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

INTRODUCTION

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

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.” 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-infact contracts. Like the UTSA, the federal Defend Trade Secrets Act (the “DTSA”) reformulates the elements of the tort of trade secret misappropriation, ¹Defend Trade Secrets Act, Pub. L. No. 114-153, §§ 1-7, 130 Stat. 376-86 (2016); 18 U.S.C. §§ 1836-1839 (amended 2016). but the DTSA has no express counterpart of the UTSA Contract Exception.

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. 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.

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. The UTSA was intended to fill the gap created by the omission of trade secrets from the Restatement (Second) of Torts. In 1995, the American Law Institute (ALI) promulgated the Restatement (Third) of Unfair Competition, which reintroduced ALI coverage of trade secrets, and, as a general proposition, is intended to be consistent with the UTSA.

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:

1. 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
2. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The definition has three aspects. The preamble is a nonexclusive list of the forms in which a trade secret can appear. Because the list is nonexclusive, it does not limit the information that can be a trade secret.