8.1 Trade Secrets

• Library: The Virginia Lawyer: A Deskbook for Practitioners (Virginia CLE) (2022 Ed.)

8.1 TRADE SECRETS

8.101 Introduction.

A trade secret may consist of any secret, formula, pattern, device, process, or compilation of information that is used in one's business and that gives the business a competitive advantage over competitors who do not know or use the trade secret. ⁵⁰⁶² Protection of trade secrets under Virginia law promotes invention and the economically efficient use of information, and it guards against unfair competition. ⁵⁰⁶³ Examples of trade secrets include a code for determining discounts, confidential business practices, know-how, a secret list of customers, test results, experiment designs, a bookkeeping method, a prototype of an invention, schematic diagrams and blueprints, financing strategies, and other proprietary information developed by a business. Trade secrets may also consist of negative information. For example, negative test results for new drugs in cancer treatment drug trials may be protected as trade secret information just as positive test results from more promising drugs are protected. Novelty is not required for information to be protected as a trade secret but secrecy is. ⁵⁰⁶⁴ The term "information" is used generally throughout paragraph 8.1 to represent all kinds of information that qualifies for trade secret protection.

Until 2016, trade secret law was primarily a matter of state law. The passage of the Defend Trade Secrets Act of 2016 ⁵⁰⁶⁵ (the DTSA) created a federal civil cause of action for trade secret misappropriation. ⁵⁰⁶⁶ Most notably, the DTSA allows trade secret owners to obtain ex parte seizure orders to recover stolen trade secrets while a full court hearing is pending. ⁵⁰⁶⁷ The DTSA further provides for remedies, including injunctions and awards of damages and costs. ⁵⁰⁶⁸ Injunctive relief may be obtained where (i) the injunction is supported by proof of actual or threatened misappropriation; (ii) the injunction does not "prevent a person from entering into an employment relationship"; and (iii) any conditions placed on employment are "based on evidence of threatened misappropriation and not merely on the information the person knows." ⁵⁰⁶⁹

The DTSA also contains provisions sheltering whistleblowers who disclose trade secrets in confidence to government officials or in lawsuits alleging retaliation by an employer. ⁵⁰⁷⁰ Employers must include a notice of this immunity in any employment agreement that governs trade secrets and other confidential information. ⁵⁰⁷¹

The DTSA does not preempt existing state law but rather offers an alternative venue for plaintiffs seeking to address trade secret theft. Indeed, although some federal statutes preempt state-based trade secret law, state regulation of trade secrets does not violate the supremacy clause. ⁵⁰⁷² For example, the Economic Espionage Act ⁵⁰⁷³ (the EE Act) prohibits misappropriating, copying, communicating, or conveying a trade secret with the intention to benefit any foreign government, agent, or instrumentality. ⁵⁰⁷⁴ The EE Act also provides businesses with federal law protection against the theft of one's trade secrets. ⁵⁰⁷⁵ Persons, including entities, found guilty under the EE Act may be fined and imprisoned. ⁵⁰⁷⁶ Depending on the violation, individuals may be fined up to $5 million and imprisoned for not more than 10 years; ⁵⁰⁷⁷ entities may be fined up to $5 million or three "times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided," whichever is greater. ⁵⁰⁷⁸

8.102 What Is a Trade Secret?

Forty-eight states, including Virginia, and the District of Columbia have adopted a portion of or a modified version of the Uniform Trade Secrets Act. ⁵⁰⁷⁹ For the most part, federal and state laws involving trade secrets co-exist with little conflict. The DTSA borrows heavily from the Uniform Trade Secrets Act, using its definition of "trade secrets," imposing an identical three-year statute of limitations, and authorizing remedies similar to those provided by states under the Uniform Trade Secrets Act. The United States Supreme Court determined that the federal preemption doctrine does not apply to invalidate states' trade secret laws because federal patent law (the relevant federal law) and the states' trade secret laws have the same objectives. The Court held that state trade secret law does not "'stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress'" with respect to federal patent law. ⁵⁰⁸⁰

The Virginia Uniform Trade Secrets Act (the Act) is definition-driven and states that a trade secret is "information . . . that . . . [d]erives . . . economic value . . . from not being generally known to, and not being readily ascertainable by . . . other persons who can [profit] from its disclosure or use" (like competitors) and "[i]s the subject of efforts that are reasonable . . . to maintain its secrecy." ⁵⁰⁸¹ The Act displaces conflicting existing law that provides remedies for misappropriation of trade secrets, but it does not affect: (i) contractual remedies; (ii) other civil remedies not based on misappropriation of trade secrets; or (iii) criminal remedies. ⁵⁰⁸²

The Act makes it illegal for a person to misappropriate trade secrets from another. ⁵⁰⁸³ Section 59.1-336 of the Virginia Code defines "misappropriation" as disclosure or use of a trade secret of another, without express or implied consent, by a person who (i) used improper means to acquire knowledge of the trade secret ⁵⁰⁸⁴ or (ii) at the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was (a) derived from or through a person who had used improper means to acquire it, ⁵⁰⁸⁵ (b) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, ⁵⁰⁸⁶ (c) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use, ⁵⁰⁸⁷ or (d) acquired by accident or mistake.

Merely acquiring a trade secret, even inadvertently, is misappropriation. The Act prohibits the improper acquisition of a trade secret, whether or not the trade secret is used in direct competition with the rightful owner. ⁵⁰⁸⁸ "This is so because the value of the trade secret as an asset of the company is diminished by its disclosure, whether or not the person acquiring it uses it competitively." ⁵⁰⁸⁹

Misappropriation of a trade secret and threatened disclosure, even without actual disclosure or use of the trade secret by an offending party, warrants relief in Virginia courts. ⁵⁰⁹⁰ However, misappropriation of a trade secret alone without threatened disclosure will not support an injunction. The more a business has invested in researching, discovering, or compiling certain information, even if the information is publicly available in a different form, the more likely it is that courts will treat the information as a trade secret. ⁵⁰⁹¹ The Restatement of Unfair Competition simplifies and expands the definition of trade secret to "any information that can be used in the operation of a business or other enterprise . . . that is sufficiently valuable and secret to afford an actual or potential economic advantage over others." ⁵⁰⁹²

The subject matter of a trade secret must be kept confidential for the Virginia statute to apply, although a trade secret does not have to be absolutely secret or known to only a handful of people to be protected. ⁵⁰⁹³ A trade secret owner's failure to protect its trade secrets deprives the information of its "secret" character. In other words, if a trade secret owner does not treat the information as secret, the law will not treat the information as secret. Matters of public knowledge, information generally known within an industry, or information easily learned through legal methods are not trade secrets. Also, common knowledge within a trade or industry group cannot be converted into a trade secret by one of the group's members.

Other forms of proprietary information or intellectual property that do not readily fall into the trademark, copyright, or patent law categories may often be protected as trade secrets. Anyone with a protectable commercial interest may own a trade secret. There is no requirement that the trade secrets of a business relate to the business's primary function.

8.103 Protecting and Maintaining Trade Secrets.

A. In General.

To maintain ownership and protection of a trade secret, a business owner must prove that the information is secret and commercially valuable, and the business owner must conduct its daily business operations in accordance with these assumptions. Vigilant confidentiality procedures are necessary to maintain the information's trade secret status. A trade secret does not have to be expensive to maintain or have been purchased at great cost to be protected. A trade secret may not have cost the business anything, but rather may reflect years of work by employees to develop the secret information or procedure that now has acquired tangible value to the business and that gives the business owner a competitive advantage. The existence of a trade secret can be proven through direct or circumstantial evidence, such as the ease or difficulty with which the information could be duplicated.

Although trade secret protection programs differ among businesses depending on the needs of the business and the type of trade secrets to be protected, an effective program should take the steps outlined below. ⁵⁰⁹⁴

B. Identify the Business's Trade Secrets.

The business should identify, inventory, and list the trade secrets and confidential proprietary information critical to the business. This list should include all information that if known by competitors would have a serious and negative impact on the business.

C. Establish Rules Governing the Disclosure of and Access to Trade Secrets.

1. In General.

The business...