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Trade Secret Law in Pennsylvania

Robert J. Yarbrough
2004

 Pennsylvania is the forty-fifth state in the Union to adopt the Uniform Trade Secrets Act, which became effective on April 19, 2004.  New Jersey and New York do not subscribe to the Act, apparently due to the mature body of trade secret case authority in those jurisdictions. 

Pennsylvania trade secret law prior to the Act

 Prior to April 19, 2004, Pennsylvania trade secret law was based on common law tort remedies and a criminal statute, 18 Pa.C.S. 3930.  The remedies under the common law included unlimited punitive damages and consequential damages.  Unjust enrichment provided another measure of relief.   The statute of limitations was the usual two years for tort.  As in other common law matters, attorneys’ fees generally were not available.

Changes imposed by the Uniform Trade Secrets Act

 The Act replaces the Pennsylvania common law on the subject of trade secrets.   Pennsylvania has changed from having a rich body of trade secret decisional law to having none at all.  So how will the courts interpret the Act? 

 It is no surprise that others have considered this problem before.   Pennsylvania law provides that when a uniform act is adopted, the courts may use the comments of the draftsmen to interpret the uniform act.  Pennsylvania law further states that the Pennsylvania enactment of a uniform statute will be interpreted to be in harmony with the interpretations of the uniform act made by the courts of other states.  Section 3 of the Act provides that where the reports of the draftsmen conflict with the decisions of other states, the reports of the draftsmen will control.  

Definition of Trade Secret

 The Act defines a trade secret in 12 Pa.C.S. 5301 as follows.

Information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that:

(1)      Derives independent economic value… 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.

(2)      Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

 This definition is largely a codification of the common law.  See, for example, and Felmlee v. Lockett, 466 Pa. 1, 9, 351 A.2d 273 (1976) (applying the definition of ‘trade secret’ from the Restatement of Torts).  An exception is the addition by the Pennsylvania legislature of customer lists to the definition of ‘trade secret.’  The inclusion of customer lists avoids the historical reluctance of Pennsylvania courts to treat customer lists as protected trade secrets. 

Injunctive Relief

 The Act provides at 12 Pa.C.S. 5303 that “[a]ctual or threatened misappropriation may be enjoined.”  The use of the term “may” indicates that an injunction will not automatically be granted even though a trade secret is misappropriated.  The plaintiff still must meet all of the requirements for issuance of an injunction under Pennsylvania law.  See, for example, A.M. Skier Agency, Inc. v. Gold, ___Pa. Superior Court ___, 747 A.2d 936 (2000) (“A plaintiff must prove three elements to support a preliminary injunction: (1) a clear right to relief; (2) an immediate need for relief; and (3) an irreparable injury unless the court grants the injunction.”)

 “Misappropriation” is a defined term and generally means acquisition or disclosure of a trade secret by a person who knows or has reason to know that it was stolen or otherwise improperly obtained.  Misappropriation also has additional nuances.  If a first person knows or should know that a second person from whom the first person obtained the information owed a duty to keep the information confidential or restrict its use, then disclosure of the information to another is “misappropriation.” 

 If a person acquires information by accident or mistake and then learns that the information is a trade secret, the person misappropriates the information if the person discloses the information to others unless the person has materially changed his position based on the trade secret information.

 The Act specifies that the injunction will terminate when a trade secret ceases to exist, but may be extended to eliminate any commercial advantage from the misappropriation of the trade secret.  In the past, the Pennsylvania courts have been willing to enjoin a trade secret thief from engaging in an entire area of business.  See Christopher M’s Hand-Poured Fudge v Hennon, __ Pa. Superior Ct. __, 699 A.2d 1272 (1997) (trade secret thief enjoined from engaging in fudge business).

 The Act also allows a court to fashion a remedy by which the recipient of a trade secret continues to use the trade secret, but pays a reasonable royalty to the victim of the theft.  The example provided by the Act is where a party innocently receives trade secret information and does not learn the information is stolen until after the party has changed the party’s position in reliance on the stolen information.  An example might be a chemical manufacturer that innocently learns of a chemical process and builds a plant to use the process prior to learning of its trade secret nature.

Damages

 The Act provides that a victim of trade secret theft may recover damages.  The Act provides wide latitude to a court in fashioning a suitable remedy, including damages measured by actual damages, unjust enrichment, reasonable royalty and exemplary (punitive) damages.   If a party innocently learns trade secret information and acts in reliance on that information so that an award of damages would be unfair, then the court will not award damages.

 An interesting change to the common law is the limitation on exemplary damages.   Under the Act, exemplary damages are limited to twice the award of compensatory damages.

Attorney’s Fees

 In another departure from common law, the court is given discretion to award attorney’s fees and costs to the prevailing party in three circumstances:

1.       the claim of misappropriation is made in “bad faith;”

2.       a “motion to terminate” an injunction is “made or resisted” in bad faith;

3.       the court finds “willful and malicious” misappropriation.

 The term “bad faith” is not defined.  The term is used in other contexts in Pennsylvania law, such as determination of recovery against insurance companies based on knowledge or reckless disregard of a lack of basis for denying a claim.  See Hayes v. Harleysville Mutual, 841 A.2d 121(2003).  The term also crops up in condemnation cases, where dishonest conduct will set aside an award.  Condemnation of Erie Municipal Airport v Agostini, 152 Pa. Commonwealth Ct. 494, 620 A.2d 55 (1993).  We can infer that similar definitions will be applied to the trade secret situation.

 The term “willful and malicious” is defined.  “Willful and malicious” includes “gross neglect of duty as to evince a reckless indifference” and “an entire want of care so as to raise the presumption that the person at fault is conscious of the consequences of his carelessness.”  In short, a person seeking attorney’s fees need not show evil intent on the part of the wrongdoer, which can be a difficult burden.  Instead the person seeking fees will prove circumstances showing that the wrongdoer was at least very negligent.

Statute of Limitations

 The Act at 12 Pa.C.S. 5307 changes the statute of limitations to three years from the date that the misappropriation was or should have been discovered.

Criminal remedies

 The Pennsylvania criminal statutes have addressed trade secret theft for some time at 18 Pa.C.S. 3930.  The Act amends that statute to add a specific section prohibiting theft of trade secrets from computers and computer networks.

 The definition of “trade secret” in the criminal statute is narrower than the definition in the statute defining the civil remedy.  The criminal definition addresses “…scientific or technical information, design, process, procedure, formula or improvement which is of value and has been specifically identified by the owner as of a confidential character, and which has not been published… .”  This criminal definition appears to exclude general commercial information such as customer lists, customer contract information and the like.