Abandoning Trade Secrets.

• Author: Hrdy, Camilla A.

Table of Contents Introduction I. Keeping Secrets A. IP Rights Generally Expire B. Trade Secrets Don't (Seem to) Expire C. The Problem with Infinite Secrecy II. Trade Secret Law as Unfair Competition A. Trade Secret Law's Closest Cousin: ... Trademark Law? B. Trademark Law's "Use" Requirement and Corollary of Abandonment Due to Nonuse C. Trade Secret Law's Old "U se" Requirement III. The Modern Independent Economic Value Requirement A. Codifying the Concept of Competitive Advantage B. A Low Bar C. A "Reasonable Departure" from the First Restatement D. Presuming Independent Economic Value 1. Development cost as evidence of independent economic value. 2. Reasonable efforts to maintain secrecy 3. Willingness of others to pay for access to the information 4. Efforts by defendants to obtain the information E. Trade Secrets in Gross IV. Trade Secret Abandonment A. Expiration Due to the Passage of Time B. Abandonment Through Conduct 1. Leaving the market 2. Superseding with newer generations of products 3. Declining to enter the market V. Building a Clearer Framework for Abandoning Trade Secrets A. The Trademark-Based Framework B. Defining Trade Secret Abandonment C. Legal and Policy Implications 1. Giving abandoned trade secrets new life 2. Are those who take abandoned secrets liable for breach of contract? 3. Wrongful acquisition of abandoned secrets Conclusion Introduction

So long as they are kept secret, trade secrets, unlike patents or copyrights, "can be protected for an unlimited time." (1) A trade secret, according to the conventional understanding, "expires" only once it is no longer kept secret. (2) Keep the secret for decades or even centuries, as with the formula for Coca-Cola, and you can potentially protect it forever.

In this Article, we argue that this conventional wisdom is wrong. Trade secrets--even those kept completely secret within a firm--can indeed expire. The reason is that there is another way to lose trade secrets besides public disclosure or a lapse in secrecy precautions: A company can "abandon" its trade secrets by failing to derive value from them. In fact, we argue that trade secrets are more like trademarks than patents and copyrights in this regard. But while trademarks rely on "use in commerce" to determine their lifespan, (3) trade secrets expire thanks to the statutory requirement of "independent economic value." (4) A trademark expires when the owner stops using the mark on goods or services; (5) a trade secret expires when the owner no longer derives "independent economic value," "actual or potential," from keeping the information a secret. (6)

Trade secrets don't literally have to be "used" to be protected. (7) Modern trade secret statutes at the federal level and in nearly all states eschew any explicit use element, conferring trade secret status to "a wider class of usable but currently-unused information." (8) Instead, today's independent economic value requirement, which was intended to codify the common law concept of "competitive advantage," (9) envisions various ways to derive economic value from keeping information a secret--ranging from selling or licensing information to others (10) to suppressing early-stage research related to a product (11)--and it gives rights to those who have "not yet had an opportunity or acquired the means to put a trade secret to use." (12)

But abandonment of trade secrets through failure to derive the requisite value is still a very real possibility, one that we think has been surprisingly underappreciated by courts and commentators alike. (13) For one thing, in a world in which technology and markets can move at the pace of months, not years, trade secrets can fail to derive economic value simply because they have become obsolete. (14) But trade secret abandonment can also happen due to the conduct of the owner. We identify three main scenarios.

First, a company that has been benefitting from a trade secret by selling products based on it can exit the market. (15) For example, there may come a day when the Coca-Cola Company stops making soft drinks or licensing others to do so. If that happens, the formula for Coke would no longer derive independent economic value from not being known to others. (16) The information may still be secret, and it may still be valuable to someone, including a former Coca-Cola employee, a competitor like PepsiCo, or members of the general public who might like to know how the famous drink was made. But it isn't valuable to the company anymore as a result of being kept secret--which is what the statute requires.

Second, a company can take a product off the market and replace it with a newer version. (17) For example, suppose Microsoft develops and keeps secret the source code for its original word-processing program, but it continues over decades to replace the original program with newer versions, all the way to Microsoft Word version 47.3. At some point the source code for the original program would no longer derive independent economic value from being kept secret; releasing it to the world would not harm Microsoft's existing business. (18)

Lastly, a company might develop a secret but then choose not to enter the market at all. (19) There, too, the secret doesn't derive independent economic value for the company due to its secrecy. To be sure, there may be good business reasons for a company to strategically quash a project and to refuse others a license if asked. For example, the company may want to sell a different product and not have an alternative version cannibalize its market. The statutory independent economic value requirement accommodates that need. If a company shelves a product that would otherwise compete directly with its products, this is a clear case of deriving value from maintaining secrecy. (20) But when a company decides not to pursue or license a line of business altogether, the secret fails to confer the necessary "actual" or even "potential" economic value. (21)

Although commentators recognize the existence of the independent economic value element, (22) they underappreciate the role that it plays in setting a trade secret's end date. Our review of the cases shows that courts lack a clear framework for assessing independent economic value and instead routinely allow plaintiffs to rely on circumstantial evidence and highly questionable presumptions to overcome any meaningful burden to prove they are deriving the requisite value from their secrets. (23)

To solve this problem, we argue that courts should draw on trademark law's abandonment doctrine. In order to avoid losing their rights, trademark owners who cease using their trademarks in commerce for a certain period of time have the burden to prove an intent to resume use in the "reasonably foreseeable future." (24) Trade secret law could benefit from adopting a parallel conception of abandonment. Trade secret plaintiffs who are not deriving the requisite value at the time of the defendant's alleged misappropriation would have to demonstrate they had an intent to resume doing so in the reasonably foreseeable future or provide some other reason their information was affording them a competitive advantage. (25) If the plaintiff can't satisfy this burden of proof, courts should deem the trade secret abandoned; it should not be possible to argue, after someone else finds value in a secret, that you saw value in it all along. (26) Importantly, no statutory amendment is required to institute this conception of abandonment. Properly understood, trade secret law already incorporates abandonment. We simply provide a clearer way to interpret what it means for a trade secret to derive independent economic value. (27)

Trade secret abandonment has some surprising implications. (28) Perhaps the most surprising is that employees might have more freedom to operate under trade secret law than is commonly believed. Once a company has abandoned a trade secret, people who know the secret--most likely, the company's employees or independent contractors who were exposed to the company's information--would be free to disclose or implement it themselves. (29) Trade secret holders might not like this. But we think it's right as a matter of statutory interpretation (30) and very important for innovation policy because it gives trade secrets that others have discarded a path to enter the market or the public domain. Both innovation and the historical record will benefit. (31)

Trade secret abandonment can also help solve a very real problem facing one important class of people: employee-inventors. It is not uncommon for someone who invented an idea while employed at a firm to want to leave and implement the idea herself if the firm won't. But currently, it's hard to do that without getting sued. (32) Employers can pop up later to demand their share of the pie when someone else demonstrates that the secret really was worth pursuing. (33) Trade secret abandonment provides a bit more room for employee-inventors whose employers didn't use their ideas to take them elsewhere and start anew. (34)

In Part I, we introduce the problem. Trade secret law, in the conventional view, confers a property right for an indefinite period of time and without the usual quid pro quo of disclosure. If we accept this view, owners can sit on their rights, keeping their secrets while declining to do anything with them.

In Part II, we challenge the conventional view by delving into the history of trade secret doctrine. We reframe trade secrets as more akin to trademarks and show that, at common law, trade secrets could be lost--abandoned--due to nonuse.

In Part III, we consider and reject the idea that modern trade secret law dramatically changed that common law norm. We argue the statutory independent economic value requirement in fact incorporates a similar, if much more nuanced, requirement that the owner derive economic value from keeping its information secret...