The Foundation for the “Federal Common Law of Trade Secrets”

Congress may, and probably will, enact a federal, civil trade secret statute in 2015. That statute potentially will have a significant impact on the enforcement and, as such, the practical value of trade secrets as IP assets.

Such enforcement also may catalyze further development of the “federal common law of trade secrets.” To some, that body of law may be a bit of a mystery, and for good reason.

Historically, trade secret law largely has been a creature of state law. But, in TianRui v. ITC, 661 F.3d 1322, 1327-28 (Fed. Cir. 2011), the U.S. Court of Appeals for the Federal Circuit held that the federal common law of trade secrets is to be applied in International Trade Commission trade secret investigations. Coupling a federal, civil trade secret statute with the Federal Circuit’s holding could mean that the federal common law of trade secrets is about to enter a key era of development.

Undoubtedly, state trade secret statutes, contemporary state trade secret decisions and prominent secondary sources (e.g., the Uniform Trade Secrets Act and Restatement of Unfair Competition) will inform any upcoming development of the federal common law of trade secrets. Just as importantly, any such development appropriately should account for Supreme Court trade secret decisions and seminal state trade secret decisions. Four such decisions are set forth below.

First, in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475, 493 (1974), the Supreme Court held that state trade secret law is not preempted by U.S. patent law. The Court (a) reasoned that each of trade secret law and patent law “has its particular role to play, and the operation of one does not take away from the need for the other” and (b) explained that “[t]rade secret law promotes the sharing of knowledge, and the efficient operation of industry[.]” Id. at 493. The concurring opinion also provides insightful analysis.

Second, in Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1011-12, 1020 (1984), the Supreme Court (a) explained that trade secrets are economically valuable property rights that can be protected by the Takings Clause of the Fifth Amendment and (b) interestingly, emphasized that a trade secret confers the “right to exclude others[.]”

Third, in Vickery v. Welch, 36 Mass. 523 (1837), the Supreme Judicial Court of Massachusetts (a) acknowledged that the value of a trade secret is based on its secrecy and (b) held that the transfer of a trade secret (a secret “art” of making chocolate) is not in restraint of trade. The court specifically noted: “The public are not prejudiced by the transfer of [the secret art] to the plaintiff. If it were worth anything, the defendant would use the art and keep it secret [which it did], and it is of no consequence to the public whether the secret art be used by the plaintiff or by the defendant.”

Fourth, in Peabody v. Norfolk, 98 Mass. 452 (1868), the Supreme Judicial Court of Massachusetts confirmed that (a) trade secrets (a secret process and secret machinery) are property and (b) a trade secret owner has the right to an injunction to prevent unauthorized use or disclosure of its trade secrets. The court specifically explained: “If [a person] invents or discovers, and keeps secret, a process of manufacture, whether a proper subject for a patent or not, he has not indeed an exclusive right to it as against the public, or against those who in good faith acquire knowledge of it; but he has a property in it, which a court of chancery will protect against one who in violation of contract and breach of confidence undertakes to apply it to his own use, or to disclose it to third persons.” More generally, Peabody is a trade secret misappropriation case against an insider (former employee) and an outsider (new employer) and, as such, provides insight into that relatively common fact pattern.