Is Uniformity a Good Thing?: New York Trade Secrets (Common) Law vs. The Push to Adopt the UTSA
New York has never been afraid to be an outlier when it comes to its laws. Just this past month, Governor Andrew Cuomo signed a bill making New York the final state to do away with separate state and federal primaries.[1] New York is similarly making waves in the field of trade secrets. With Massachusetts having adopted the Uniform Trade Secrets Act (“UTSA”) last year, New York now stands as the final state that has yet to adopt the model trade secret legislation.[2] It was approximately 11 years ago that fellow Fordham IPLJ staffer, Robert T. Neufeld, called for New York to adopt a trade secrets statute modeled on the UTSA, yet no progress has happened since.[3] This blog post will examine the UTSA, the consequences of non-adoption in New York, and perspectives on whether or not adoption is the right solution. The longer that New York waits to adopt the UTSA, the longer the state hurts itself by having weaker protections for its companies’ trade secrets.
So, what is the UTSA? Created in 1979 and later amended in 1985, the UTSA is a model state trade secrets law which has been almost universally adopted.[4] Originally, most state trade secrets law stemmed from the First Restatement of Torts §§ 757 and 758; however, the UTSA brought trade secrets law into the modern era by broadening the definition of a trade secret and protecting “negative information about research or a process that doesn’t work,” which was something that the Restatement definition did not cover.[5] New York generally follows the Restatement’s definition of a trade secret today, which uses a six-factor test measuring:
(1) the extent to which the information is known outside of [the] business;
(2) the extent to which it is known by employees and others involved in [the] business;
(3) the extent of measures taken by [the business] to guard the secrecy of the information;
(4) the value of the information to [the business] and [its] competitors;
(5) the amount of effort or money expended by [the business] in developing the information;
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[6]
Moreover, while under the Restatement a trade secrets action could be based in either contract or tort, the UTSA cleared things up by creating two separate causes of action: misappropriation of a trade secret and improper acquisition of a trade secret.[7]
So, what does it mean that New York does not use the UTSA? There are three key differences: 1) New York requires “continuous use” of a trade secret in order for a misappropriation claim to succeed while UTSA states do not, 2) New York does not feature the flexible cost-shifting provisions of the UTSA, and 3) New York courts have generally refused to apply the “inevitable disclosure” doctrine that is featured in the UTSA.[8]
Let’s begin with continuous use. The UTSA allows information that is not currently in use to qualify for trade secret protection while non-UTSA states such as New York do not.[9] Bombard comes up with a brilliant analogy to explain this. Under the UTSA, both the formulas for Coke™ and New Coke™ would be protected as trade secrets; meanwhile, only the formula for Coke™ would be protected in New York since the New Coke™ formula has not been in continuous use.[10] Yet without explanation, New York law assumes that if a trade secret is valuable, it must be in continuous use in order to be protected.
Next, the fee-shifting opportunities are much greater in UTSA states than in New York. The UTSA allows fee-shifting in three distinct cases: when a bad faith misappropriation claim is brought, when a bad faith motion to terminate an injunction is made or resisted, and when the misappropriation is “willful and malicious.”[11] Under the UTSA, these provisions operate as both as an incentive to not misappropriate trade secrets and to prevent frivolous court actions related to trade secrets.[12] Meanwhile, in New York, courts are only willing to award attorney’s fees when a contract or statute requires the award.[13] Furthermore, the only exception to this strict New York rule is a situation when the entire motivation for the conduct was to harm the party owning the trade secret[14]; yet, in a trade secrets action, the misappropriator is likely to not only be motivated by a desire to harm the competitor, but also by a desire to make money off of the trade secret. Thus, fee-shifting is rarely available in New York trade secrets cases[15]
Finally, the UTSA allows the granting of injunctions in the case not only of actual disclosure of a trade secret, but also of “threatened disclosure.”[16] This is unlike the common law, which New York follows, wherein plaintiffs must make a showing of a reasonable likelihood of success on the merits in order to have the injunction granted.[17] Courts have interpreted the UTSA’s “threatened disclosure” language as creating what Bombard called a “de facto non-compete [agreement].”[18] Meanwhile, New York courts have refused to apply such a doctrine in their own courts.[19]
So, should New York adopt the UTSA? When Neufield called for the adoption of a New York Trade secrets act 11 years ago, he noted a few salient reasons that New York should make the switch.[20] For instance, New York law is currently unclear about exactly which types of actions a trade secret owner can even bring. This creates uncertainty for companies located in the state who are trying to plan their affairs.[21] Moreover, being based off of the original Restatement of Torts, New York’s trade secret law is outdated.[22] Neufield notes that the writers of the Second Restatement chose to leave trade secrets out of that version entirely, so that the Restatement law on which New York law is currently based has remained unchanged since the 1930s.[23]
Another reason New York should rush to amend its trade secrets law is that it is actually being bypassed in federal court by litigants who prefer to use the new federal law: the Defend Trade Secrets Act of 2016 (DTSA), which was modeled off of the UTSA and has broader damages available for plaintiffs.[24] This phenomenon was made clear in a recent 2018 New York Court of Appeals opinion that dealt with a certified question from the Second Circuit in E.J. Brooks Company v. Cambridge Security Seals 2018 WL 2048724 (N.Y. May 3, 2018).[25] The certified question was whether under New York law, “a plaintiff can recover damages measured by the costs [that] the defendant avoided due to its unlawful activity for claims” of trade secret misappropriation and unjust enrichment.[26] In a 4-3 decision, the Court of Appeals said that plaintiffs could not get such damages in a ruling completely counter to the DTSA (and implicitly the UTSA as well).[27] Essentially, by limiting the possible recovery to only a plaintiff’s losses (and not including the money that the defendant saves as a result of their misappropriation), the New York Court of Appeals has made the state a much less desirable venue for trade secrets actions.[28] In fact, because litigants can now bring a federal civil action under the DTSA for similar conduct that would be actionable under New York state law, this case “may well have driven trade secret litigation from New York courts to federal courts, as plaintiffs will prefer the flexible damages options provided by the DTSA.”[29]
Simply stated, New York could lose its position as a “commercial and biotechnology hub” if it does not update its trade secrets law.[30] In Neufield’s view, adoption of the UTSA in New York would not only “encourage investment and research by current businesses, but also would attract new industries to [the] State”[31] By making its law uniform to others around the nation, New York would be sending “a signal to business and industry that New York provides favorable protection for this form of intellectual property.”[32] Finally, by articulating its trade secrets law in a statute, the New York legislature could cabin state courts’ current discretion in the area.[33] In a similar vein, commentators have hailed Massachusetts’ recent UTSA adoption and said that as a result of the new law, “trade secret owners and employers now carry a lighter burden, enjoy broader protections, and have more avenues to enforce their rights.”[34]
Meanwhile, very few commentators — if any — have come out in favor of New York maintaining its status quo. Therefore, because adopting the UTSA would modernize, improve, and harmonize New York’s trade secret law with other states around the country and would make New York a desirable venue to litigate trade secrets in again, New York should adopt a version of the UTSA during the current legislative session. The longer that New York waits to take this logical and simple step in improving its laws, the more it delays the positive effects for businesses located in the state.
Footnotes
