Printer Friendly

II. Property as a potential justification.

Any normative justification of trade secrets must begin with consideration of whether trade secrets are property. To many, if trade secrets are property, then laws protecting them are normatively justified. Thus, the question of whether or not trade secrets are property has raged on for many years. While some wonder why it matters, (64) others believe that the shift toward calling intangible assets "property" has created and will continue to create a shift toward the overprotection of intellectual property. (65) Whether trade secrets are property depends on who you ask; I examine the competing theories below and then provide one of my own.

A. Defining Property

Three primary theories consider trade secrets as property: exclusivity theory, integrated theory, and bundle theory.

1. Exclusivity Theory

Even those who believe exclusive rights are the sole requirement for property disagree about whether trade secrets should be property. For example, Judge Frank Easterbrook argues that intellectual property includes the right to exclude, just like real or personal property. (66) This analysis was followed in Ruckelshaus v. Monsanto Co.: (67) "The right to exclude others is generally 'one of the most essential sticks in the bundle of rights that are commonly characterized as property.'" (68) The problem with this argument is that trade secrets are not actually exclusive, as pointed out by the California Supreme Court: "The owner of the trade secret is protected only against the appropriation of the secret by improper means and the subsequent use or disclosure of the improperly acquired secret. There are various legitimate means, such as reverse engineering, by which a trade secret can be acquired and used." (69) Others, however, look to Thomas Jefferson's analysis of the issue:
 Inventions then cannot, in nature, be a subject of property.
 Society may give an exclusive right to the profits arising from
 them, as an encouragement to men to pursue ideas which may
 produce utility, but this may or may not be done, according to
 the will and convenience of the society, without claim or
 complaint from anybody. (70)

The limit of this argument is that regardless of the normative basis for such a right, the legally enforceable right to exclude is always defined by the "will and convenience of society," even for real property. (71) There is no reason why a real property owner must have a right to exclude others even if he or she has the ability to do so by building a fence; instead, the law allows the owner to exclude even without a fence. Similarly, those with patents are given the same rights--patent law does not have an independent development or fair use exception. (72) Ideas, real property, personal property, and other tangible or intangible assets all have the legal rights that the state grants. (73) The primary difference is the difficulty of enforcement; real and personal property may be unique, allowing for exclusivity through possession, (74) while current technology does not allow a purging of ideas in the brain. (75) Thus, it is not clear why the right to exclude should make trade secrets property, or the lack thereof should exclude trade secrets from being property.

2. Integrated Theory

Rather than looking at exclusion, integration theorists look at how the asset is acquired, used, and disposed. (76) They argue that exclusivity is not enough, nor even necessary, to define property. (77) Even then, scholars cannot agree. For example, Adam Mossoff argues that trade secrets are property because they are acquired by the actions of the trade secret owner because discoverers can make their "own use" of the information because it is secret and because the owners can decide how the information is disposed of by publication or transfer. (78) This theory, however, also fails to resonate. How is it that two people can acquire and use the same secret? Why should acquisition and use of an idea that is free for all to discover merit any protection?

Pamela Samuelson argues the contrary. Even though information may be acquired, used, and transferred, she relies on the Masland point of view that trade secret misappropriation is about breach of confidences or other use of improper means. Trade secrets are not property, but instead the enforcement of social values. (79)

3. Bundle Theory

The middle ground is to treat trade secrets as a "Hohfeldian" bundle of rights, (80) wherein trade secret rights are simply a collection of social rights and duties. This is an approach this Article takes below as part of substantive property analysis. A problem with the bundle of rights theory is that the word "property" ceases to have any real meaning. (81) With the bundle, it is impossible to determine what particular bundle makes a set of rights property and what bundle renders a set of rights "not property."

4. An Alternate Categorization

It is because of the fundamental disagreement among the three theories above that the debate about trade secrets (and other intangible assets, for that matter) continues. In the alternative, this Article proposes different categories of intellectual property, at least as those categories apply to trade secrets. I call the categories "collateral property" and "substantive property."

Aside from the effect that any nomenclature might have on the collective mindshare, (82) whether trade secrets are called property or not matters primarily in cases where a statutory or constitutional right is triggered by "property." (83) I call this "collateral property."

For all other intents and purposes, trade secrets are a bundle of rights; the only differences between trade secrets, patents, and real property are the collection and mixture of rights. I call this "substantive property." Thus, whether trade secrets are normatively justified as "substantive property" will depend on whether the bundle of rights itself is normatively justified. (84)

This is not to say that property rights are unimportant or that trade secrets are not property. Indeed, if you asked most business owners, they would say that their trade secrets are their property. This tends to support the philosophical and populist justification for trade secrets discussed below. However, because trade secrets are so different from real and personal property, and even from other forms of intellectual property, normative analysis of specific property rights granted is helpful to justify why trade secret owners call their information property.

B. Collateral Property

There is no shortage of judges and scholars willing to call trade secrets "property." (85) The reasons vary, but they reflect in large part an underlying acceptance that information can be "owned" so long as it is not generally available. Normatively, however, the moniker "property" does not necessarily justify protecting information from "improper" discovery by others. Instead, calling trade secrets property is usually important in cases where some important decision factor other than trade secret misappropriation depends on whether the information at issue is considered property or not. In fact, some cases may go so far as to protect information as property even if it is not a trade secret. (86)

For example, section 2860 of the California Labor Code states that the employer "owns" everything the employee "acquires" by virtue of his or her employment. (87) If trade secrets were not "property" in the sense of ownership, then the Labor Code would be illusory--employees could claim that they own every discovery made using the resources of the employer. (88) In an extension of this concept, the Supreme Court determined that unpublished news stories gathered from public sources were "property" of the Wall Street Journal for the purposes of insider trading laws. (89) Similarly, in 1998, the Massachusetts Supreme Court relied on Peabody to support a finding that trade secret customer information was "property" for the purposes of a Massachusetts unfair competition claim. (90) In each of these instances, the collateral right attaches regardless of how we might consider liability in a trade secret action.

Each of these examples hardly shakes the foundation of intellectual property law. It is quite reasonable from a transaction costs (as well as common sense) point of view that employers will own the confidential information created by their employees during the course of business. It is also quite reasonable that trade secret misappropriation would be called unfair competition.

In an oft cited case, the U.S. Supreme Court had an opportunity to address this state law issue and both affirmed that trade secrets could be property and left the issue up to the states. (91) In Ruckelshaus, pesticide manufacturer Monsanto challenged, as a Fifth Amendment taking, a statute that allowed the Environmental Protection Agency to disclose its trade secret data to the public. (92) The Court determined that under Missouri law, which followed the Restatement (First) of Torts at the time, trade secrets were property, and thus could be subject to a taking. (93) In doing so, the Court relied in part on a Missouri case decided in 1917, (94) which makes sense because the shift from "property" to "unfair competition" around the time of Masland had not yet become widespread.

In his treatise, Milgrim proudly calls his second chapter "Trade Secrets as Property" (95) and relies on cases like those above to argue that trade secrets are property. In that chapter, however, Milgrim focuses less on the policy reasons for having trade secrets in the first place and more on the collateral aspects of trade secret property, such as assignment, takings, and inheritance. (96) The questions Milgrim addresses have long been settled, and they do not rely on a "substantive" property view of trade secrets. For example, a valid contract is "property" under the takings clause. (97) This does not mean a contract automatically has the same rights as real property.

Thus, while trade secrets may quite reasonably be considered property in a variety of circumstances, the underlying question is whether such treatment should have a policy impact on trade secrets qua trade secrets. (98) While treatment of intangible information as property in collateral areas may be substantive judgments, those judgments do not shed much light on why we have trade secrets. Answering the normative question requires further examination of the scope of rights granted to particular information.

C. Substantive Property Rights

The treatment of trade secrets as substantive property dates back to the inception of trade secret law in the United States: "In this court, it is settled that a secret art is a legal subject of property." (99) Professor Bone explains that this supposedly "settled" generalization was the culmination of prior cases that used a collateral understanding of property. (100) That is, Peabody transitioned collateral rights into substantive rights. (101) This conversion had benefits under nineteenth-century law; no injunction could issue in equity unless the secret was "property." (102) Further, privity was no longer required if the trade secret was property. (103)

However, a "conversion" argument does not necessarily mean that trade secrets should not be considered "substantive" property. For example, Peabody relies on a much earlier case, Vickery v. Welch, (104) in which the trade secrets are substantive and not collateral. In Vickery, the defendant seller was to sell the exclusive right to a secret process as part of a conveyance of a mill, but the seller claimed that he had the right to disclose the process to anyone he wished. (105) The Massachusetts Supreme Court ruled that the value of a secret process lies in its exclusivity; the ability of one person to use information and to keep others from using it is exactly what gives the information a competitive advantage. (106)

For some, the exclusivity discussed in Vickery would be sufficient to call any given right "property." For others, this distinction is meaningless, because competitors can reverse engineer the secret or discover it by independent means. Furthermore, it is difficult to say that one can ever exclusively possess information. If someone "takes" a person's information, the original owner is not divested of possession. Regardless of the outcome of such a debate, it cannot be said that the "property" right granted in Peabody and Vickery was based solely on collateral concerns. Instead, Vickery stands for the proposition that secret information has value precisely because of its secret nature and not because courts call that information property. This aspect of trade secrets continues to the present--a key requirement under the UTSA is that the information must have independent value based on its secrecy. (107)

One would think that the question of whether and how trade secrets are treated as property has been answered--for more than 150 years no less--but this is not so. Nearly two centuries after Vickery, the California Supreme Court summarized the transition from the Restatement (First) of Torts to the UTSA, but explicitly refused to answer the question posed here, namely whether trade secrets should be treated as property and whether such treatment makes a difference in practice. (108) Instead, the court summarized the history of trade secrets (including citation to Masland) and argued that substantive trade secret rights do not fall exclusively under either the property view or the liability view. (109) It is perhaps more helpful to consider trade secrets as comprising a bundle of rights. The question is whether this bundle is justified; Part III examines three justifications.

D. The Bundle of Rights

A substantive trade secret "property right" is comprised of a collection of rights associated with what might be done with particular information. This, too, is hardly an earth shattering proclamation. The complexity, it seems, is detailing what rights are included in the bundle and whether or not a particular right is appropriately justified. (110) To date, this analysis remains incomplete. (111)

In all events, a comparison to the real property bundle is not apt. (112) Information simply cannot be protected in the same way that real property can be protected, at the very least because information can be replicated without loss, while real property is unique. That said, the suggestion that trade secret rights should be protected like "any other" property is hardly the end of the world for efficient intellectual property laws. While those who disfavor the property motif may bristle that comparisons to real property will lead to overprotection of information, it is quite possible that the focus is wrong. (113) Real property is not the "infinite rights of exclusion" straw man that it is made out to be. If the bundle of rights for real property were unending, there would be no nuisance, attractive nuisance, zoning regulations, land use regulations, building codes, adverse possession, fence laws, endangered species laws, public easements, and so forth. (114) Instead, each of the above laws and their limitations on the real property bundle of rights gets analyzed for normative justification, economic efficiency, and other considerations. So, too, are the bundle of rights afforded to trade secrets and any other intellectual property, for that matter. Rather than stopping at the comparison to real property, it may make sense to focus on the limits of real property rights and analogize them to intangibles. (115)

What, then, is the bundle of rights associated with trade secrets? It is not simply the right to exclude, nor is it simply the right to acquire, use, and dispose. (116) Furthermore, the rights must be additional to and/or different from those that would exist in the absence of trade secret law; (117) otherwise, there would be no need to have trade secrets in the first place. The following are rights and duties abstracted from trade secret law:

* The right to keep certain information secret and still obtain legal protection; (118)

--Including the right to exclude others from disclosing certain information, so long as certain prerequisites are met; (119)

--Including the right to exclude others--even those without privity or actual knowledge--from using certain information, so long as certain prerequisites are met; (120)

* The duty to attempt to keep information secret; (121)

* The right to use certain information as one wishes and still receive protection even if others have the same information; (122)

* The right to not use certain information if one wishes and still obtain legal protection; (123)

* The right to recover damages for harm caused by illicit use or disclosure of certain information, so long as certain prerequisites are met; (124)

* The right to recover the benefits from others for the illicit use or disclosure of certain information, so long as certain prerequisites are met; (125)

* The right to transfer, devise, or otherwise make exclusive grants of certain information; (126) and

* The right to compensation for a government taking of certain information. (127)

Most of the rights and duties on this list are different from those associated with real property, personal property, and even other types of intellectual property. So long as discussion about the rights of trade secret holders points to the above bundle, (128) then the risk of overprotection is limited. Keeping those that make the rules focused on the bundle and not "property" rhetoric may be difficult, but this should not be a large problem with respect to trade secrets. Because the nature of the information is by definition secret, the impact of expanding rights to trade secrets on the public is quite limited. Thus, the policy debate is between many companies who want to simultaneously keep and appropriate secret information. It is not surprising that the protection under trade secret law has not expanded significantly during the time of the UTSA, which is now more than twenty-five years old. (129)

(64.) Stephen L. Carter, Does It Matter Whether Intellectual Property Is Property?, 68 CHI.-KENT. L. REV. 715, 716 (1993).

(65.) Chiappetta, supra note 8, at 84; Lemley, supra note 15, at 1037; Samuelson, supra

note 60, at 399; see, e.g., Hudson Hotels Corp. v. Choice Hotels Int'l, 995 F.2d 1173, 1178 (2d Cir. 1993) (holding that trade secrets cannot be property unless they show novelty and originality). Interestingly, trade secrets allow for greater damages than patents. Hill, supra note 8, at 13.

(66.) Frank H. Easterbrook, Intellectual Property Is Still Property, 13 HARV. J.L. & PUB. POL'Y 108, 112 (1990) ("[the] right to exclude in intellectual property is no different in principle from the right to exclude in physical property").

(67.) Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984).

(68.) Id. at 1011 (quoting Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979)).

(69.) Cadence Design Sys., Inc. v. Avant! Corp., 57 P.3d 647, 650 (Cal. 2002).

(70.) Letter from Thomas Jefferson to Isaac McPherson (Aug. 13, 1813), in THE WRITINGS OF THOMAS JEFFERSON 334 (Library ed. 1903); see Graham v. John Deere Co., 383 U.S. 1, 9 n.2 (1966) (outlining Jefferson's philosophy on the nature of patent monopolies).

(71.) Of course, many might agree that there is a moral right to exclude even without the benefit of the law.

(72.) Even this statement is too much; patent law limits exclusive use in the area of certain business method patents and medical use. 35 U.S.C. [sub section] 273, 287(c) (2000).

(73.) For example, real property rights do not include the right to exclude in adverse possession, nor do they include the right to limit flyovers, which were excluded in Christopher. See E.I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970).

(74.) There is a reason for the maxim that "possession is nine-tenths of the law."

(75.) Such technology is not outside the purview of science fiction, however. If ideas could be purged from the minds of others, then Jefferson's argument would be weaker still.

(76.) Adam Mossoff, What Is Property? Putting the Pieces Back Together, 45 ARIZ. L. REV. 371, 405-06 (2003); see also Samuelson, supra note 60, at 370 (the most important rights associated with property are use, enjoyment, possession, transfer, and exclusion).

(77.) Mossoff, supra note 76, at 405-06.

(78.) Id. at 418.

(79.) Samuelson, supra note 60, at 374-75.

(80.) See generally Wesley N. Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning, 26 YALE L.J. 710 (1917).

(81.) Thomas C. Grey, The Malthusian Constitution, 41 U. MIAMI L. REV. 21, 30 (1986) ("[Modern scholars] see property in resources as consisting of the infinitely divisible claims to possession, use, disposition, and profit that people might have with respect to those things. There is, on this conception, no essential core of those rights that naturally constitutes ownership.").

(82.) See Lemley, supra note 15.

(83.) See, e.g., Warner-Lambert Co. v. Execuquest Corp., 691 N.E.2d 545, 547 (Mass. 1998) (holding that trade secrets are property under section 93A of the General Laws of Massachusetts, which requires a loss of property to allow for an injunction).

(84.) It is here that Mark Lemley is concerned. Lemley, supra note 15. Because the term "property" is rarely discussed with such precision, he worries that lawmakers will grant more and more rights to intellectual property so that their "bundle" approximates the bundle of rights associated with real property. See also Chiappetta, supra note 8, at 150.

(85.) Milgrim attempts to find every case doing so. 1 ROGER M. MILGRIM, MILGRIM ON TRADE SECRETS 73-98 (2006).

(86.) Int'l News Serv. v. Associated Press, 248 U.S. 215, 237 (1918) (stating news reports are "quasi property" with respect to competitors, even if not with respect to the public); USM Corp. v. Marson Fastener Corp., 393 N.E.2d 895, 903 (Mass. 1979) ("A plaintiff who may not claim trade secret protection either because it failed to take reasonable steps to preserve its secrecy or because the information, while confidential, is only 'business information,' may still be entitled to some relief against one who improperly procures such information.").

(87.) CAL. LAB. CODE [section] 2860 (West 2003).

(88.) See, e.g., Am. Alloy Steel Corp. v. Ross, 308 P.2d 494, 496-97 (Cal. Dist. Ct. App. 1957) (stating that confidential information is property of the employer, general information is not). But see Chiappetta, supra note 8, at 162-63 (arguing that the default should not be that the employer owns all information and that the employer must instead give employees clear notice of what the employer considers to be a trade secret).

(89.) Carpenter v. United States, 484 U.S. 19, 26 (1987) ("Confidential business information has long been recognized as property."). Intellectual property scholars are troubled by Carpenter. See Samuelson, supra note 60, at 396 (stating that Carpenter is "disturbing" because employees had no reason to know that their employer might consider their work or production schedules property). On the other hand, from a labor management point of view the decision makes sense; allowing employees to maintain rights in confidential company information--whether or not a trade secret--would be disastrous on a level far greater than any musings about the justification for trade secret law.

(90.) Warner-Lambert Co. v. Execuquest Corp., 691 N.E.2d 545, 546-47 (Mass. 1998) (holding that trade secrets are property under section 93A of the General Laws of Massachusetts, which requires a loss of property to allow for an injunction).

(91.) Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984).

(92.) Id. at 999.

(93.) Id. at 1003-04.

(94.) Luckett v. Orange Julep Co., 196 S.W. 740, 743 (Mo. 1917) ("[S]aid formula is the sole property of the plaintiffs.").

(95.) 1 MILGRIM, supra note 85. Milgrim is quick to point out that "Trade Secrets as Property" used to be his first chapter, but the passage of the UTSA required him to put a definitional discussion first. Id.

(96.) Id.

(97.) Lynch v. United States, 292 U.S. 571, 579 (1934) (stating that a valid contract was the subject of a taking).

(98.) Professor Chiappetta and others call this "conversational" property and assume that the word "property" used in conversation implies a certain set of rights unless precision is used. Carter, supra note 64, at 716; Chiappetta, supra note 8, at 150. I argue the contrary--calling trade secrets "property" is not relevant to modern trade secret misappropriation case law. The UTSA has not been amended in more than twenty years.

(99.) Peabody v. Norfolk, 98 Mass. 452, 459-60 (1868).

(100.) Bone, supra note 5, at 251-54.

(101.) Id. at 253-54.

(102.) Id.

(103.) Id.

(104.) Vickery v. Welch, 36 Mass. (19 Pick.) 523 (1837).

(105.) Id. at 525-27 (determining whether the seller had a right to disclose the secret is substantive, not collateral).

(106.) Id.; accord Cent. Transp. Co. v. Pullman's Palace Car Co., 139 U.S. 24, 53 (1891) ("Upon the sale of a secret process, a covenant, express or implied, that the seller will not use the process himself or communicate it to any other person, is lawful, because the process must be kept secret in order to be of any value....").

(107.) UNIF. TRADE SECRETS ACT [section] 1(4) (amended 1985), 14 U.L.A. 538 (Supp. 2006).

(108.) Cadence Design Sys., Inc. v. Avant! Corp., 57 P.3d 647, 649-50 (Cal. 2002).

(109.) Id. But see DVD Copy Control Ass'n v. Bunner, 75 P.3d 1, 13 (Cal. 2003) ("By creating a limited property right in information, trade secret law 'acts as an incentive for investment in innovation.'" (citation omitted)). The California Supreme Court goes on to list almost every single justification for trade secrets. See discussion infra Part III. The court wanted to make a strong statement about the policy of trade secrets to show why the First Amendment did not preempt an injunction. See discussion infra Part III.

(110.) See infra Parts III, IV (discussing the justification of various rights under trade secret law).

(111.) Professor Chiappetta describes the bundle as the right to rely on the confidence of others and the right to be free from "bad acts." Chiappetta, supra note 8, at 151-52. This description is too broad to be useful if one is trying to compare the rights to personal, real, or intellectual property.

(112.) See Lemley, supra note 15, at 1032.

(113.) As noted above, the one area where the nomenclature matters is the extent to which the term "property" has an effect on laws that create a bundle of rights that is greater than necessary to achieve the goals of intellectual property law. See generally id. However, with respect to trade secrets, despite the "property" brand since Ruckelshaus, trade secret law has not shifted toward overprotection. But see Samuelson, supra note 60 (expressing concerns about the extension of protection to non-trade secret information).

(114.) While appropriate treatment of "property" in the law may require careful judgment, some of these examples were borne of common law; as such, one cannot say that protection will be ever-expanding just because something is called "property."

(115.) See, e.g., Michael A. Carrier, Cabining Intellectual Property Through a Property Rights Paradigm, 54 DUKE L.J. 1 (2004) (conducting an extensive review of limits in real property and analogizing those limits to intellectual property).

(116.) Chiappetta, supra note 8, at 152 ("[W]e must be extremely wary of gap-filling and demand precision in any 'trade secrets as property' discussion.").

(117.) For example, the right not to have a contract breached is not a right that comes with trade secret law; that would exist anyway.

(118.) This may seem obvious given the fact that these are secrets, but this right is a very

clear differentiator from patent law.

(119.) UNIF. TRADE SECRETS ACT [section] 2 (amended 1985), 14 U.L.A. 619 (Supp. 2006).

(120.) Id. [sub section] 1(2), 2.

(121.) Id. [section] 1(4).

(122.) This, too, may seem obvious, but not all patents may be practiced by their owners, if they are based on someone else's patent. The Patent Act only allows remedies for infringement, not a right to use.

(123.) This right is granted under the UTSA, but not in the Restatement. UNIF. TRADE SECRETS ACT [section] 5; see RESTATEMENT (FIRST) OF TORTS (1939).

(124.) UNIF. TRADE SECRETS ACT [section] 3.

(125.) Id.

(126.) See generally 1 MILGRIM, supra note 85.

(127.) Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984).

(128.) Of course, the terms "certain information" and "certain prerequisites" must be defined, and I do so later in this Article.

(129.) Indeed, trade secret rights in practice have not been significantly broadened in the last hundred years, though there are always outlier cases.
COPYRIGHT 2007 Marquette University Law School
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Why Do We Have Trade Secrets?
Author:Risch, Michael
Publication:Marquette Intellectual Property Law Review
Date:Jan 1, 2007
Previous Article:I. Trade secrets and their history.
Next Article:III. The justification for trade secrets.

Related Articles
Locking up intellectual property: Keep your secrets from walking out the door. (Small Business Advisor).
State-sponsored crime: the futility of the Economic Espionage Act.
I. Trade secrets and their history.
III. The justification for trade secrets.
IV. The marginal utility of trade secrets.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters