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Sunday, 29 August 2010

The Term of Trade Secret Protection: The Dirty Little Secret

Should trade secret protection be limited in time? On first glance, the correct answer would seem to be-- "no". Don't we teach students that one of the basic trade-offs between patents and trade secrets is that the patents provide robust protection for a fixed period of time while trade secret protection is valid only as long as the confidential information remains secret.

Like any risk that is further bathed in uncertainty, the owner of a trade secret lives in a quantum-like world where the next wave may bring with it unwanted disclosure of the information, either because of reverse engineering or malfeasance. Stated otherwise, hovering over the potential for an unlimited term of protection is the ever-present risk of disclosure. Win the jackpot, like say Coca-Cola, and the two converge, where the specific trade secret benefits from a seemingly limitless term of protection. Lose the lottery, and the owner of the erstwhile trade secret can only hope that it has extracted enough value, either by way of first mover advantage or otherwise, to justify the time and effort in adopting the trade secret route.

While the foregoing represents the canonical view of the question, it appears that there are challenges to this commonly-held wisdom. The first heresy comes from the world of legal practice. This Kat suspects that there are few readers who who have not encountered a clause in a grant for the right of use of a trade secret that provides for a fixed time limit for the secrecy undertaking. This form of clause seems more typically to emanate from the party who is the recipient of the disclosure, and that makes perfect sense. It is difficult to come up with circumstances in which the disclosing party has an interest in limiting the period of time that the recipient is obligated to maintain secrecy of the information. The only situation that I can come up with is where the disclosing party actually intends to compete with the recipient, and the contractual ability to disclose the trade secret might actually confer a competitive advantage on the disclosing party. But such a scenario seems pretty far-fetched.

The argument most typically raised by the recipient in favour of a fixed time limit for the secrecy undertaking is one of mutual convenience. The claim goes something like this:"Because of the rapidly changing circumstances in the industry in which the secret is being used, the contractual term for the secrecy obligation (say five years for purposes of discussion) provides a degree of certainty to both parties. In any event, within five years, the value of the information will be nil. But to avoid any possible dispute that there has been an unauthorized disclosure, the parties agree in advance on the period in which the trade secret will be protected. In so doing, both parties can then go with their business."
To be honest: I am not certain that I fully buy into this claim. But if confidential information falls within a rapidly changing technology, the disclosing party is often prepared to accept this time limation, especially where that party can try to leverage its consent on this point to obtain concessions on other contractual provisions. Whatever the reason, the facts on the ground of trade secret practice indicate that the holy canon extolling the value of a potentially unlimited term of protection frequently does not square with the behaviour of the parties.

Professor Mark Lemley, at the end of a wide-spanning defence of trade secret protection ("The Surprising Virtue of Treating Trade Secrets as IP Rights", Stanford Law Review, vol. 61, no. 2, November 2008), suggests another reason why an unlimited term for trade secret protection might not be appropriate. He writes (at p. 353):
"But is not clear that this indefinite term properly strikes the balance between providing incentives to invent and ensuring that the world benefits from the new invention. It may be that after a certain period of time the additional incentive from the prospect of secrecy is marginal, while the costs of maintaining secrcy are not. ...One possible implication of treating trade secrets as IP rights, then, is that the law should provide that trade secrets "expire" after a certain period [footnote omitted]."
Lemley argues that there are potential various advantages in providing legal incentives to maintain secrecy of inventions in certain circumstances. From this vantage, what is key is how to best calibrate these incentives. One way to conceptualize this calibration is establish a fixed period of time for protection of the trade secret, after which the value of the secrecy is outweighed by the various costs in maintaining such secrecy. Having raised the point, however, Lemley is very chary about actually proposing how such a time limit might work. He concludes that "[i]t may be too hard to decide on a start date, and therefore an end date, and compelling disclosure of informatiom at the end of the term may also prove problematic."

But, as we have described above, parties to a transaction involving a trade secret often themselves do a form of balancing act between maintaining secrecy and allowing ultimate disclosure. Stated otherwise, there is no reason to try and fix some set of principles for best calibrating the term of trade secret protection; parties are already reaching a private resolution to the issue. Merpel oberves that, given the nature of trade secret protection, that is the way that it should be.


Nuno Pires de Carvalho said...

This is, actually, a moot issue. The term of protection of trade secrets is... zero. Trade secrets are not protected in themselves. What is protected is honesty in trade, fairness in competition. Nobody is liable for obtaining a secret from another person. Only disonest means of obtaining that secret are sanctioned by law. I cannot see how the term of protection of trade secrets can be limited, unless we are ready to accept that breach of confidence, bribery, and industrial spying become somehow lawful and, ultimately, rewarded. It is not a coincidence that protection of trade secrets is the oldest component of industrial property. The Code of Hamurabi contained a provision that is repeated in footnote 10 of the TRIPS Agreement. 4,000 years later, ensuring honesty in trade is still a fundamental value.

Norman said...

I agree entirely with the last paragraph of the post. 'Balancing' is a pervasive but pernicious concept in academic IP writing. It sounds good - who could be against a 'fair balance' - but in practice the evidence needed to establish the optimal balance on the facts of any case - or even in general terms - is never available. 'Balancing' ends up being invoked arbitrarily as spurious support for whatever outcome happens to fit the author's intuitions.

Anonymous said...

Another reason for imposing time limits is that these clauses are often contained in post-termination covenants. The courts are always prone to looking to see if post-termination covenants are too wide and restrictive and such time-limits can help in this regard.

Neil Wilkof said...


Thanks for the domment. You raise the more general issue of how a trade secret obligation intertwines with a non-compete undertaking. My experience is that courts are all over the map on this. I am still waiting for the article that provides a compelling conceptual framwork to deal with the issue.

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