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.
