The term “derivative” trade secrets[i] is the basis of a new legal theory being shopped around to create broad trade secret liability where none exists. Under this theory, someone who buys a product made with a trade secret process, without knowledge of the trade secret or intent to misappropriate it, can nonetheless be liable for misappropriation because the product was “derived from” an unauthorized use of a trade secret.
Proponents of this new theory of trade secret liability rely on an analogy to the concept of product by process under the patent statute.[ii] The reasoning for this theory is that one ought not to be able to copy a patented process abroad in order to import competing products into the United States. However, the Supreme Court has held that patent laws pre-empt state laws that purport to provide patent-like protection.[iii] Use of a product made abroad by a patented process is only actionable under Section 271(g) because Congress passed a statute specifically granting such protection.[iv] Similarly, Congress specifically authorized the International Trade Commission to issue exclusion orders relating to products “made, processed, or mined under, or by means of, a process covered by the claims of a valid and enforceable United States Patent” pursuant to 19 U.S.C.A. § 1337(B).[v] These federal statutes pre-empt any argument that a buyer of a product can have strict liability under trade secret law for purchasing a product made with a trade secret process that is not itself a trade secret.
Moreover, neither the Uniform Trade Secrets Act nor the Defend Trade Secrets Act create this kind of “derivative” liability. Something is either a trade secret or it is not. To be a trade secret, two essential elements are required (among others).
The trade secret must be secret; and
There must be an intent to use the trade secret.[vi]
To qualify as a protectable trade secret, the owner of the trade secret must make “efforts that are reasonable under the circumstances to maintain its secrecy.”[vii] Trade secret law “does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering. . . .” [viii] So if the product itself embodies the trade secret, if it is not sold under an NDA with a “no reverse engineering clause”, then any secrecy ended upon sale. Further, if the product is well-known, and does not reveal any trade secrets, then the product is not a trade secret. Moreover, trade secret misappropriation requires intent and cannot be a strict liability offense.
Finally, a trade secret owner can bring an ITC action against a foreign producer of a product for unfair competition under Section 337 of Title 19. This claim relies on the misuse of a trade secret process abroad as an act of unfair competition, for which an order excluding it from importation into the United States can issue. But outside of this specific statute, there is no other basis to allege that purchase or use of a product made with a trade secret process is itself actionable where it does not meet the test for a trade secret.
So is this a creative way for “trolls” to hit up buyers for settlements? Perhaps like the copyright troll who asks for money if a picture is inadvertently copied from one website to another without permission? Or even a patent troll? Regardless of what you call it, “derivative trade secret” is a theory that quickly disappears in the light of day.
[i] Benjamin J. Bradford and Remi Jaffré, The Uncertain Protection of “Derivative” Trade Secrets, 18 J. MARSHALL REV. INTELL. PROP. L. 241 (2019).
[iii]Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 152 (1989) (“state regulation of intellectual property must yield to the extent that it clashes with the balance struck by Congress in our patent laws.”).
[iv] 35 U.S.C.A. § 271 (West) (“Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent.”).
[viii]See, e.g., Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476 (1974).
Authors: Caitlin Dean, DJ Healey
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.
Caitlin Dean is a litigation attorney in Fish & Richardson’s Houston office. Caitlin’s practice focuses on patent and trade secret litigation in Federal District Courts spanning a diverse array of industries...
Danielle (DJ) Healey has been litigating complex cases in federal, state courts, and agencies, and handling licensing, antitrust, mediation and arbitration matters for over 34 years. She has focused on patent litigation and related antitrust and tort claims since 1994.