June 2, 2023
Whether it’s the recipe for Coca-Cola – which has purportedly only been known by a select few since 1891 – or the source code for a brand new iPhone video game app, the protection of trade secrets has been a central bedrock of our capitalist economy, where ideas and knowledge can be as potent an economic force as capital and brand awareness.
There are numerous areas of intellectual property law that exist to protect one’s work from being used by another – including copyright and trademark law – and one area of IP law where criminal and civil law intersect is that of trade secret protection. In California, the California Uniform Trade Secrets Act (or “CUTSA”) provides civil consequences to those who are found to have stolen trade secrets, while under federal law, the Economic Espionage Act of 1996 (or “EEA”) makes it a federal crime to steal trade secrets, while also allowing for a cause of action in a federal lawsuit related to the alleged theft of trade secrets.
What qualifies as a trade secret?
Pursuant to CUTSA, a “trade secret” means “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
The EEA provides a somewhat similar definition for a trade secret, indicating that the term “means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if – (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
Thus, both CUTSA and EEA provide a very broad definition of what might qualify as a trade secret to essentially include any type of information with economic value, but that the owner has taken means to keep secret. Thus, while the McDonald’s golden arches logo has significant value, it is not a trade secret as it is well known and certainly not kept a secret. On the other hand, a specific recipe that McDonald’s uses in a new food product could be a trade secret if significant efforts are made to keep that recipe a secret.
Following from the above, a commonly used defense in the context of trade secret civil and criminal litigation is that the “trade secret” allegedly stolen either did not have independent economic value and/or that it was not being kept secret, i.e. the alleged owner of the information did not take reasonable means to keep it secret.
What qualifies as improper misappropriation of a trade secret?
Pursuant to EEA, “misappropriation” in the context of trade secret theft means:
- acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
- disclosure of the use of a trade secret of another without express or implied consent who
- Used improper means to acquire knowledge of the trade secret;
- At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was derived through improper means or where there are circumstances giving rise to a duty to maintain the trade secret.
The EEA further explains that “improper means” used to acquire a trade secret includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage…” but does NOT include “reverse engineering” or “independent derivation.” The CUTSA contains substantially similar definitions of both misappropriation and improper means in the context of trade secret theft.
Thus, here, potential defenses to a claim of trade secret theft could include a lack of knowledge on the part of the person who acquired the trade secret that it was acquired by improper means.
Penalties for Trade Secret Theft
In a civil lawsuit under CUTSA, a plaintiff may seek damages for unjust enrichment, lost profits, and/or a “reasonable royalty” if neither damages nor unjust enrichment caused by misappropriation of the trade secret is reasonably provable. Lost profits generally relate to the actual losses in profit suffered by an individual or company when their trade secrets are stolen, while unjust enrichment refers to the ill-gotten gains the defending party obtains by the use of the trade secret. The EEA similarly awards damages in civil lawsuits for both actual losses and unjust enrichment by the offending party. Additionally, injunctive relief may be sought to prevent the person who acquired the trade secret from further using the trade secret and to preserve the secrecy of the information.
Where federal prosecutors seek criminal sanctions pursuant to the EEA, a criminal defendant can face up to 15 years in prison and a $5,000,000 fine.
Conclusion
The time to seek experienced counsel from a skilled white-collar defense attorney is at the first signs of a potential government investigation, enforcement action, prosecution, or civil action related to white-collar activities. Often, the first steps in responding to a potential government proceeding are the most critical in setting the course for an ultimate outcome that defends one’s interests, reputation, and, in some cases, freedom. Contact our office to speak with an experienced white-collar defense attorney regarding your situation today.
