressing local commercial disputes. These local common law principles were first distilled in the Restatement of Torts and the Restatement of Unfair Competition and then codified in the Uniform Trade Secrets Act in 1979. Underscoring the local prerogative of trade secret law, state legislatures modified and tailored the Uniform Trade Secrets Act to reflect their state-specific concerns and needs. For many years, despite a push for national uniformity, a number of states chose not to adopt a statutory scheme at all (some still haven’t).

If you ask ten different people, you will probably get ten different answers. In fact, fewer than half of the European Union’s 28 member states actually have a clear legal definition at all for a trade secret. It’s no surprise, therefore, that the ways in which trade secrets are defined and treated varies considerably between the EU’s member states. These inconsistencies make it tricky for companies to do business in the EU. Somewhat belatedly, the EU has recognized the problems posed and, in order to address them, it has taken the step of harmonizing and upgrading the existing legal landscape by passing the Trade Secrets Directive.

Earlier this year, President Obama signed into law the new federal “Defend Trade Secrets Act of 2016.” It arms with substantial new weaponry those whose trade secrets have been taken. What has been less heralded, but might just affect you more directly, are new requirements that might lead you to revise your standard confidentiality and non-disclosure agreements.

The DTSA amends the definition of misappropriation from what was found in the EEA to bring the definition more in line with that of the Uniform Trade Secrets Act (UTSA) that has been adopted by almost all U.S. states. Indeed, apart of explicitly recognizing certain potential defenses that are discussed in the commentary of the UTSA, the DTSA is identical to the UTSA. According to the House Report, “The Committee intentionally used this established definition to make clear that this Act is not intended to alter the balance of current trade secret law or alter specific court decisions.” House of Representatives, Report No. 114-529, April 26, 2016, at 14. Federal courts therefore, will look to state decisions involving the state’s version of the UTSA for guidance.