United States: New State Trade Secret Law Was Nearly A Secret Itself

When the Governor signed a recent appropriations bill passed by the House and the Senate during the last days of the most recent legislative session, the bill contained a version of the Uniform Trade Secrets Act. The UTSA version in the proposed legislation was buried deep within the appropriations bill, which was not entirely surprising. Such a proposal, entitled "Chapter 93L," has been held out previously as part of a compromise to proposed non-compete reform, which was also enacted within the same appropriations bill.

The form of the UTSA signed by Governor Baker differs in many important respects from the standard form UTSA as set forth in Protecting Trade Secrets Under the Uniform Trade Secrets Act, Practical Advice for Executives by Michael Craig Budden (Quorum Books, 1996). As of that publication, 40 states and the District of Columbia had passed versions of the UTSA.

The reasons for the need for such a law are well stated in the Budden publication:

In recent years, numerous suits seeking injunctions barring the use of and damages for the misappropriation and theft of trade secrets have been prosecuted. Although many of the firms involved in these suits could be classified as high technology firms, ...many are not.

Protecting Trade Secrets at page 4. Many businesses seeking protection for trade secrets involve companies in "the health and medical field, personnel placement firms, insurance companies, composite materials construction, transportation firms, restaurants, entertainment providers, and even firms involved in the cosmetics business." Id.

The Massachusetts version of the UTSA differs in some substantial ways from the Model Act. For instance, in the Massachusetts version, what as defined as "improper means" of obtaining a trade secret does not include "reverse engineering." This is not an exclusion contained in the Model Act, and may provide a significant defense to one accused of trade secret misappropriation, especially where the product involved is highly technical in nature.

The definition of a protectable trade secret under the Massachusetts act contains many more qualifiers than does the Model Act. The Model Act defines a trade secret as "information, including a formula, pattern, compilation, program, device, method, technique or process, that: derives independent economic value, actual or potential, from not being generally known[.]" The Massachusetts act mentions by name other additional items which may be considered trade secrets such as "business strategy" and "financial or customer data." However, the Massachusetts act only recognizes these items as trade secrets where, "at the time of the alleged misappropriation: (i) [they] provided an economic advantage, actual or potential, from not being generally known[.]" This appears to be a higher standard to meet than that of the Model Act, since it indicates a required showing that the trade secret was, in fact, providing an economic advantage or potential for same, to the owner at the time of misappropriation.

When it comes to injunctive relief as a means of deflecting misappropriation, Section 2 of the Massachusetts Act expressly requires "a showing that information qualifying as a trade secret has been or is threatened to be misappropriated." The Model Act simply states that "[a]ctual or threatened misappropriation may be enjoined." The Massachusetts act further qualifies injunctive relief by requiring "consideration of prior conduct and the circumstances of potential use[.]" These qualifiers for injunctive relief are not defined in the Massachusetts act. The first – consideration of prior conduct – seems to imply that the conduct of the trade secret owner may somehow compromise the use of equity to stop misappropriation. The second – circumstances of potential use – appears to imply that some uses of another's trade secret may be proper, or at least not subject to being enjoined. The Massachusetts act, however, does not appear to define these conditions in any way. This seems to make the resort to injunctive relief more problematic or complicated than under the Model Act.

Both the Massachusetts and Model Act contemplate injunctions which condition future use of a trade secret upon the payment of a reasonable royalty. The Massachusetts Act, however, states that this type of order is only allowed "[i]n exceptional circumstances[.]" This term is defined as "a material and prejudicial change of positon prior to acquiring the knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable." This phrase implies that the unknowing, yet wrongful user, of a trade secret may be "exonerated" by being ordered to pay a reasonable royalty, rather than being ordered to halt use of the trade secret entirely.

When it comes to damages, the Model Act states simply, "[i]n addition to or in lieu of injunctive relief, a complainant may recover damages for the actual loss caused by the misappropriation." Under the Massachusetts Act, damages are recoverable "[e]xcept to the extent that a material and prejudicial change of positon prior to acquiring the knowledge or reason to know of misappropriation renders a monetary recovery inequitable[.]" See Section 3(a). This qualifier on recovery of damages implies that one who "innocently" acquires a trade secret may not be liable for monetary damages. This condition clearly "ups the ante" when it comes to the Plaintiff's burden of proof. It appears to be akin to a mens rea requirement wherein Plaintiff needs to demonstrate that the trade secret absconder knew what he was doing.

Unlike the Model Act, the Massachusetts Act adds an additional burden of proof provision which states: "In an action alleging misappropriation, a party shall state with reasonable particularity the circumstances thereof, including the nature of the trade secret and the basis for its protection."

In short, the Massachusetts Act contains a number of qualifiers and preconditions which may make it more difficult and challenging for trade secret owners to fight in court for their intellectual property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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