71 CBJ 360. Trade Secrets Law - Principles, Pitfalls and Pronouncements.

• Author: By THOMAS J. RECHEN AND PETER L. Costas (fn*)

Connecticut Bar Journal

Volume 71.

71 CBJ 360.

Trade Secrets Law - Principles, Pitfalls and Pronouncements

369Trade Secrets Law -- Principles, Pitfalls and PronouncementsBy THOMAS J. RECHEN AND PETER L. Costas (fn*)Connecticut has long provided protection for trade secrets which frequently represent a substantial portion of the real "capital" of a company, although rarely noted on its balance sheet. Frequently, the value of a company in negotiations for merger or sale will hinge upon its technology and the protectability of that technology.

Potential buyers recognize that bricks and mortar, equipment and personnel can be readily replaced, but the key to the continuing profitability of a company is its ability to maintain an edge over the competition by reason of its technology and its business information. Patents offer protection for technology for a specific term of years, but trade secret protection can be indefinite or can vanish with one misstep.

Lawyers provide in purchase and sale documents language to effect the transfer of rights to trade secrets, and in various other documents language restricting the right to use or divulge trade secrets or confidential information. Although much used in many contexts, there is considerable confusion as to the care and feeding of trade secrets, and as to the law enabling enforcement.

Trade secrets have long been protected by the common law. Now, the Uniform Trade Secrets Act, (fn1) adopted in 1983, and the Economic Espionage Act, adopted by Congress in 1996, (fn2) provide statutory bases for policing misappropriation of trade secrets.

361Connecticut, sometimes referred to as the birthplace of American manufacturing, was one of the first states in the union to adopt the Uniform Trade Secrets Act (the "Act"). The adoption of the Act in 1983 helped to cement in Connecticut jurisprudence a developing body of case law designed to protect new ideas, inventions, innovations, methods, techniques, know-how and other valuable, proprietary, and confidential information. Thirty-seven states have now

361adopted the Uniform Trade Secrets Act, substantially codifying a body of law that began to develop in the mid-nineteenth century, at the dawn of the industrial age.

Although sometimes misunderstood as related to federal patent law, the law of trade secrets was born of state substantive common law, (fn3) and is actually an outgrowth of the law of contracts, labor and employment, fiduciary relationships, and unfair competition. Trade secrets are relied upon to control intellectual property: (1) for which patent protection has not yet been obtained; (2) that, although commercially significant, is not patentable; (3) that cannot be adequately protected by issuance of a patent because infringement may not be readily detected; (4) that may be kept secret for a period longer than the period of protection provided by patents available under current patent law; (fn4) or (5) that is perceived to have insufficient value to warrant the time and cost associated with the pursuit of patent protection.

How has the law in this state evolved? What kind of property is subject to trade secret protection? What measure of secrecy is required? What effect does the Act have upon the existing common law? How does one enforce rights under the current common law and statutory framework? These questions will be addressed in this article.

1. DEFINITION OF TRADE SECRETS

   Section 35-51(d) of the Act provides the following definition: "trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, process, drawing, cost data or customer list 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, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (fn5)

   362This definition reflects the evolution of more than one hundred years of common law and is a synthesis of many cases and much discussion. This article will survey the origins of the law, the Act and the Connecticut decisions.

2. THE ORIGINS OF TRADE SECRET LAW

   Basically, the common law recognized that persons receiving valuable information as a result of positions of trust or contract should not profit from a breach of their obligations to safeguard the information, and it enjoined unauthorized disclosure and use.

   By the middle of the nineteenth century, there had been a number of English cases wherein the courts had protected formulas for patent medicine. In 1837 the Massachusetts Supreme Court handed down a decision in Vickey v. Welch, (fn6) in which a mill owner executed a bond to sell his chocolate mill together with his trade secrets relating to the method of making the chocolate. However, subsequently he refused to agree not to convey the trade secrets to others. The Court found that the bond was forfeited by the defendant's conduct.

   In 1868 the Massachusetts Supreme Court, in Peabody v. Norfolk, (fn7) enjoined a former employee from violating an agreement not to disclose or make use of secret machinery, stating: ... the jurisdiction in equity to interfere by injunction to prevent such a breach of trust, when the injury would be irreparable and the remedy at law inadequate, is well established by authority.

   During the latter part of the nineteenth century, courts in New York, Pennsylvania and elsewhere were also dealing with trade secrets issues.

   In Fowle v. Park, (fn8) the United States Supreme Court first dealt with trade secrets in a case involving the enforcement of a contract limiting the use of a secret formula for a patent medicine. The court stated in its decision ". . the policy of the law is to encourage useful discoveries by securing their fruits to those who made them."

   In E.L DuPont Nemours Power Co. v. Masland, (fn9) justice

   363Holmes stated: The word "property" as applied to trademarks and trade secrets is an unanalyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith. Whether the plaintiffs have any valuable secret or not the defendant knows the facts, whatever they are, through a special confidence that he accepted. The property may be denied, but the confidence cannot be. Therefore the starting point for the present matter is not property or due process of law, but that the defendant stood in confidential relations with the plaintiffs, or one of them.

   As the law relating to trade secrets evolved, it ultimately found its way into the Restatement of Torts in 1939. Section 757 included the following definition of a trade secret: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.

3. FROM COMMON LAW To STATUTE - THE EVOLUTION OF TRADE SECRET LAW IN CONNECTICUT

   364Trade secrets were first recognized by the Connecticut Supreme Court in 1926 when the Court heard a case brought by an inventor against a former employee to prevent him from using a confidential method of combining cork, rubber, channel cloth, and other materials to support a glass windshield in an automobile. In Schavoir v. American Re-Bonded Leather Co., (fn10) the Court held: Indeed, the fact that the discoverer of a process or formula may not be able to secure property rights in it by means of the patent law, may be the very reason why he seeks the protection of secrecy. He must have a secret, that is, something not known to the public or in his trade; and the character of the article produced might make so obvious the process or formula by which it is made that the very putting of it upon the market destroys the secret of its production. But this does not mean that the possibility of its discovery, by chemical analysis or experimentation, will itself put an end to the rights of the originator, and so long as the method of its production remains a secret, the law is not much concerned with its nature or the elements which go to make up the composition. Here the plaintiff, consciously or unconsciously, did make use of elements which, in a certain combination, were covered by the old Goodyear patent, and the use of which, in that combination, had become well known for certain purposes. But the proportions of those elements going to make up the composition which the plaintiff originated, and that which, while acting for him, the defendant finally adapted to commercial use, and additional elements deemed necessary to produce an article of commercial value, and the adaption of the combination to the manufacture of channel cloth, were matters not known to others, and were his distinctive contribution to commercial progress.

   * * *

   It was open to anyone to use the same process, provided they came by the necessary knowledge fairly. But the trial court finds that the method developed by the plaintiff continued to be his secret after the placing of the channel cloth upon the market. The knowledge of the process which the defendant had was obtained by reason of the confidence reposed in it by the plaintiff, and upon its express...