Ladas & Parry - Transfers of Intellectual Property - TRANSFER OF TRADE SECRETS IN THE UNITED STATES

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TRANSFER OF TRADE SECRETS IN THE UNITED STATES

Trade secrets are a fully assignable and transferable type of intangible asset. [132] Despite the adoption of statutes, such as the Uniform Trade Secret Act and Economic Espionage Act of 1996, by some states, [133] the Restatement of Torts § 757(b) still provides the most comprehensive and widely relied-on definition of a trade secret. [134] Due to the intangible nature of trade secrets and the fact that most trade secret disputes are still interpreted under the common law of individual states, the extent of the property right in a trade secret is determined by the extent to which the owner protects its trade secret interest from disclosure to third parties. [135] Disclosure of a trade secret to a third party who is not obligated to protect the confidentiality of the information will end the property owner's right in the trade secret. [136]

One of the basic tenets that must be followed in any trade secret transfer is that, in

order for a valid transaction to take place and for the transfer to be perfected, the purchaser of a trade secret must take possession of the property. [137] The problem therein lies in the fact that trade secrets, as intangible property, are not easily possessed. [138] A trade secret that is sold and still retained by the transferor poses the risk that the transferor will assign the same trade secret to a subsequent, bona fide purchaser for value. [139]

Accordingly, courts have been called upon to resolve disputes in which the transferor retains the trade secret after an initial sale and assigns the same property to a subsequent good faith assignee. [140] Interpretation based on this scenario has ultimately resulted in a line of cases in which courts have decided that the subsequent assignee's rights in the property are valid and the original purchaser's remedy is against the transferor. [141]

After an assignment of a trade secret, the transferor will generally be enjoined from continuing use of that trade secret, making it available to third parties and, of course, selling an interest in the same property to a subsequent bona fide purchaser. [142] Qualifying this general rule is the partial assignment of a trade secret that will constitute, in most instances, a valid transaction. [143] Furthermore, if an inventor opts to assign an unpatented invention, he or she will be enjoined from seeking a letters patent in derogation of the rights of his assignee. [144]

[132] See Painton & Co. v. Bourns, Inc., 442 F.2d 216 (2d Cir. 1971); Dr Miles Co. v. John D. Park & Sons Co. 200 U.S.373 (1911).

[133] 18 U.S.C. §§ 1831-39. Section 1832 of The Economic Espionage Act of 1996 makes it a federal crime for any person to convert a trade secret to his own benefit or the benefit of others intending or knowing that the offense will injure any owner of a trade secret. See also R. Mark Halligan, The Economic Espionage Act of 1996: the Theft of Trade Secrets is Now a Federal Crime, (1997), 1.

[134] The Restatement of Torts § 757(b) defines a trade secret as "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. It differs from other secret information in a business...in that it is not simply information as to single or ephemeral events in the conduct of the business, as, for example, the amount or other terms of a secret bid for a contract or the salary of certain employees, or the security investments made or contemplated, or the date fixed for the announcement of a new policy or for bringing out a new model or the like. A trade secret is a process or device for continuous use in the operation of the business. Generally, it relates to the productions of goods, as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management."

[135] See Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984). See also Kaiser Aetna v. U.S., 444 U.S. 176 (1979) (holding that the right to exclude others is "one of the most essential sticks in the bundle of rights that are commonly characterized as property.").

[136]See Ruckelshaus, 467 U.S. at 1002. See also Harrington v. National Outdoor Advertising Co., 196 S.W.2d 786 (1946); Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974).

[137] See Milgrim On Trade Secrets § 2.02[l].

[138] Ibid., § 2.02[l].

[139] Ibid.

[140] See Stewart v. Hook, 45 S.E. 369 (S.Ct Ga. 1903) (holding that when a transferor assigned its secret formula to a subsequent good faith assignee after selling the same property to the original assignee, the first assignee's recourse was not against the subsequent purchaser; rather, its proper remedy and cause of action was against the transferor. The subsequent good faith assignee was entitled to retain the trade secret that it had purchased for value.).

[141] See, e.g., Sprague v. Rust Master Chem. Corp., 70 N.E.2d 831 (1947).

[142] See generally Hooker Chem. & Plastic Corp. v. United States 591 F.2d 652 (Ct.Cl. 1978); Platinum Prods. Corp. v. Berthold 21 N.E.2d 520 (NY 1939); see also Milgrim on Trade Secrets §2.02[2]. See Milgrim on Trade Secrets, § 2.0212]; see also American Dirigold Corp. v. Dirigold Metals Corp., 125 F.2d 446, 452 (6th Cir. 1942).

[143] See Milgrim on Trade Secrets, § 2.02[2]; see also New Era Electric Range Co. v. Serrell, 252 N.Y. 107 (1929).

[144] Ibid.

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