Trade Secrecy, Innovation, and the Requirement of Reasonable Secrecy Precautions

Robert G. Bone

Boston University School of Law Working Paper 09-40

Abstract

This essay is a contribution to a forthcoming volume on trade secret law, The Law and Theory of Trade Secrecy: A Handbook of Contemporary Research (Rochelle C. Dreyfuss and Katherine J. Strandburg, eds., Edward Elgar Press) (forthcoming 2010).  The essay focuses on the reasonable secrecy precautions (RSP) requirement in trade secret law.  In addition to proving that information is actually secret, a trade secret owner must also prove that it has used reasonable efforts to maintain the information’s secrecy.  The RSP requirement is puzzling.  Usually property owners can obtain legal relief for infringement without first taking self-help measures to prevent the infringement.  Moreover, the RSP requirement seems wasteful since it encourages expenditures on costly precautions when information is already secret, and it generates additional social costs by making public access more difficult and thus impeding further innovation.  This essay first reviews the history of the RSP requirement.  It argues that the doctrine made sense in the late nineteenth century, when it was justified by a formalistic, natural-rights-based theory of property rights, but that it continued as part of trade secret law even after legal realism stripped away its property-based justification.  The essay then critically examines current efforts to justify the doctrine, including arguments based on notice and on circumstantial evidence of actual secrecy, value, and improper appropriation. These particular arguments do not support a universally applicable RSP requirement, and it is also difficult to see how the doctrine follows from the standard economic and moral theories used to justify trade secret law more generally.  Finally, the essay develops and critically examines three (relatively) new arguments for the RSP requirement: two based on minimizing enforcement costs, and one based on harnessing signaling benefits.  Each of these arguments has promise but also suffers from major weaknesses.  The essay concludes by arguing that the RSP requirement warrants more serious attention than it has received.  Given the history of the doctrine and the failure of its standard justifications, it is very likely that the requirement should be eliminated.  However, it is also possible, though uncertain, that the RSP requirement creates sufficient enforcement cost and/or signaling benefits to warrant retaining it on cost-benefit grounds.  In any event, these potential benefits should be analyzed more carefully before any decision about the RSP requirement is made.

Keywords: trade secrecy, reasonable secrecy precautions (RSP), the RSP requirement, natural-rights based theory of property rights, enforcement costs, signaling benefit, Uniform Trade Secrets Act (IUTSA), McClary v. Hubbard, Junker v. Plummer, Rockwell Graphics Systems v. DEV Industries

JEL Classification: K00, K11

Accepted Paper Series

Citation: Bone, Robert G., to appear in THE LAW AND THEORY OF TRADE SECRECY: A HANDBOOK OF CONTEMPORARY RESEARCH (Rochelle C. Dreyfuss and Katherine J. Strandberg, eds., Edward Elgar Press), forthcoming 2010.

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Robert G. Bone Contact Information

Email: rbone@bu.edu
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215
USA

Phone: 617-353-4421

Fax: 617-353-3077

SSRN Location:
http://www.ssrn.com/abstract=1467723


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