The Secret’s Out:
New Jersey Codifies Trade Secret Protection

When Governor Chris Christie signed the New Jersey Trade Secrets Act into law last month, New Jersey became the 46th state to afford statutory protection to trade secrets, thereby providing trade secret owners in New Jersey with an important new tool to protect their rights.

In the past, parties seeking to protect and enforce their trade secret rights under New Jersey law had to rely on case law as the legal basis for their claims. Now, New Jersey-related trade secret claims that accrue on or after January 9, 2012 instead will live or die based on New Jersey Trade Secrets Act provisions.

New Jersey's enactment of the New Jersey Trade Secrets Act leaves only three states without statutory codes governing the protection of trade secrets: New York, Massachusetts and Texas. In those states, common law rules with respect to trade secret claims still apply – a consideration which trade secret holders in the Tri-State Area should keep in mind when formulating trade secret protection policies and procedures and framing trade-secret-based causes of action.

Codification of Existing
New Jersey Law on Trade Secrets

The New Jersey Trade Secrets Act (N.J. Stat. § 56:15) (the "Act") is based on the Uniform Trade Secrets Act (the "UTSA"), which has been adopted by 46 other states with various modifications. The UTSA codifies basic principles of common law trade secret protection which focus on maintaining the secrecy of innovations, as compared with other intellectual property paradigms such as patents and copyrights. At the heart of these principles is the concept of a trade secret as information which derives actual or potential economic value from its proprietary nature and which is the subject of reasonable efforts to maintain its secrecy.¹ In adopting the UTSA, New Jersey formally endorsed these principles, while incorporating several modifications to the Act to take into account New Jersey-specific jurisprudence.

The Act grew out of a 2008 New Jersey Law Revision Commission review of the USTA.² By design, the resulting statute in many ways conforms to New Jersey case law on trade secrets. For example, the definition of trade secret in the Act is derived from a long line of New Jersey cases and offers a unified definition for courts to follow. Before the Act was enacted, "there [was] no exact definition of a trade secret"³ and New Jersey courts generally relied on the broad definition of trade secret found in the Restatement of Torts § 757.⁴ In contrast, a trade secret is defined more concisely in the Act as "information, held by one or more people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype 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."⁵

The Act also codifies and is consistent with other aspects of New Jersey's common law on trade secrets, including provisions which (i) give courts authority to enjoin actual or threatened misappropriation,⁶ (ii) provide guidelines for imposing damages,⁷ (iii) make attorneys' fees recoverable in cases of willful misappropriation,⁸ and (iv) prohibit the use of the defense that a proper means of acquiring the trade secret existed at the time of misappropriation.

More of the Same,
But With Some Important Twists

While the Act codifies many aspects of New Jersey's common law on trade secrets, it also includes some significant variations from those rules. One major change is in the area of applicable statutes of limitation. The Act shortens the statute of limitations for bringing trade secret claims to three years from discovery of unauthorized access, use or disclosure, down from six years under prior New Jersey law. However, because the Act does not apply retroactively to trade secret violations that occurred before January 9, 2012, all causes of action that arose prior to that date continue to be governed by the six-year statute of limitations.

Second, the Act's definition of trade secret eliminates the "use-in-business" requirement from Ahlert v. Hasbro, Inc., 325 F. Supp. 2d 509, 513-514 (D.N.J. 2004). This change expands trade secret protection and clarifies any confusion caused by the "use-in-business" requirement.

In addition, the Act clearly distinguishes between the varying degrees of misappropriation and provides for remedies accordingly. For willful and malicious misappropriation, a court may impose an injunction and award punitive damages, not to exceed twice the compensatory damages. For exceptional circumstances involving innocent receipt of misappropriated trade secrets, a court may impose a lighter penalty such as a royalty rather than an injunction and damages.

Finally, the Act, unlike the New Jersey common law, allows a litigant to recover its reasonable expert fees if the misappropriation is willful and malicious or in the case of bad faith litigation. This provision is worth noting because expert witness fees can be particularly expensive in trade secret litigation due to the fact that damages are often complicated to calculate. Some other states which have adopted a modified version of the UTSA have not expressly provided for expert witness fees.⁹ As such, it is clear that the New Jersey legislature intended to make the recovery of expert witness fees available for qualified trade secret litigants.

Impact of the Act on
New Jersey Trade Secret Cases

Aside from the foregoing variations, the real impact of the Act will be to bring a higher level of uniformity to New Jersey trade secret decisions without radically changing the legal landscape. In particular, based on the court's discussion in Sun Dial Corp. v. Rideout, 16 N.J. 252 (1954), one of New Jersey's leading cases on trade secret law, it does not appear that the Act will dramatically alter the end result of courts' analyses of whether a trade secret exists.

In Sun Dial, the Supreme Court of New Jersey distinguished trade secret protection from patent protection by explaining that a "formula, process, device or compilation" may be protected as a trade secret regardless of its "novelty and invention." The court explained that the plaintiff's sun dial manufacturing process "in the aggregate" was protected as a trade secret even though the individual components of the process may have been well known. The court focused on the value of the secret process which produced sun dials with a "high degree of accuracy and fine technical finish." The court also focused on the degree of secrecy surrounding the manufacturing process to determine that although the plaintiffs never entered any express agreements with the defendants restraining their use of the process, the "defendants were made aware of the process with full understanding that it was…to remain secret," and therefore the defendants were enjoined from using or disclosing it.

Under the Act, the case would likely have had the same outcome. The Act defines trade secret as a "process" (among other things) that "[d]erives 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 and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Since the process produced highly accurate sun dials and the plaintiffs made their employees aware that the sun dial manufacturing process was to remain secret and used reasonable efforts to keep the process a secret, the process was a trade secret under the Act. Therefore, the former employee defendant's use of the secret process for "purposes other than their employer's benefit" (Sun Dial quoting E.I. Du Pont de Nemours Powder Co. v. Masland, 244 U.S. 100, 102 (1917)) would qualify as misappropriation under the Act. To prevent the defendants from misappropriating the plaintiff's trade secret, the court would have been authorized under the Act to enjoin the defendants from using the process in their new sun dial manufacturing business, thereby producing the same outcome under the Act that actually occurred in the case.

Across the Hudson River,
Non-Statutory Rules Governing
Trade Secrets Still Reign

New York continues to rely on common law to protect trade secrets and remains one of only three states that has not adopted some form of the UTSA. New York continues to base its definition of trade secret on § 757 of the Restatement of Torts,¹⁰ while the Act offers a more succinct definition based on the UTSA (which incorporates many of the factors provided in the Restatement). Just like the Act in New Jersey, the statute of limitations for trade secret misappropriation in New York is three years.¹¹ Additionally, in both New Jersey and New York, once a secret process or innovation has been appropriated, a court may impose an injunction against further use.¹²

One difference between the two states is that under the Act in New Jersey, a court may impose royalties as an alternative to an injunction in exceptional circumstances, including "a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable." This makes New Jersey's law more favorable to the innocent recipient of misappropriated information. Both states provide for damages for misappropriation and provide for punitive damages in the case of willful appropriation.¹³ New York, however, does not provide the option of royalties as an alternative to damages as set forth in the Act. Additionally, the Act in New Jersey expressly provides for the recovery of a reasonable sum of expert witness fees in the case of willful and malicious appropriation or a claim made in bad faith. New York courts, however, will not impose expert fees in the absence of a contractual provision, statute or court rule.¹⁴

Conclusions

The recently adopted New Jersey Trade Secret Act will provide owners of trade secrets with an important tool to protect their trade secret rights. The Act will likely ensure greater uniformity of New Jersey court decisions in the area, as well as provide owners with a broader range of potential remedies. Practitioners in the area should be aware of important modifications to existing law, such as shortening of the applicable statute of limitations from 6 to 3 years. Practitioners on both sides of the Hudson should be cognizant of applicable differences between the trade secret laws of New Jersey and New York when considering venue and choice of law-related issues.

* Jeffrey Weingart and Jeffrey Schreiber are partners at the law firm of Meister Seelig & Fein LLP, with offices in New York, New Jersey, Connecticut, Boston and Los Angeles. Chelsea Silverstein, a legal intern at the firm, contributed to this article. For more information, please go to www.meisterseelig.com.

0796-001 Doc. #91

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