Misappropriation

 
 

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A misappropriation of a trade secret may occur where a person acquires the trade secret through improper means or where the person discloses the trade secret in violatio of a duty to keep the information confidential.

The UTSA and the DTSA define improper means as including "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means."  Courts have further held some intentional acts (other than independent development or reverse engineering) to discover the trade secret to constitute an improper means of acquisition.

Improper Means

A disclosure of a trade secret constitutes misappropriation if the disclosure constitutes a breach of a duty to keep information confidential.  One situation where such a duty of confidentiality exists is in contract that specifies the duty.  Such a contract may exist in an employer-employee relationship, or it may exist between the trade-secret holder and a third party, such as a supplier or vendor.  Whether a party to that contract has breached the duty will depend on the specific circumstances under consideration.

Breach of Duty
Duty Arising Outside of Contract

The duty of confidentiality can arise outside of a contract.  A particular relationship may indicate a duty not to disclose information.  The employment relationship often is considered a “relationship of confidence” which would create a duty independent of any contractual provision.  The business that a third-party does with a trade-secret owner often creates a duty to keep information confidential.  There need not be any fiduciary relationship for the duty to arise.

Question 2

John has a great idea for a new business.  He has spent considerable time and money planning the business model, which is so innovative that it plans to be financially rewarding.  John is careful to designate any material that has information relating to the business model as confidential and proprietary.  John seeks capital to start the business, and in doing so, he must disclose the confidential business model to investors.  In making the disclosure, John informs the investors that he expects the investors to keep the information confidential.  One of the investors, Harold, is quiet when John communicates this expectation.  Subsequently, Harold sells the information to a competitor of John.

Question:  Has Harold misappropriated John’s trade secret?

Question 3

Clarence has developed a formula for creating a synthetic material.  He makes affirmative efforts to keep the formula secret.  Unfortunately, however, while at a party, Harold gets drunk and tells someone, Charlie, his secret formula.  He writes it on a piece of paper and gives it to Bob, explaining only that “this formula will change the world!”  Bob posts the formula to his Facebook account.

Question: Has Bob misappropriated Clarence’s trade secret?

Answers
 
 
 
 
 
 
 
Practice Problems

Question 1

Martin would like to know the client list of BIG BLOCK CO. (BBC), which is a trade secret.  To that end, Martin enters BBC pretending to be a city inspector of the premises.  THE BBC employees let him go anywhere in the building, based on his representation that he is a city inspector.  Martin then proceeds to find a document with the client list on it, covertly takes a photograph of the document, and then leaves the building.

Question: Has Martin misappropriated the trade secret of BBC?

Answer to Question 3

No.  The circumstances of Clarence disclosing the formula to Bob do not suggest any duty on Bob’s part to keep the information confidential.  Nor did Bob acquire the information through improper means.  Bob’s disclosure on Facebook would not constitute a misappropriation.

Answer to Question 2

Yes.  The circumstances of John’s disclosure, including his express statement, indicate a reasonable expectation that the information be kept confidential.  Harold has a duty to keep the information confidential.  In disclosing the information, Harold has breached his duty, and thereby misappropriated the trade secret.

Answer to Question 1

Yes.  Martin has made a misrepresentation in order to gain access to the trade secret.  This would constitute an improper means of acquisition, so it would be a misappropriation.

Question 4

Better Business Ideas (BBI) is a consulting firm that identifies strategies for businesses to become more profitable.Holis Inc. is a retail furniture business that has observed declining revenues over the past few years.Holis requests BBI to provide an analysis of its business.BBI then performs extensive data collection of, and research on, Holis and the retail furniture industry.

 

BBI creates a memo that outlines its findings and makes specific recommendations.  BBI clearly marks the memo as “Confidential” and places it in a sealed envelope that is also marked accordingly.  BBI implements other precautions to preserve the secrecy of the memo (e.g., confidentiality agreements with employees; current drafts in a locked cabinet).  Nevertheless, a BBI employee secretly meets with a Holis executive and, for $2,000, discloses the contents of the memo—prior to BBI formally giving the memo to Holis.  Having learned the memo’s contents, Holis proceeds to sever its relationship with BBI, refusing to pay for the findings and proposals that BBI documented in the memo.

Question: Has Holis committed a trade-secret violation?

Answer to Question 4

Yes.  Holis has used improper means to discover confidential business information that is valuable.  The contents of the memo are valuable as evidenced by the fact that Holis engaged BBI to produce the information.  The means that Holis employed to acquire the information are improper: bribing an employee to disclose the contents of a confidential document is improper—even if otherwise legal.  Finally, BBI has made reasonable efforts to protect the secrecy of the information.