Trade Secrets

Trade secrets are distinct from other types of intellectual property in that their value is derived from their non-disclosure. Unlike patent and copyright protections, which require some disclosure or publication in return for temporary protection, a trade secret is protected only so long as the holder of the trade secret maintains the secrecy of the information. Various factors effect the decision to seek patent or copyright protection versus maintaining a trade secret, including patentability and economic viability.

What is a Trade Secret?
Trade secrets can consist of nearly any kind of intangible property that derives its value from its confidentiality. For example, formulas, processes, complications, patterns, programs, techniques, client lists, business methods, pricing information, and source code can all be considered trade secrets when entities make efforts to keep them confidential. Under Utah law, trade secrets are defined by a three-part test; to be protectable an alleged trade secret must consist of:

“information, including a formula, pattern, compilation, program, device, method, technique, or process,” that “derives independent economic value . . . from not being known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure”; and
“is the subject of efforts are reasonable under the circumstances to maintain its secrecy.”2
To be considered a trade secret, the process, formula, technique, etc. cannot be generally known or readily ascertainable. When determining whether something constitutes a trade secret, courts consider the relevant experience and knowledge of the specific defendants. For example, in CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC the court found that pricing information did not qualify as a trade secret in light of the sophistication of the defendants because the defendants could reasonably know the pricing information.3

A combination of “generally known elements or steps can qualify as a trade secret, if it represents a valuable contribution attributable to the independent efforts of the one claiming to have conceived it.”4 The determination of whether the product, design, vision, compilation, etc. constitutes a trade secret is fact-based inquiry, where a court will consider: “(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in its business; (3) the extent of measures taken by the business to guard the secrecy of its information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.”5 For example, in USA Power, the Utah Supreme Court remanded the case to determine whether the Plaintiff’s development plans for a power plant constituted a trade secret.6 Although each piece of the development plans (taken individually) was known and ascertainable, the Plaintiff argued the vision of plant when analyzed together constituted a trade secret.7

Customer lists (like other compilations) can be considered trade secrets. However, to be considered a trade secret, the evidence much show that great expense and effort was used to obtain the information in the customer list—over and above the normal practice of product sales and development.8 For example, in Ikon Office Solution, Inc. v. American Office Products, Inc., an employer alleged that a former employee had misappropriated a customer list and contact information in violation of the Uniform Trade Secrets Act; the court stated that although a customer list can be a trade secret where the employer has expended considerable time and money, the customer list at issue was not a trade secret because “a person with a rudimentary knowledge of the industry” could quickly identify the key consumers in the area.9 The court further held the information included in the list was not a trade secret because it was information that the employee had in his head from years of personally cultivating the accounts.10

Maintaining Confidentiality
Companies must make reasonable efforts to maintain the confidentiality of their trade secrets.11 To do so, companies may: require employees, independent contractors and other business associates to sign non-disclosure agreements; restrict access to the trade secret to only those individuals to whom disclosure is necessary; mark information as proprietary and confidential; monitor access to confidential information; and pursue instances of misappropriation through litigation.

Former employees “may not use confidential information obtained during the course of his or her employment to compete after termination with his or her former employer.”12 Written contracts or formal employment contracts are not required in order to create this duty, rather this duty “is grounded on ‘basic principles of equity’ . . . and upon an implied contract, growing out of the nature of the employer-employee relation.”13 An employee’s duty to abstain from using the confidential information entrusted to her during her course of employment “does not necessarily turn on the existence of a legally enforceable contract.”14 Although requiring employees to sign a non-disclosure agreement is not always necessary to maintain an action for misappropriation of trade secrets, such practices help to ensure that companies satisfy the third prong of the test for trade secrets—utilizing reasonable efforts to maintain the security of the trade secret.15

When disclosure of a trade secret is made to a non-employee without requiring that individual sign a non-disclosure agreement, courts are likely to find that no trade secret exits. For example, in Medspring the court found the Plaintiff would not likely be successful on the merits of its misappropriation of trade secret claim where it had disclosed the alleged trade secret to both an employee and the employee’s boyfriend who was not subject to a non-disclosure agreement.16

Misappropriation
The Utah Uniform Trade Secrets Act defines “misappropriation” as:

acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
disclosure or use of a trade secret of another without express or implied consent by a person who:
used improper means to acquire knowledge of the trade secret; or
at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was:

derived from or through a person who had utilized improper means to acquire it;
acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.17

Thus, a trade secret may be misappropriated when it is acquired through theft, bribery, misrepresentation, or breach of a duty to maintain secrecy. Juries may infer misappropriation of a trade secret from circumstantial evidence.18 For example, where the same individual assisted in creating bids for competing companies, it is a reasonable inference that the individual knew exact numbers used in the first bid and used that proprietary knowledge in assisting the second company to develop its bid.

While misappropriation of a trade secret through improper means is actionable,19 discovery of a trade secret through reverse engineering or independent research is not actionable.20 In one extreme example, a competitor attempted to acquire knowledge of the chemical process used in a proprietary method for producing methanol by taking aerial photographs of a chemical plant during construction. There the court held that such constituted misappropriation and the competitor’s attempts “[t]o obtain knowledge of a process without spending the time and money to discover it independently is improper unless the holder voluntarily discloses it or fails to take reasonable precautions to ensure its secrecy.”

Litigating Misappropriation of Trade Secrets—Preemption
The Utah Trade Secrets Act expressly preempts conflicting state remedies that are based on the misappropriation of trade secrets.21 However, contractual remedies (whether based on the misappropriation of a trade secret or not) are not preempted.22 Utah courts have stated that the purpose of the Utah Trade Secrets Act “is to preserve a single tort action under state law for misappropriation of a trade secret.”23 Guided by this principle, the court in CDD Restoration held “the UTSA preempts claims based on the unauthorized use of information, irrespective of whether that information meets the statutory definition of a trade secret.”24 Thus, “a claim is preempted to the extent that it is based on factual allegations supporting a misappropriation of trade secrets or otherwise confidential information.”25 A non-trade secret claim is preempted if proof of that claim “would also simultaneously establish a claim for misappropriation of trade secrets” irrespective of the “surplus elements of proof” necessary to establish that claim.26 However, a claim that is based on wrongful conduct independent of the misappropriation of a trade secret is not preempted. 27 For example, in CDC Restoration the court found the plaintiff’s breach of fiduciary duty claim was preempted where the claim was based entirely on the defendant’s alleged misappropriation and use of confidential information.28 A claim for intentional interference based on the alleged use of trade secrets is preempted by the Utah Uniform Trade Secrets Act. CDC Restoration & Const., L.C. v. Tradesman Contractors, LLC, 2012 UT App. 60, 274 P.3d 317. See also Mona Vie, LLC v. FVA Ventures, Inc., Docket No. 2:12-cv-152, 2012 WL 1952496 (D. Utah, May 30, 2012) (holding that the Utah Uniform Trade Secrets Act preempts a claim for intentional interference based on the alleged use of confidential information).

Liability for Misappropriation of Trade Secrets
An entity or individual may be entitled to both injunctive relief and monetary damages when seeking redress for violation of a trade secret. Injunctive relief is available to enjoin actual or threatened misappropriation.29 Monetary damages can be measured by the actual loss caused by misappropriation, the unjust enrichment to the defendant, or a reasonable royalty—the “price that would be set by a willing buyer and a willing seller” for a license in the trade secret, a measure of damages that seeks to recreate “an actual market transaction … [in] which both parties gain from the transaction.”30 Exemplary damages—up to twice the amount awarded for general damages—may be available if willful and malicious misappropriation exists.31

Finally, Utah courts may award attorney’s fees to a prevailing party where a claim of misappropriation is made in bad faith, where a motion to terminate an injunction is made or resisted in bad faith, or where willful and malicious misappropriation exists.32 In extreme cases, misappropriation of a trade secret may also subject an individual or entity to criminal sanctions.33