Everyone has heard of the term "trade secret" but what exactly is it? This article provides an overview of trade secrets law in Pennsylvania.
1. What kind of information is considered a "trade secret"?
In 2004, Pennsylvania adopted the Uniform Trade Secret Act ("UTSA"). The Pennsylvania statute now defines a "trade secret" as follows: "[i]nformation, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."
In other words, a "trade secret" is confidential, proprietary information which is not publicly known or otherwise discoverable (e.g., reverse engineered). The information must provide a potential or actual economic advantage over one’s competitors. To safeguard the trade secret, the company should have policies or procedures in place to vigorously safeguard the confidential nature of the trade secret. If the trade secret is ever publicly disclosed (whether intentionally or unintentionally), the information would no longer proprietary to the company. Employees have an implied, contractual duty to keep such information confidential under Pennsylvania common law.
A. Examples of Trade Secrets
A non-exhaustive list of trade secrets include business or marketing plans, chemical or pricing formulas, software, design or manufacturing processes, and customer lists. Classic examples of trade secrets include the secret formula for Coca-Cola® or Colonel Sander’s secret recipe of eleven herbs and spices for Kentucky Fried Chicken®. Inventions may be trade secrets, but they must not be patented since issued patents are accessible to the public.
2. How are trade secrets lost or stolen?
A. Loss of Trade Secret Protection
Trade secret protection is lost once the proprietary information becomes public. For example, if a patent application is published, the invention is no longer a trade secret since the information is now public. Further, even if a patent application is not published while it is pending with the patent office, it will become published once granted and so the trade secret is therefore "lost."
Trade secret protection may also be lost if one is disclosing proprietary information to a third party in the absence of a confidentiality agreement.
Trade secret protection may be lost if the company does not vigorously enforce trade secret policies to keep the confidential, proprietary information a secret.
B. Theft of Trade Secrets
Trade secrets are stolen when an unauthorized third party unlawfully acquires the trade secret information or when an authorized party (e.g., an employee or contractor) discloses the information to an unauthorized third party (e.g., a competitor).
The following are examples of how trade secrets can be stolen:
- unauthorized disclosure by a trusted employee (e.g., manager, engineer, scientist, etc.) or other trusted individual (e.g., contractor) who is currently with or has left the employment of the company;
- unauthorized disclosure by suppliers, consultants, financial advisors or others who entered into non-disclosure (i.e., confidentiality) agreements with the company;
- unauthorized disclosure by any person owing an implied duty to the company not to make such a disclosure (e.g., directors, corporate officers, high-level employees); and
- industrial espionage.
3. How are Trade Secrets Enforced?
One can sue for trade secret misappropriation (i.e., theft) if an unauthorized disclosure of trade secret information has occurred. The remedies for such a suit include an order of the court in the form of an injunction which requires those who are in unlawful possession of the trade secret information to refrain from using it or disclosing it to others so as to prevent the trade secret information from being public (and thus the loss of the trade secret protection). The court may also award the company monetary damages to compensate for any economic loss suffered as a result of the trade secrets theft. Criminal penalties may also apply for theft of trade secrets.
4. Can Trade Secrets be Sold?
Yes. Trade secrets are a form of intellectual property (i.e., proprietary information) and thus may be sold as intangible assets, just as patents, trademarks, and business goodwill may be transferred with the name of a company.
Adequate and effective use and management of trade secret information is necessary to help maintain the competitive edge. Establishing and maintaining best trade secret practices as part of one’s global business strategy is a necessity. Vigorously protecting intangible assets such as trade secrets gives companies a competitive edge in an information-driven world where the intangible assets increasingly outweigh the tangible assets.