The Trade Secret-Contract Interface

• Author: Deepa Varadarajan
• Position: Assistant Professor of Legal Studies, Department of Risk Management and Insurance, J. Mack Robinson College of Business, Georgia State University
• Pages: 1543-1591

1543

The Trade Secret-Contract Interface

Deepa Varadarajan*

ABSTRACT: Contracts play a dual—and dueling—role in trade secret law.

On the one hand, non-disclosure contracts serve an important evidentiary

role, helping owners prove key elements of a trade secret claim (e.g., reasonable

secrecy efforts). Because of this evidentiary role, trade secret owners routinely

use confidentiality contracts when sharing information with employees,

business collaborators, and consumers. This Article suggests that contracts

have a pivotal evidentiary role in trade secret cases because of their notice

function. Unlike patent law, trade secret law does not impose formal

application or disclosure requirements on putative owners. Thus, non-

disclosure contracts are one of the few ways to notify recipients of information

about the existence and scope of claimed trade secrets.

Contracts’ centrality to trade secret law can create doctrinal tension, however,

when owners draft provisions to evade trade secret law’s requirements and

limitations. For example, trade secret owners impose contract provisions that

prohibit reverse engineering, avoid ongoing secrecy precautions, prevent the

use of non-secret or publicly available information, and incorporate employee

non-compete clauses. Such provisions conflict with trade secret law, but

owners can nonetheless enforce them through breach of contract claims. The

pervasive use of contract law to evade trade secret limitations can undermine

important policy concerns, such as promoting cumulative innovation and

protecting employee mobility. This Article offers the first comprehensive

account of trade secret law’s uniquely co-dependent yet complicated

relationship with contract law. I consider various legal mechanisms to

strengthen the ex ante notice function of contracts and deter uses of contract

that pose particular risks to trade secret law’s underlying policy concerns.

*

Assistant Professor of Legal Studies, Department of Risk Management and Insurance,

J. Mack Robinson College of Business, Georgia State University; Secondary A ppointment,

Georgia State University College of Law. For helpful comments, I thank Laura Heymann, Michael

Madison, Sean Pager, Nirej Sekhon, Jeremy Sheff, Eva Subotnik, and participants of the Junior

Scholars in Intellectual Property (“JSIP”) Workshop at Michigan State University, the Academy

of Legal Studies in Business (“ALSB”) Annual Meeting, and the St. John’s Intellectual Property

Colloquium. All errors are my own.

1544 IOWA LAW REVIEW [Vol. 103:1543

I.INTRODUCTION ........................................................................... 1544

II. UNDERSTANDING TRADE SECRETS AS INTELLECTUAL

PROPERTY .................................................................................... 1548

A.ORIGINS OF TRADE SECRET LAW ............................................ 1548

B.CENTRAL FEATURES OF TRADE SECRET LAW ........................... 1550

C.INFORMATION’S “DUAL FUNCTION” AND INTELLECTUAL

PROPERTY LAWS’ BALANCING ACT ........................................ 1553

III.THE EVIDENTIARY ROLE OF CONTRACTS IN TRADE SECRET

LAW ............................................................................................. 1556

A.EVIDENCE OF PLAINTIFF’S REASONABLE SECRECY

PRECAUTIONS ....................................................................... 1557

B.EVIDENCE OF DEFENDANT’S “MISAPPROPRIATION” .................. 1558

C.VIEWING THE EVIDENTIARY ROLE OF CONTRACTS THROUGH

THE LENS OF NOTICE ............................................................ 1560

IV. THE EVASIVE ROLE OF CONTRACTS IN TRADE SECRET LAW ....... 1563

A.ENLARGING TRADE SECRET SUBJECT MATTER ........................ 1564

B.AVOIDING ONGOING REASONABLE SECRECY PRECAUTIONS ...... 1566

C.ELIMINATING THE REVERSE ENGINEERING DEFENSE ................ 1568

D.USING NON-COMPETE CLAUSES TO CIRCUMVENT TRADE

SECRET REQUIREMENTS AND LIMITATIONS ............................. 1571

E.THE RELATIONSHIP BETWEEN CONTRACTUAL PROCESS AND

SUBSTANCE ........................................................................... 1573

V.DOCTRINAL MECHANISMS TO SCRUTINIZE TRADE

SECRET-EVASIVE USES OF CONTRACT LAW ................................ 1576

A.THE LIMITS OF PREEMPTION ................................................. 1578

1.Preemption Arguments Pre-DTSA ............................. 1578

2.Preemption Arguments Post-DTSA ........................... 1580

B.MISUSE DOCTRINE AND TRADE SECRET LAW ........................... 1583

C.REINVIGORATING CONTRACT LAW’S NON-ENFORCEMENT

DOCTRINES ........................................................................... 1587

VI.CONCLUSION .............................................................................. 1590

I. INTRODUCTION

Contract law and intellectual property law have a complicated

relationship. On the one hand, intellectual property owners use contract law

to share proprietary technologies, creative works, and information in efficient

ways. On the other hand, intellectual property owners can dictate contract

terms that deviate from intellectual property law’s default rules. Laws

2018] THE TRADE SECRET-CONTRACT INTERFACE 1545

governing patents, copyrights, and trade secrets impose eligibility

requirements and limitations to balance the interests of intellectual property

owners against users, follow-on innovators who build on existing works, and

the public.1 These legislatively calibrated balances can be undermined when

firms employ contract terms to restrict information uses that intellectual

property laws permit.

The question of whether intellectual property laws are just default rules

that parties can contract around or fixed policy judgments has generated

significant scholarly debate.2 Much of it has analyzed (and criticized)

copyright owners’ imposition of non-negotiable licenses (e.g., “clickwraps”

and “shrinkwraps”) when selling access to mass-market software.3 These

pervasive licenses, which often condition user access on contract terms that

eliminate various limits built into copyright law (like fair use), threaten to

become a form of “privately legislated intellectual property.”4

1. See infra Part II.C.

2. See, e.g., Jonathan M. Barnett, Why is Everyone Afraid of IP Licensing?, 30 HARV. J.L. & TECH.

123, 124–25 (2017); Mark A. Lemley, Beyond Preemption: The Law and Policy of Intellectual Property

Licensing, 87 CALIF. L. REV. 111, 118–33 (1999); J.H. Reichman & Jonathan A. Franklin, Privately

Legislated Intellectual Property Rights: Reconciling Freedom of Contact with Public Good Uses of Information,

147 U. PA. L. REV. 875, 876–83 (1999).

3. Such licenses come in various forms, including “shrinkwrap” licenses, which are

wrapped in plastic and accompany software, “clickwrap” licenses, which are electronically

transmitted and require a party to click “I agree” before downloading software or accessing a site,

and “browsewrap” licenses, which condition use of a website on terms that are typically accessed

via hyperlink. Collectively, these types of restrictive agreements have been ref erred to as “terms

of use” licenses. See Mark Lemley, Terms of Use, 91 MINN. L. REV. 459, 459–60 (2006) [hereinafter

Lemley, Terms of Use]. A voluminous body of intellectual property law scholarship addresses the

impact of such adhesive consumer licenses on policy concerns underlying intellectual property

laws. See generally Julie E. Cohen, Copyright and the Jurisprudence of Self-Help, 13 BERKELEY TECH. L.J.

1089 (1998); Niva Elkin-Koren, Copyright Policy and the Limits of Freedom of Contract, 12 BERKELEY

TECH. L.J. 93 (1997); Mark A. Lemley, Intellectual Property and Shrinkwrap Licenses, 68 S. CAL. L.

REV. 1239 (1995) [hereinafter Lemley, Intellectual Property]; Maureen A. O’Rourke, Drawing the

Boundary Between Copyright and Contract: Copyright Preemption of Software License Te rms, 45 DUKE L.J.

479 (1995). In addition, a voluminous body of contract law scholarship critiques adhesive

consumer licenses, focusing less on their threat to underlying IP policies and more on their

broader threat to traditional notions of assent and salience that undergird and legitimize private

contracting. See generally N

ANCY S. KIM, WRAP CONTRAC TS: FOUNDATIONS AND RAMIFICATIONS

(2013); MARGARET JANE RADIN, BOILERPLATE: THE FINE PRINT, VANISHING RIGHTS, AND THE RULE

OF LAW (2012); James Gibson, Boilerplate’s False Dichotomy, 106 GEO. L.J. 249 (2018).

4. Reichman & Franklin, supra note 2, at 882. Intellectual property law scholars have also

raised concerns about copyright and patent owners’ use of contract law to evade the first-sale or

exhaustion limitation that applies to sales of informational goods. See Ariel Katz, The First Sale

Doctrine and the Economics of Post-Sale Restraints, 2014 BYU L. REV. 55, 141 (suggesting that IP

owners’ ability to contract around the first sale doctrine should be permitted only in “limited

circumstances”); Aaron Perzanowski & Jason Schultz, Digital Exhaustion, 58 UCLA L. REV. 889,

892 (2011) (describing “first sale’s practical benefits and the problem of its increasing

marginalization”); Guy A. Rub, Rebalancing Copyright Exhaustion, 64 EMORY L.J. 741, 748–49

(2015) (arguing for certain restrictions on copyright owners’ ability to contract around the

exhaustion limitation).