It’s About Control, Not Exclusion: Why Trade Secrets Are Treated Like Property, Part 1

By James Pooley
January 21, 2020

“What is it about this special right that should make us feel comfortable calling it property? It is the element of control. Although we can’t control whether someone independently develops the same information, we can control who gets access to our own, and under what circumstances.”

“Knowledge conquered by labor becomes a possession – a property entirely our own.”

— Samuel Smiles

https://depositphotos.com/19771693/stock-photo-speedometer-with-the-words-youre.htmlSometimes it seems that trade secrets are always fighting for respect. I recently ran into a friend who teaches at a European university. He somehow found a way to squeeze into the conversation a pronouncement: “You know, trade secrets are not property.”

Stay with me; this gets interesting.

I sighed, because I knew what was coming. I’d heard it many times before. “The essence of property,” he said, “is the ability to exclude others, and that doesn’t exist with trade secrets. Anyone is free to discover the same information, or to reverse engineer a product to learn how it is made.”

I acknowledged that trade secret rights are not exclusive, and it’s easy to reverse engineer some things. “But what about secret formulas, like Coca-Cola’s, and secret algorithms, like Google’s? And companies often make products using processes that you can’t figure out by looking at what’s public.” He was ready with the ultimate squelch: “Sure, but all of that is not property, because you can’t exclude anyone; you might not even know when someone is using the same so-called secret. If you can’t order them off, it’s not property.”

Like I said, I’ve heard this before. Even in the specialized world of intellectual property, the other major rights – patents, copyrights, trademarks – give you exclusivity, at least for a time. (Twenty years for patents, life of the author plus 70 years for copyrights, and during commercial use for trademarks.) If someone tries to make the same invention, publish the same song, or use a confusingly similar mark, you can get a court to make them stop, just like you can protect your land against trespassers. But for trade secrets, you have to accept the fact that others may develop, or discover, the same information that gives you an advantage over your competitors.

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Why the European Union is Different

In some parts of the world – mainly Europe, where my professor friend was from – this distinction can matter. When the EU in 2016 issued its Trade Secrets Directive, requiring all the member states to meet certain standards in their national laws, it specifically said that trade secrets were not to be treated as “intellectual property.” That meant that the earlier EU Enforcement Directive, which provided some helpful remedies like seizure, and which required sharing certain information with the owner of the IP, wouldn’t apply to trade secrets.

Never mind that every one of the EU member countries have long been signatories to the 1995 TRIPS Agreement, which declares, in Article 1, Section 2, that all categories of IP, including “Undisclosed Information” (Article 39), are “intellectual property.” In Europe, the combination of academic inflexibility and political cowardice has kept business secrets trapped in this “non-property” abstraction.

On our side of the Atlantic, we’ve taken a more practical view about treating information as “property.” As we imported the law of trade secrets from Britain (which is about to leave the EU, but apparently not because of how they treat secrets), U.S. judges recognized that the knowledge developed by a business that gives it an edge should be treated like more traditional forms of property. This was important to an emerging industrial economy that required sharing information in confidence with employees and others.

U.S. Jurisprudence, Manufacturing Processes and Taxation

In 1868, Massachusetts’ highest court ruled that if one “invents or discovers, and keeps secret, a process of manufacture . . . he has a property in it” that courts will protect against a breach of confidence. But the ability to assert trade secrets had already been established by the same court many years earlier. It may seem deliciously coincidental to those of you familiar with Roald Dahl’s Charlie and the Chocolate Factory that the first trade secret case in the U.S. was about . . . a process for making chocolate. If you want to look it up, it’s Vickery v. Welch, 36 Mass. 523 (1837).

In the first half of the 20th Century the courts took a small detour by emphasizing that the interest being protected was more about the confidential relationship than the information itself. In 1917, the U.S. Supreme Court declared that “the property may be denied, but the confidence cannot be.” But in later cases, the Court ruled that trade secrets may be taxed, that the constitutional requirement of compensation for seizure of property applied to trade secrets, and that “confidential business information” was “property” within the meaning of the mail and wire fraud statutes.

These decisions align with the way that business treats valuable information as an asset. It can be bought and sold, licensed, shared, and pledged as collateral. Is it “property”? The view here is that if it waddles and quacks, it’s a duck.

But apart from the way we treat it in transactions, what is it about this special right that should make us feel comfortable calling it property? It is the element of control. Although we can’t control whether someone independently develops the same information, we can control who gets access to our own, and under what circumstances.

Back in 1623 in Constantinople (now Istanbul), a fellow named Avedis Zildjian was trying to perform alchemy, and while he didn’t manage to transform base metal into gold, he did happen on a special alloy of copper, tin and silver that when fashioned into a circular sheet made a great sound. Today, the Zildjian family company still supplies what are considered the world’s best cymbals to leading musicians all over the world. The secrets are safe because they’ve not been disclosed outside the family for generations.

Managing Confidentiality Through Reasonable Efforts Strengthens Rights

Other businesses can achieve the same effect, simply by managing their information assets. In fact, the modern law on trade secrets requires that, before courts will lend a hand to enforce promises of confidentiality, the owner has to show that it has engaged in “reasonable efforts” to keep the information secret. What’s “reasonable?” The law doesn’t specify, beyond teaching that every circumstance is unique, reflecting the value of the information, the risk of its loss, and the cost (including inconvenience) of instituting various measures to reduce the risk.

In the end, getting help from the courts to protect your secrets will depend to some extent on how much you exercise the control that comes with secrecy. Realizing the need to share information with employees, vendors, customers and collaboration partners, you should establish all the controls that help everyone understand the confidential nature of your data assets and reduce the risk of inadvertent leakage or contamination by someone else’s secrets.

Next month, in Part 2, we’ll take a closer look at what businesses should be doing to maintain the integrity of these most valuable assets. In the meantime, just remember this: you have control over who gets access and what they can do with those assets. Exercise that control, and you’ve staked a claim to your property. No matter what the European professor says.

CLICK HERE to CONTINUE READING Part 2

Image Source: Deposit Photos
Image ID: 19771693
Copyright: alexmillos 

The Author

James Pooley

James Pooley is a former Deputy Director of the World Intellectual Property Organization (WIPO). Having returned to Silicon Valley, Mr. Pooley established a private law practice where he specializes in trade secret litigation, counseling and strategy.

For more than 45 years, Jim has represented clients in high-stakes patent and trade secret disputes. His broad litigation experience, combined with his service as an international diplomat and business executive, make him uniquely qualified to serve as advisor, co-counsel or expert in trade secret matters. Jim testified before the Senate Judiciary Committee on the Defend Trade Secrets Act, and worked with congressional staff on the legislation. His most recent book is Secrets: Managing Information Assets in the Age of Cyberespionage, available here.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 5 Comments comments.

  1. IPdude January 21, 2020 6:29 pm

    Trade secrets = property. Patents = public utility. Why? Because big tech lobbied very effectively. Period.

  2. FredLM January 22, 2020 8:24 am

    Regarding the EU Directive, it is also about control.

    “Art. 2:
    For the purposes of this Directive, the following definitions apply:

    (2) ‘trade secret holder’ means any natural or legal person lawfully controlling a trade secret;”

  3. Anon January 22, 2020 9:07 am

    Perhaps what is missing from the European professor’s comments (other than noting that IP law is a sovereign-centric law), is less an attempt at noting differences between trade secrets and other ‘forms’ of IP protection, and noting WHY Sovereigns are willing to exchange legal protection for the sharing of something inchoate and personal with the larger community.

    What is the Quid Pro Quo with Trade Secrets?

    While I certainly appreciate Mr. Poole’s learned insights on the vehicle of Trade Secrets, and as an advocate for my clients, I certainly appreciate the option of Trade Secrets, as a larger advocate for innovation itself, I am compelled to NOT let Trade Secrets share the same stage as the likes of patents and even copyrights may be presented upon (trademarks of course arise under a different Constitutional clause).

    Here, I have to take exception to the painting as a detour, what is actually the very tie to a legitimate government intrusion FOR providing legal consequences of Trade Secret violations: the expectation of confidentiality.

    I would also add another historical parallel (and one far less flattering in regards to innovation): Trade Secrets are the primary tool of Guilds. And historically, the advance provided by patents stands in direct contrast to ‘Guild mentality.’

  4. Anee January 22, 2020 9:58 am

    You’ll never get the Krabby Patty formula, Plankton.

  5. TFCFM January 22, 2020 10:00 am

    This is a nice, informative article. However, I question the significance of the specific topic addressed. Both in the US or the EU, certain rights belong to the possessor of a trade secret. Whether we assign to the particular bundles of rights one possesses in each jurisdiction the title “property” or something else seems to me as (in)significant as debates about whether some (usually modernistic) creations are called “art” or something else.

    Nonetheless, thanks for an thought-provoking article that sets us up for the ‘meat’ which seems likely to come in installment #2.