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
SUMMARY

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... (see full summary)

 
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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.INFORMATIONS “DUAL FUNCTION AND INTELLECTUAL
PROPERTY LAWS BALANCING ACT ........................................ 1553
III.THE EVIDENTIARY ROLE OF CONTRACTS IN TRADE SECRET
LAW ............................................................................................. 1556
A.EVIDENCE OF PLAINTIFFS REASONABLE SECRECY
PRECAUTIONS ....................................................................... 1557
B.EVIDENCE OF DEFENDANTS “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 LAWS 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).

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