Trade Secrets

AuthorHenry C. Su - Michael J. Lockerby
Of the various types of intellectual property rights, trade secrets are the
most easily overlooked because both their creation and continued exis-
tence depend upon secrecy. Inside a company, their creation is unlikely
to be noted in any department-wide or firm-wide announcements or press
releases. And unlike patents, copyrights, and trademarks, trade secrets will
not be the subject of any registration document or other public document.1
Trade secrets are often licensed in conjunction with the license to use a
trademark that is the “cornerstone of a franchise system.”2 By definition,
however, the franchisor’s trade secrets will not be identified with any spec-
ificity in the Franchise Disclosure Document provided to state franchise
regulators and prospective franchisees. And although it may be the franchi-
sor’s trademark that identifies “a network of stores whose very uniformity
and predictability attracts customers,”3 one or more of the franchisor’s
trade secrets may account for much of that “uniformity and predictability.”
Unlike a business’s prominent if not famous trademark, its trade secrets are
by definition hidden—and in some cases unknown. Complicating matters
further is that trade secrets may be present in all aspects of the franchised
business. Recipes and formulas, for example, are an important component
1. In limited circumstances, as discussed in more detail in Chapter 4, the fact that trade
secrets exist—but not the content of the trade secrets themselves—may be disclosed in
connection with an application for copyright registration that seeks special relief from the
Copyright Office’s standard deposit requirements.
2. Susser v. Carvel Corp., 206 F. Supp. 636, 640 (S.D.N.Y.), aff’d, 332 F.2d 505 (2d Cir.), cert.
granted, 379 U.S. 885 (1964), cert. dismissed, 381 U.S. 125 (1965).
3. Principe v. McDonald’s Corp., 631 F.2d 303, 309 (4th Cir. 1980).
Chapter 6
Trade Secrets
Henry C. Su and Michael J. Lockerby
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214 • The Intellectual Property Handbook
of many restaurant and other franchise systems. Depending upon the facts
and circumstances, however, trade secret protection may also extend to
many other aspects of the franchise or any other business. These include
methods of doing business, strategic business plans, customer lists and
information, planned promotional campaigns, and computer software, to
name a few. Because a trade secret is—by definition—secret, when compa-
nies periodically take stock of their intellectual property assets, they may
fail to grasp the full extent of their trade secret portfolio. Depending on
the industry in which the company competes and the technology on which
the company’s business is based, this could represent an extremely costly
oversight. In some cases, the trade secret portfolio may be more valuable
than all of the company’s patents, copyrights, and trademarks combined.
The value of the company’s intellectual property (IP) portfolio may be
augmented by the fact that trade secrets do not require the filing of any
applications for registration to perfect, document, or maintain their exis-
tence. As a result, a company does not have to implement and maintain
a prosecution, docketing, or registration program for trade secrets. Trade
secret protection thus does not require the company to be subject to the
administrative burdens typically associated with IP protection and other
costs. Moreover, unlike patents and copyrights, trade secrets can have an
indefinite lifespan if the company takes reasonable precautions to protect
their secrecy and to guard against their unauthorized disclosure or use.
Trade secret protection also differs from other forms of intellectual prop-
erty in that it extends to ideas. In addition, it does not require the owner to
reduce the work to a tangible form to secure legal protection. Finally, although
some items (e.g., processes and inventions) might be eligible for either patent
or trade secret protection, some are eligible for protection only as trade secrets
(e.g., customer lists). These attributes of trade secrets can also augment their
value and utility to a company, regardless of whether it is a franchise.
Needless to say, any precautions taken to preserve the confidential status
of trade secrets and to limit their use have to be reasonable and effective.
Trade secrets are easily misappropriated because at one level they repre-
sent nothing more than information, which can be memorized or scribbled
down, e-mailed or downloaded, or otherwise copied onto some tangible
medium and then surreptitiously removed from company premises. Once
the trade secrets fall into the hands of an unscrupulous competitor, for-
mer employee, licensee, or franchisee, they can be clandestinely put to
immediate use. Depending on the nature of the trade secrets, a competitor
or former employee or franchisee may be able to take and make use of
the secrets without detection. For example, if the trade secrets involve a
time-saving or cost-saving step for a manufacturing process or recipe, they
could be implemented inside a competitor’s facility without the rightful
owner’s knowledge or even suspicion.
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I. Introduction 215
The mobile workforce of today’s knowledge-based economy heightens
the risk of misappropriation. It has become routine for employees, contrac-
tors, and consultants for technology companies to change jobs frequently.
To maintain trade secrets and thus their value, a business must keep close
track of what trade secrets new employees, franchisees, and independent
contractors may attempt to or in fact bring with them from their previous
employment, franchise system, or other business relationship. Otherwise the
unintended consequence of hiring a new employee, appointing a new fran-
chisee, or retaining a new independent contractor may be a trade secret mis-
appropriation claim asserted by the former employer, franchisor, or other
business partner. By the same token, the company needs to use adequate
safeguards upon the termination of employment, franchise, and independent
contractor relationships to prevent departing employees, franchisees, and
contractors from taking—and therefore potentially destroying—valuable
trade secrets. To maintain and protect its portfolio of trade secrets while
guarding against allegations of misappropriation, any company—including
not only franchisors and high-technology companies but also traditional
manufacturers—needs to monitor and regulate the potential flow of confi-
dential and proprietary business information in and out of the company’s
existing workforce and cadre of business partners (e.g., distributors, con-
sultants, franchisees, licensees, and in some cases even vendors). Though
potentially a daunting task, it can be managed with appropriate attention
and resources.
This chapter will acquaint the reader with sufficient knowledge of trade
secret law to be able to spot potential issues and problems. Consequently, it
will err on the side of treating some legal issues that are tangentially related
to trade secrets at least superficially rather than omitting them altogether.
The reader should also consult, as necessary, a more in-depth and exhaus-
tive subject-matter treatise4 and, where important and valuable trade secret
issues are at stake, consult with experienced IP counsel as well. In particular,
the reader should also consult the trade secret law of the specific state or
states that may be applicable to the transaction or dispute because—until
recently—the primary source of trade secret protection in the United States5
has been at the state level, both by statute and under the common law.
Unlike patent and copyright protection—each of which is largely gov-
erned by a single, self-contained federal statute—trade secret protection
is affected by a number of state and federal laws. Although there are some
differences in the law of various states, as of January 1, 2016, 47 states
plus the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have
4. See, e.g., 1 - 3
melviN f. JageR, tRade SecRetS laW
(2005); 1 - 4
RogeR m. milgRim, milgRim oN
tRade SecRetS
5. Outside the United States, trade secret protection varies widely from jurisdiction to
jurisdiction. International trade secret law is beyond the scope of this chapter.
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