Academic journal article Santa Clara High Technology Law Journal

The Contract Exception to the Uniform Trade Secrets Act and Its Implications for the Federal Defend Trade Secrets Act

Academic journal article Santa Clara High Technology Law Journal

The Contract Exception to the Uniform Trade Secrets Act and Its Implications for the Federal Defend Trade Secrets Act

Article excerpt

Table of Contents  Introduction I. An Overview Of The USTA   A. The UTSA Preemption Provision   B. The Contract Exception to the UTSA Preemption Provision   C. Necessary Exclusions from the Contract Exception   D. The Tort Consequences of the Contract Exception II. An Overview of Restrictive Employment Covenants   A. General Principles     1. The Relationship of Restrictive Covenants to the UTSA     2. Common Restrictive Covenants     3. Limitations Upon the Enforceability of Restrictive     Covenants   B. The Dual Function of Covenants Not to Disclose or to Use   Information   C. The Effect of Restrictive Covenants in UTSA Litigation   D. Suits for Both Breach of a Restrictive Covenant and Violation   of the UTSA III. Federal Trade Secret Legislation   A. The Economic Espionage Act     1. Overview     2. The Need for the DTSA   B. The Defend Trade Secrets Act     1. Overview     2. The DTSA Equivalent of the UTSA Contract Exception Conclusion 

Introduction

The state-enacted Uniform Trade Secrets Act (1) ("UTSA") reformulates the elements of the tort of trade secret misappropriation and preempts conflicting duplicative noncontractual remedies in an enacting state. (2) The UTSA was initially adopted in 1979 and amended in 1985 (3) by the Uniform Law Commission (the "ULC"). (4) The ULC reports the UTSA as having been enacted in forty-seven states. (5)

Section 7 of the widely-adopted 1985 version of the UTSA expressly excepts from preemption "contractual remedies, whether or not based upon misappropriation of a trade secret." (6) An Official Comment to both the 1985 and 1979 versions of UTSA Section 7(b) states that the Contract Exception is limited to express and implied-in-fact contracts. (7) Like the UTSA, the federal Defend Trade Secrets Act (the "DTSA") reformulates the elements of the tort of trade secret misappropriation, (8) but the DTSA has no express counterpart of the UTSA Contract Exception. (9)

The UTSA Contract Exception reflects the close relationship between the tort of trade secret misappropriation and restrictive covenants. (10) An Official Comment to both the 1985 and 1979 versions of the UTSA gives covenants not to disclose trade secrets and covenants not to compete, which are intended to protect trade secrets as examples of contracts that are not preempted. (11) These covenants exist in two principal contexts: they are required by persons with trade secret rights from employees with access to trade secrets and confidential information and from business associates with access to trade secrets and confidential information, e.g., licensees, customers, joint ventures, distributors, and suppliers. (12)

The two principal contexts in which restrictive covenants are required involve many of the same considerations. However, with respect to employees, the extent to which an individual's ability to find appropriate work is limited is an important factor in determining enforceability; whereas, with respect to business associates, the extent to which a business' ability to compete is limited is an important factor in determining enforceability.

This Article deals with the relationship of restrictive employment covenants to the UTSA and the DTSA. The starting place is an overview of the UTSA and the law of restrictive employment covenants.

I. An Overview of the USTA

The UTSA is an intellectual property statute that encourages the development of valuable new commercial information through recognition of limited exclusive rights. (13) The UTSA was intended to fill the gap created by the omission of trade secrets from the Restatement (Second) of Torts. (14) In 1995, the American Law Institute (ALI) promulgated the Restatement (Third) of Unfair Competition, (15) which reintroduced ALI coverage of trade secrets, (16) and, as a general proposition, is intended to be consistent with the UTSA. (17)

UTSA Section 1(4) defines a "trade secret" as follows:

"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process that:

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. …

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