San Francisco

Trade secrets: protecting valuable information in a competitive world.

Protecting valuable information is crucial to maintaining an edge in today’s competitive business landscape. Trade secrets—information that provides economic value by remaining secret—are ways businesses protect their assets.
25 May 23 | United States of America
Bartko Zankel Bunzel & Miller
Sean McTigue

This blog post will discuss the concept of trade secrets, the historical development of trade secrets law, and how to identify a trade secret based on the six-factor test. We will also touch upon the timing of trade secret identification and the importance of a pre-filing investigation in trade secret misappropriation lawsuits, particularly under California law.

What is a Trade Secret?
A trade secret is information that provides actual or potential economic value derived from its secrecy. The “it” analysis, asking “What is ‘it’ that plaintiff alleges to be a trade secret?,” is the beginning and ending point of trade secrets law.

How is a Trade Secret Different from other Intellectual Property?
Unlike patents or copyrights, companies do not publicly disclose trade secrets to gain protection. Some companies keep their technology a secret rather than seeking patents to prevent competitors from gaining insights into their operations. While businesses cannot exclude others from independently developing the same technology if it is a trade secret, competitors also do not receive any hints about how it works (like they could by reading a patent).

For example, the trade secrets at issue in a recent case, where the plaintiff obtained an $845M judgment after a jury trial, were advanced mathematical and scientific concepts embodied in source code for software enabling photolithography mask optimization. Customer lists can also be trade secrets. However, this protection is more limited in California due to California Business and Professions Code § 16600.

Historical Development of Trade Secrets Law
United States trade secrets law originated with the American Law Institute Restatement of Torts Section 757 (1939). Scholars and trial lawyers reviewed 19th and early 20th-century case law to determine when society should give the special status of a “trade secret.” This review led to the development of the six-factor test, which remains the standard for determining whether a piece of information qualifies as a statutory trade secret today.

The Six-Factor Test:

  1. The extent to which entities outside the company know the information.
  2. The extent to which employees and others involved in the company know the information.
  3. The extent of measures taken by the company to guard the secrecy of the information.
  4. The value of the information to the company and competitors.
  5. The amount of time, effort, and money expended by the company in developing the information.
  6. The ease or difficulty with which others could properly acquire or duplicate the information.

California’s definition of a trade secret in California Civil Code § 3426.1(d) reflects these factors:

“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Trade Secret Identification Timing
Today’s hot-topic issue in trade secret law is when a piece of information must be identified as an alleged trade secret “with particularity.” Ideally, trade secret identification should occur during the pre-filing investigation before filing the lawsuit. Delaying identification until after filing the case can weaken the protection of legitimate trade secrets, result in wasted discovery costs, and undermine the trade secret owner’s responsibility to develop internal trade secret asset management systems.

In California, this is particularly true due to the Code of Civil Procedure § 2019.210, which requires that “before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity.” This limitation on discovery can require satisfying the six-factor test above for each alleged trade secret before getting discovery from the defendant. A back and forth with opposing counsel regarding whether the identification meets the six-factor test with “reasonable particularity” can stall discovery into other causes of action as well, to the extent trade secret misappropriation allegations overlap with other causes of action, such as breach of contract or intentional interference with business relations.

Pre-Filing Investigation
Conducting a reasonable pre-filing investigation is crucial for a trade secret misappropriation claim. A plaintiff must evaluate each trade secret it intends to allege under the six-factor test. The plaintiff must also link the alleged trade secrets to acts of threatened or actual access, use, or disclosure (the three types of misappropriation).

Trade secret identification is a critical aspect of protecting intellectual property. By understanding the six-factor test and conducting a thorough pre-filing investigation, trade secret owners can better protect their valuable assets and minimize the risk of misappropriation. Understanding the historical development of trade secrets law and the timing of trade secret identification will also help ensure that trade secret owners can navigate the complex world of intellectual property protection effectively. With a particular emphasis on California law, such as California Business and Professions Code § 16600, Civil Code § 3426.1(d), and Code of Civil Procedure § 2019.210, businesses operating within or interacting with the state can remain well-informed about the specifics of protecting their trade secrets.