Jonathan J. Lerner, Nicholas Stevens and Richard T. Welch
Consider the case of a client who comes to you claiming that a competitor has stolen his trade secrets and asks you to bring an action against the competitor. The client makes molded plastic dishwasher parts for which it developed the design, and claims a competitor has obtained from some source a copy of the schematics and is using that information to make an exact replica of the product, which it is selling to the client's customers. So far, it sounds like a pretty good trade secret misappropriation case, you think. Be careful though, because there may be a defense to the claim that you are not considering. On the other hand they may be other causes of action that are available.
I. When is a secret not a trade secret?
Under New Jersey's law against misappropriation of trade secrets, information can only be protected if the plaintiff has a business advantage because that information is not known to its competitors and cannot be easily developed by them using proper means. (1) It follows, naturally, that if the information in question is readily ascertainable by a competitor, without resort to misappropriation, then trade secret protection is not available.
In the case of product design information, it is frequently the case that much of the information that would be needed to recreate the design of a product can be gleaned from an examination of the product itself. Thus, if a business can re-create the product of a competitor through reverse engineering, i.e., starting with the finished product and working backward to determine the design, it may do so without running afoul of trade secret protection. The re-creation of the design would have come from information that was readily ascertainable by proper means. In fact, the United States Supreme Court has firmly established that states may not prohibit the reverse engineering of products not protected under patent, copyright, or trademark law. (2)
The permissibility of reverse engineering and the definition of a trade secret combine to give rise to an intriguing defense to a claim of misappropriation of a trade secret. In defending a claim of misappropriation of trade secrets related to a product design, a defendant can avoid liability not only by establishing that it reverse engineered the plaintiff's product, but also by establishing that it could have reverse engineered the product, whether or not it actually did so. The theory is that if the information is readily ascertainable, it does not meet the definition of a trade secret and is therefore not protected, regardless of the means by which the defendant obtained it. This concept has been coined Areverse engineerability." (3)
This is a curious gap in the protection offered to a business as trade secrets because it would appear to allow a competitor to take product design information from a manufacturer by any means at all, proper or otherwise, as long as the particular product involved could be reverse engineered. There are, however, limits to this defense, as logic would suggest. Some of these limits are imposed from within the framework of trade secret law itself, and others by other causes of action that might apply to any misconduct by the competitor in obtaining the information. These limits serve to define and circumscribe the defense of reverse engineerability itself, of course, but they also help to illuminate the conceptual framework of trade secret protection itself, and the role it plays in a larger jurisprudence.
II. Reverse Engineerability
The elements of a trade secret claim have been clearly established by New Jersey courts. (4) In order to prove a claim for misappropriation of a trade secret, a plaintiff must establish that:
1. the information meets the definition of a trade secret;
2. that it was communicated in confidence;
3. that it was disclosed in breach of that confidence;
4. that it was acquired by user with knowledge of the breach;
5. that it was used to the detriment of the plaintiff; and
6. that the plaintiff took precautions to maintain secrecy.(5)
For the purposes of this discussion, the first element, the establishment of the existence of a trade secret, is the primary focus. New Jersey has adopted the definition of a trade secret from the Restatement of Torts, which provides that a trade secret is defined 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." (6)
In determining whether information meets this definition, a court should consider the following relevant factors, again taken directly from the Restatement:
1. the extent the information is known outside plaintiff's business;
2. whether the information is known by employees and others within business;
3. the extent of measures taken by the plaintiff to guard the secrecy of the information.
4. the value of information to the plaintiff and its competitors;
5. the expense and effort devoted by plaintiff to developing the information; and
6. the ease by which information could be acquired or developed by proper means.(7).
In this framework, then, secrecy is paramount. While all elements of the claim must be proven by the plaintiff, (8), the determination of whether or not the information meets the definition of a trade secret is the first inquiry, and if plaintiff cannot carry that burden, all other elements are moot.
It is well-settled that a business is entitled to copy the product of a competitor, as long as that product is not protected under patent, copyright, or trademark law. This principle has been firmly established by the United States Supreme Court, on the grounds that to allow states to prohibit the duplication of products not protected under those federal regimes would conflict with Congress's Constitutional prerogative to determine the level of protection necessary to strike the proper balance between encouraging competition and rewarding innovation. (9) Thus, if a business can reverse engineer a competitor's product, it is free to do so, without regard for how easy or difficult that process might be. (10)
The reverse engineerability defense to a trade secrets action arises as a result of the priority the New Jersey/Restatement trade secret cause of action gives to the nature of the information itself over the conduct of the parties. (11) To establish liability under the trade secret elements, a plaintiff must prove that the information it seeks to protect is held closely enough to fall within the scope of the protection of the cause of action. (12) In discussing the secrecy required to establish a trade secret in the context of product design, the comments to the relevant section of the Restatement specify that "[m]atters that are fully disclosed by the goods which one markets cannot be his secret." (13) In other words, a plaintiff might establish all of the other elements of a trade secret claim, including, significantly, the elements of misappropriation, and yet not succeed if it is found that the design information at issue could be ascertained from the product itself.
Both federal and state courts in New Jersey have acknowledged the validity of this defense. The principle was stated succinctly by the Third Circuit in SI Handling Systems, Inc. v. Heisley, (14) when it noted that
[i]t is clear that . . . [the product in question] is not entitled to trade secret protection if it is susceptible to reverse engineering, regardless of whether appellants in fact went through such an exercise, or, as would be more likely, relied on their memory. (15)
The SI Handling decision was cited on this issue by both the New Jersey Supreme Court, in Hammock by Hammock v. Hoffman-LaRoche, Inc., (16) and the Appellate Division in Rycoline Products v. Walsh (17). In Rycoline, the court addressed the issue of susceptibility of a product to reverse engineering in depth, ultimately holding that the information at issue in that case, the formula for a chemical product used in the printing industry, was protectable as a trade secret in part because there was no evidence that the formula could be reverse engineered (see further discussion below). (18)
While the defense of reverse engineerability was recognized but denied in both Hammock and Rycoline, it has been successfully asserted in both federal and state courts. In Adolph Gottscho, Inc. v. Bell-Mark Corp.,(19) the plaintiff sought an injunction and damages against a former employee and a competitor to whom the employee had provided information that the plaintiff claimed was a trade secret. (20) The former employee, a mechanic and draftsman, had created drawings reflecting certain features of the labeling machines made by both of the corporate parties. (21) The defendant business eventually obtained the drawings and used them to create similar features on its own machines. (22) The New Jersey Supreme Court held that the information contained in the drawings made by the former employee could be easily gleaned by a competent mechanic from inspection of the plaintiff's machines, and that the information was therefore not protectable as a trade secret. (23)
In Williams v. Curtiss-Wright Corp.,(24) the Third Circuit considered another case involving mechanical drawings of plaintiffs products, which were airplane engine replacement parts. (25) The defendant had obtained a number of these drawings, which were created by the plaintiff, and used them to start a competing business. (26) The Third Circuit upheld the trial court's ruling that most of the drawings did constitute trade secrets, in part on the strength of credible expert testimony that the fine tolerances required for the parts could not have been identified through reverse engineering. (27) However, the court also let stand that part of the trial court's ruling that found that a few of the parts could be reverse engineered, and that those parts were therefore excepted from the injunction awarded against the defendant. (28)
This defense is not absolute, however. In its discussion of the issue, the Rycoline court recognized that if the subject design information could only be obtained through a lengthy and expensive reverse engineering process, then the information was not, in fact, "readily ascertainable" from the product itself. (29) In discussing the defense, the court noted that to be successful, A defendant must demonstrate that [the product] is "quickly reverse engineerable." The more difficult, time consuming and costly it would be to develop the product, the less likely it can be considered to be "reverse engineerable." (30) Thus, in such a case, a competitor would still be free to undertake the actual reverse engineering of the product, but could not use the original manufacturer's information and rely on the product's susceptibility to reverse engineering as a defense.
The Rycoline court also established that the defense involved a shifting of burdens. Whereas generally the plaintiff bears the burden of proving all of the elements of a trade secrets claim, when a defendant asserts that the information is not protectable because it is reverse engineerable, the burden shifts to the defendant, who must demonstrate that it could have employed reverse engineering to derive the information necessary to duplicate the product, and that it could have done so relatively quickly. (31)
Notwithstanding these limiting factors, it is nevertheless striking that, at least for the purposes of a trade secret claim, the mere fact of a product's susceptibility to reverse engineering grants carte blanche to a misappropriator to use the information in competition against the original manufacturer, without regard for the propriety of the means by which that information was obtained. Given the potentially inequitable results that might follow from this approach, it is not surprising that there are other causes of action that effectively limits even further the application of the reverse engineerability defense.
III. Complementary Causes of Action
A defense of reverse engineerability, of course, is an affirmative defense, in that it accepts the premise that the defendant used the plaintiff's information, and challenges only that the information is protectable as a matter of law. It is relevant to inquire, then, as to how the defendant came to possess information considered to be confidential by the plaintiff, and correspondingly, as to whether the means by which the defendant's acquired the information might itself give rise to liability.
The New Jersey Supreme Court, in Lamorte Burns Co. V. Walters, (32) made it clear that "information need not rise to the level of a trade secret to be protectable." (33) Thus, New Jersey courts have awarded injunctive and monetary relief under a number of different causes of actions in cases in which a business's confidential information was used in competition against it. These causes of action which include breach of a non-compete or non-disclosure agreement, breach of an employee's duty of loyalty, tortious interference with economic advantage, unfair competition, and misappropriation of confidential and proprietary information. (34)
The Lamorte-Burns case is a useful guide in determining the circumstances in which information that does not meet the definition of a trade secret can be nonetheless protected, not only because the case involved all of the alternative theories of liability noted above, but also because in its decision in that case, the New Jersey Supreme Court discussed the principles that allowed those theories to be applied in such cases. (35) Plaintiff, an insurance claims adjustment firm, brought suit against two former employees who started a competing business using detailed confidential information regarding customers and their ongoing claims files that the employees had compiled while they worked for plaintiff and taken with them when they left. (36) Plaintiff asserted causes of action for breach of a confidentiality agreement (as to one defendant), breach of the employees' duty of loyalty, tortious interference with economic advantage, and misappropriation of confidential information. (37)
In reversing the Appellate Division's denial of summary judgment to the plaintiff on its tort claims, the Court noted that while it was likely that the information taken by the defendants would rise to the level of a trade secret, its designation as such was not critical to establishing liability for its misappropriation. (38) The Court cited with approval cases from a number of jurisdictions that had afforded protection to information regardless of its qualification as a trade secret, based on the confidential relationship between the parties. (39) The Court noted that these cases relied on principles of agency, and quoted provisions of the Restatement (Second) of Agency to the effect that an agent has a duty not to use against the principal information acquired in confidence during the course of the agency. (40)
On that basis, the Court held that the information taken by the defendants was protectable because it was provided to defendants in confidence in the course of their employment for the sole purpose of servicing the plaintiff's customers. (41) Having found that the information was protectable, the Court further held that the defendants had breached their duty of loyalty by taking affirmative action to the detriment of the employer while still employed (by taking the information) and had committed tortious interference with plaintiff's economic advantage (by using the information to cause customers to move actively ongoing claims to their new, competing business). (42) The Court also held that the defendants' actions were sufficient to sustain plaintiff's claims under theories of unfair competition and misappropriation of confidential and proprietary information. (43)
Significantly in the context of the trade secrets defense of reverse engineerability to note that in the Lamorte Burns case the priority given to the conduct of the parties in relation to that given the nature of the information at issue is reversed from that in trade secrets cases; here the conduct of the parties is the key element, while the nature of the information is a relevant, but less significant factor.
In discussing whether or not the information in Lamorte Burns was protectable, acknowledged that the unavailability to the general public of the subject information in that case was a factor in determining that the information was imparted in confidence to the defendants. (44) However, its analysis under the principles of agency, as well as its application of the facts to the claims of tortious interference and breach of the duty of loyalty, make it clear that the animating factor in its decision was the employees' breach of trust with the employer, rather than the particular nature of the information involved. In discussing the breach of the duty of loyalty claim, the Court again cited to a number of cases from other jurisdictions to support the proposition that the prohibition against using purloined information beyond the term of employment arose from the fact that such use was an extension of the violation of the trust of the employer. (45) As to its discussion of the tortious interference claim, the Court concluded by noting that: "[W]e respect the principles of free competition, but defendants' taking of plaintiff's confidential and proprietary property and then using it effectively to target plaintiffs' clients, is contrary to the notion of free competition that is fair." (46)
Cases involving similar circumstances but different information help to define how readily ascertainable information must be before that factor will overcome a breach of trust by an employee. In Subcarrier Communications, Inc. v. Day, (47), the Appellate Division refused to grant a preliminary injunction against a former employee of a company that brokered contracts between telecommunications carriers and owners of property that would be advantageous sites for placement of cellular transmission equipment. (48) The information the employer claimed as confidential were lists of possible locations and of telecommunications carriers who were the employer's customers. (49)
The court held that this information was not sufficiently confidential to merit protection, noting the testimony of the defendant that "companies in the field basically look for tall buildings in a geographic area, and solicit their owners or managers for antenna leases." (50) Regarding the customers, the court recognized that customer lists could be confidential information, or even trade secrets, but that in this case, All defendants were dealing with long distance telephone carriers, and AT&T, MCI, and Sprint were on plaintiff's list, there could be no valid claim that they were protected customers. (51)
In Whitmeyer Bros., Inc. v. Doyle, (52) the New Jersey Supreme Court overturned the trial court's award of a preliminary injunction to enforce a non-competition agreement where the employer's business consisted of highway repair contracts with public entities, and the information it sought to protect was its bidding procedures and its customer list. (53) The Supreme Court held that given that bids in the industry all contained essentially the same information and were awarded on the basis of price, and that the contracts were all a matter of public record, the information was not sufficiently confidential to serve as a legitimate interest that the employer could protect through a contract restraining the defendant from competing with it. (54)
These cases, among others that decline to protect information on the basis of its lack of secrecy, (55) demonstrate that to fall outside of the protection of the various causes of action directed at various stripes of unfair competition, information must be so widely known or readily ascertainable that there is very little value to the secrecy in which it is held by the complaining business. Such a finding would seem to be unlikely where the information at issue was information detailing the design of a manufacturer's products, even where a competitor could possibly retrieve that information by means of reverse engineering. As the Appellate Division noted in Platinum Management v. Dah (56), "to be judicially protected, information need not rise to the level of the usual trade secret, and indeed, may otherwise be publicly available." (57)
A defense of reverse engineerability, then, would not likely succeed outside of the context of the cause of action of misappropriation of trade secrets. The focus of the other causes of action on the conduct of the defendant and the very broad range of information considered to be protectable under these causes of action, would likely overcome the argument that product design information could not be protected from misappropriation on the basis that it was discoverable by reverse engineering.
IV. A seamless web
As is made clear by the discussion above regarding the defense to a trade secret claim of reverse engineerability and potential alternative causes of action in such a case, there is substantial overlap between trade secret claims and unfair competition torts, including breach of protective covenants. Notably, in any case in which any of these latter claims would apply to protect the interest of a business in protecting its confidential information, the scope of information potentially covered by the action would include any information that could also be protected as a trade secret. (58) Thus, these claims do effectively fill the reverse engineerability gap in trade secret law.
The converse, however, is not true. Much of the information that might be protected through one of these alternatives to a trade secret claim would not meet the definition of a trade secret. Given that fact, and the fact that any of these more inclusive actions can obtain for a plaintiff substantially the same relief, both injunctive and monetary, as a successful trade secrets claim, it is tempting to wonder whether a trade secrets claim is worth the bother.
The answer is related to the purpose underlying the separate protection afforded trade secrets, and the conceptual relationship between that protection and the broader protection available for business information that is confidential, but which does not rise to the level of a trade secret. The Lamorte Burns Court and others have differentiated the two categories of claims by noting that a trade secret claim is founded upon the nature of the information at issue while the unfair competition claims are founded on the misconduct of the competitor. This distinction is accurate as far as it goes, but in the end proves to be of little moment.
As our discussion regarding the defense of reverse engineerability and the means by which it can be circumvented demonstrates, the same protections are available in both cases involving trade secrets and in those involving valuable confidential information. Thus, in terms of the protection available for a business's information, there is effectively little distinction between information which rises to the level of a trade secret and that which does not.
Any final inclination to regard trade secrets as distinct from other confidential information of value, and perhaps worthy of more protection because of their secrecy, is put to rest by the very source of New Jersey trade secret law, the Restatement of Torts. In the comments to ' 757, of the Restatement the genesis of the definition of a trade secret in New Jersey, the drafters note the following in regard to the difference between trade secrets and other, less secret information:
The significant difference of fact between trade secrets and processes or devices which are not secret is that knowledge of the latter is available to the copier without the use of improper means to procure it, while knowledge of the former is ordinarily available to him only by the use of such means. It is the employment of improper means to procure the trade secret, rather than the mere copying or use, which is the basis of the liability under the rule stated in this Section. . . . The suggestion that one has a right to exclude others from the use of his trade secret because he has a right of property in the idea has been frequently advanced and rejected. The theory that has prevailed is that the protection is afforded only by a general duty of good faith and that the liability rests upon breach of this duty; that is, breach of contract, abuse of confidence or impropriety in the method of ascertaining the secret. Apart from [these], trade secrets may be copied as freely as devices or processes which are not secret.
According to the restatement, there really is nothing inherently significant about information that meets the definition of a trade secret. Trade secret law is simply another restraint on improper business conduct, as are the other causes of action discussed above that seek to curtail unfair competition. Like the others, it has a niche, in that it applies to create a clear path to liability in certain particular factual circumstances. In a breach of the duty of loyalty claim, competitive conduct by an employee while still employed creates a defined basis for liability. In the case of a claim under contract, it is the contract itself that provides the factual foundation. For tortious interference, the key facts are an ongoing relationship and the expectation that it will continue. The clear basis for liability in a trade secrets claim is that the information at issue is so to be closely held by the business that improper behavior.
Given the specific targets of these causes of action, it is natural that any one of them will have gaps that leave unprotected information that is yet of value to a business, such as the reverse engineerability gap in the trade secrets claim. By capturing all of the factual premises included in their collective scope, though, they effectively provide strong and broad protection for businesses against unfair competition arising from the misappropriation of proprietary information.
(1) See, Sun Dial Corp. v. Rideout, 29 N.J.Super. 361 (1954); Rycoline Products, Inc. v. Walsh, 334 N.J.Super. 62 (2000); SI Handling Systems, Inc. v. Heisley, 753 F.2d 1244 (1985).
(2) See, Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989).
(3) This term appears in Rycoline, supra discussed infra.
(4) Although forty-five state, along with the District of Columbia and the United States Virgin Islands, have adopted into statute some form of the Uniform Trade Secret Act, misappropriation of a trade secret is still a common law cause of action in New Jersey. Because, however, both New Jersey's common law elements of the claim and the provision of the UTSA are largely derived from the Restatement of Torts definition of the claim [citations], the differences between the two are not substantial.
(5) See, Rycoline, 334 N.J.Super. at 71, citing Rohm & Haas Co. v. Adco Chem Co., 689 F.2d 424, 429-30 (3rd Cir. 1982) and Stone v. Goss, 65 N.J.Eq. 756, 759-60 (E&A 1903).
(6) See, Restatement of Torts 757, comment b (1939); Hammock by Hammock, 142 N.J. 356, 384 (1995); Smith v. BIC Corp., 869 F.2d 194, 199 (1989).
(7) See, Restatement of Torts 757, comment b (1939); Hammock, 142 N.J. at 384; Smith, 869 F.2d at 200.
(8) See, Rycoline, 334 N.J. Super. at 71.
(9) See, Bonito Boats, 489 U.S. 141, at 146-53; citing, inter alia, U.S. Const. Art. I, 8.
(10) See, Sun Dial Corp., 29 N.J.Super. at 368; Rycoline, 334 N.J. Super. at 74-75.
(11) See, Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 300 (2001).
(12) See, Rycoline, 334 N.J. Super., at 71.
(13) Restatement of Torts 757, comment b.
(14) Supra, 753 F.2d 1244.
(15) Id. at 1262. The SI Handling case was decided under Pennsylvania law, which, at that time, was substantially similar to New Jersey trade secret law as it was also derived from the Restatement definition of the cause of action. See, Rohm and Haas, supra, noting in a trade secret case that the relevant law in Pennsylvania and New Jersey was so similar that it mooted the choice of law question before the court.
(16) Supra, 142 N.J. 356.
(17) Supra, 334 N.J.Super. 62.
(18) Id. at 74.
(19) 79 N.J.Super. 156 (1963).
(20) See, id.
(21) See, id., at 162-63.
(22) See, id.
(23) See, id., at 159-62.
(24) 681 F.2d 161 (1982).
(25) See, id., at 162.
(26) See, id.
(27) See, id., at 163.
(28) See, id.
(29) See, Rycoline, 334 N.J.Super. at 74-75.
(30) Id., at 75, citing Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983); Zatos Int'l, Inc. v. Young, 830 F.2d 350 (D.C. Cir. 1987); and ILG Industries, Inc. v. Scott, 273 N.E.2d 393 (Ill. 1973).
(31) See, Rycoline, 334 N.J. Super., at 74.
(32) Supra, 167 N.J. 285.
(33) Id., at 299.
(34) Other causes of action may apply, as wel