I. Introduction

A recent case on computer software has defined the standards for trade secret violations in a reverse engineering case. The court in Aqua Connect, Inc. v. Code Rebel, LLC[1] emphasized that under the California Uniform Trade Secret Act[2] , “improper means” does not include reverse engineering or independent derivation alone; it must be combined with some other improper action to form the basis of a cognizable misappropriation claim.”[3] In the case, a computer software company acquired the plaintiff’s software by downloading a free trial version. However, the version included a “clickwrap” agreement in which the user specifically warrants that he or she will not reverse engineer the software. The court notes that the plaintiffs may have a cause of action in breach of contract based on the clickwrap agreement, but the means by which the software was obtained was not an “improper means” under the statute. Putting aside whether such clickwrap agreements can override the state statute by forbidding reverse engineering, which is clearly allowed under the uniform trade secret law[4], questions remain about what kind of other improper means must be proven along with reverse engineering to state a trade secret misappropriation claim?

The question on trade secrets brought to me involved the development of cigarette tobacco blends by a company which sells a variety of smoking materials and accessories. The tobacconist who created the `house blends’, which were identified by initials indicating that they were “like” or “similar to” famous national brand cigarette tobacco blends.[5] The trademark names were not used, but the initials were recognizable by those who regularly partake of those brands in their smoking habits. The creator of the “knockoff” blends just happened to be a former employee of one of the major cigarette companies, who was employed in the area of tobacco blend creation there. Although it was not known whether he had signed a confidentiality agreement with the major tobacco company not to reveal trade secrets, it was fairly likely that he did not take physical copies of the “recipes” for the blends with him when he ended his employment with the company.  Being experienced in the area of mixing different types of tobacco to approximate the well-known national brands, was he off the hook for misappropriation of trade secrets because he was able, through his own knowledge, to reverse engineer the “knockoff”  blends? The tobacco products seller, it was learned, had received correspondence from the former employer of the tobacconist claiming he had misappropriated their proprietary “recipes” for the well-known cigarette tobacco blends. To make matters more complex, the tobacconist had been employed by another company doing similar work in between his employment with the national company and his current job, and had received the same type of “warning” letter when he was employed there. So what kind of “improper means” would the tobacconist’s former employer have to prove in order to charge him with misappropriation of their cigarette tobacco blend formulas, which they hold as trade secrets?

II. Overview of Trade Secret Law

Trade secrets have been around for many years, back to the time of the Romans, and causes of action for misappropriation of trade secrets were brought over to America from England and became part of its common law.[6]  The prohibitions against misappropriating trade secrets stems from a desire to protect innovations not within the categories of things that are patentable or copyrightable. Trade secrets are innovations that are usually processes, procedures, or ideas. The definition of a protectable trade secret is information which “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 is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” [7] Other intellectual property laws have limitations, either in subject matter or time. Patent law requires that inventions be a new invention or a “new and useful improvement”, “novel” and “non-obvious”,[8] while copyright  grants a limited time to its owner to exploit “an original work of authorship”, and protects innovations in their expression only, not in processes, procedures, or the ideas themselves.[9] Trade secret laws allow the innovator a way to protect his ideas and prevent others from saving time and effort to develop similar innovations by appropriating his. They do not prevent a second company from independently discovering and using the first company’s innovation, as long as the second company uncovered the first company’s idea by proper means. The main condition of protection as a trade secret is that the owner of the innovation takes steps to safeguard it, and companies send millions of dollars investing in confidentiality measures to protect their trade secrets.

III. State and Federal Trade Secret Laws

State laws giving trade secrets protection help to encourage businesses to develop new uses by allowing them to keep the confidentiality of their valuable competitive information. The laws do not discourage competitor businesses from developing their own valuable uses.[10] There are only a few states which have not adopted their own Trade Secrets Acts,[11]  most modeled on the Uniform Trade Secrets Act of 1985, drafted by the National Conference of Commissioners on Uniform State Laws.[12] The Uniform Trade Secrets Act, upon which all state trade secret legislation has been based, including Ohio’s, defines “misappropriation” as the acquisition of a trade secret by “improper means”. This includes having knowledge that another person used improper means to acquire the trade secret information, as well as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”[13] The California Uniform Trade Secret Act makes part of its law the helpful admonition that reverse engineering or independent derivation alone do not constitute improper means, but the comments to the 1985 revision of the Uniform Trade Secret Law refine the definition by listing several proper means of discovery, including by independent invention; reverse engineering; licensing arrangements; and published literature.[14]

The push for states to have uniform laws on trade secret misappropriation has become much more urgent in recent years due to the global nature of our communications and trade. Some of our multinational treaties have requirements that signatory nations provide a minimal level of protection for intellectual property existing within their borders, such as the North American Free Trade Agreement (NAFTA), the General Agreement on Tariffs and Trade (GATT) and the Uruguay Round Agreements Act (URAA) which include the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS.)[15] The TRIPS Agreement specifically offers protection for “undisclosed information”[16] and its definition of such information is consistent with treatment of trade secrets in common and civil law countries.[17] Some authors have urged the enactment of a federal trade secret act, so that compliance problems are not created with America’s international obligations if a state alters or interprets its trade secret law in a manner inconsistent with our international treaties.[18] The Supreme Court case of Golan v. Holder recently decided a longstanding issue involving enforcement of these federal treaties in the area of international intellectual property. In 1996, the Economic Espionage Act was enacted, making the theft of physical copies of trade secrets a federal criminal offense.[19] The criminal offenses may only be prosecuted by the federal government, not parties in civil litigation, and the law addresses only actual theft (rather than the less severe “misappropriation” prohibited by the uniform trade secret acts) of the information, mainly through industrial espionage.

IV. Case Studies and Evidence Issues

In a case claiming trade secret misappropriation, the plaintiff must raise an inference of improper use, such as access by the defendant, that the defendant’s design mirrors the plaintiff’s design, or that the defendant designed the product in less time than typically required to complete the trial and error process of independent derivation or reverse engineering. The plaintiff is not required to prove improper use by presenting evidence specifically refuting reverse engineering or independent derivation, though it may choose to do so. Once credible evidence is presented by the plaintiff establishing improper use, the defendant then bears the burden of proof of its defense of reverse engineering or independent derivation.[20]

Many trade secret misappropriation claims come from knowledge obtained by employees in the course of their employment, and necessary to their work. When an employee goes to work for a rival company in the same field, some information that was considered to be “secret” may be used at the new job. Even if the employee has signed a confidentiality agreement and does not intent to reveal a trade secret, the nature of his job may involve information absorbed in his previous employment, and recalled by him through his experience in the field. Since airtight protection of corporate information would make it difficult for employees to move between jobs, resulting in an inefficient labor market and infringing on personal liberties. Therefore, courts have tended to require the holder of trade secret information to demonstrate the misappropriation of documents or the misuse of specific product information.[21]

This standard does not take the defendant off the hook for preserving evidence pertaining to the case, though. A recent California trade secrets case against a former engineer employee of a diving company, who left the company and set up a competing business, shows the consequences of attempting to destroy evidence of misappropriation of a trade secret. In Amron International Diving Supply, Inc. v. Hydrolinx Diving Communication,[22] the defendant was found to have stolen 110,000 files from his former employer. He then violated a court order to preserve all evidence by using wiping software to permanently eradicate data and destroyed hard drives on two of  his computers. He even installed a new hard drive on a third computer and manipulated the system  clock to make it appear older, all after he had received the preservation order. The court found the defendant in contempt of court and fined him $73,000 plus attorney fees and costs for the plaintiff, who had to employ a forensic consulting firm to discover the defendant’s misconduct. Also, as a result of the defendant’s actions, his lawyer asked to be removed as his counsel on the case.[23]

Turning to the operation of trade secret law on the question of development of cigarette tobacco blends that are similar to national brands, there is a possibility that cigarette formula information may be obtainable by one of the “proper means” listed in the uniform trade secret law. Published information about the ingredients in the most popular cigarettes may be available to the public, presumably allowing for some reverse engineering of the formulas. Some tobacco companies have voluntarily listed the ingredients of their cigarettes on their websites for years, but not in the amounts that would allow blends to be recreated.[24] R.J. Reynolds Company, the second largest tobacco company in the world, which produces the cigarette brands Camel, Kool, Pall Mall and Winston states on its website that “the specific blend formulas for our products (the recipes that include the exact amounts of every ingredient) are trade secrets, and we vigorously work to ensure that our competitors do not have access to our formulas.”[25]  Phillip Morris, the world’s largest tobacco company, controls fifty percent of the consumer market.[26] The Federal Food and Drug Administration now require tobacco companies to tell them their formulas, in an attempt to determine whether certain ingredients may make tobacco more harmful or addictive.[27]

In a suit brought by Phillip Morris against the state of Massachusetts over an act passed requiring tobacco companies selling their wares in the state to publicly disclose their ingredient lists for cigarettes, claimed that the operation of the act would threaten to destroy the company’s enormously valuable trade secrets. The court cited the information publicly released by the tobacco companies made the cigarette formulas no longer truly confidential.[28] However, it turns out that it is not that easy to “reverse engineer” exactly the ingredients that make up famous national cigarette brands. The court in Phillip Morris noted that “despite regular efforts by various of the plaintiffs to monitor competing brands and to reproduce those brands’ flavorings, to date the companies have failed to reverse-engineer brand-specific recipes.”[29] The plaintiffs insisted that “a complete ingredient list with the ingredients listed in descending order by weight would advance the feasibility of duplicating the taste and aroma of a competitor’s brand.”[30] The plaintiff’s arguments, including several constitutional grounds including taking of property without compensation, were eventually accepted by the federal court, and they were granted an injunction against the enactment of the Massachusetts law.[31]

V. Conclusion

Even with the utmost protection of cigarette tobacco blend recipes as trade secrets, the promotion of the companies’ national brands is probably the most effective way to prevent a competitor from taking market share. Consumers choose their cigarette brands based on flavor, taste and aroma, but also develop a loyalty to certain brands that is bolstered by advertising. The strength and value of their brands is emphasized in advertising, and although cigarette ads are no longer on television, the image of the Marlboro Man is still ubiquitous in print ads, and leads smokers to identify with the strong and virile character. The money spent on brand recognition assures that there are many smokers who would never switch to a “knockoff” brand because of their loyalty to the national brands.

With the price of cigarettes always increasing, the economy has led many formerly loyal smokers to roll their own to save money, but they still would prefer to use tobacco that is similar in taste and aroma to their favorite national brands, even if they can’t duplicate the “Marlboro experience.” The development of tobacco blends that “compare to” their favorite brands allows the home cigarette maker to somewhat duplicate a smoking experience that has become prohibitively expensive for them. In addition, since the loose tobacco presumably does not have a lot of the added ingredients that the FDA is worried about in national branded cigarettes, although the home rolled smokes may be more natural, whether that increases the safety or healthfulness of any cigarette is doubtful. Whether the tobacconist uses the knowledge stored in his brain from his former job at the national tobacco company, uses the published ingredient lists available from the companies, or reverse-engineers the blends using study of the national cigarette’s leaf composition[32], chances are he has not done so in violation of his former employer’s trade secrets. The elaborate procedures used by the national tobacco companies to safeguard their ingredient information, and the probability that the former employee was not given and did not have full access to the cigarette recipes in his work, makes it unlikely that the blends he has created were anything but a product of his experience and familiarity with tobacco types, and his interpretation of the famous cigarette’s flavor and aroma. Smokers of the knock-off blends would probably say they are not identical to their favorite smokes, but are close enough to avoid paying the national brands’ prices. The initials used to indicate the blends’ similarity to national brand names are not enough under trademark laws to violate the marks by passing off or false association, and the direct labeling that the blends are not the actual identical blends but are “similar to” them refutes any claim of consumer confusion.

© 2012 Mary Ellen Tomazic

[1] No. 2:11-cv-05764-RSWL-MAN (C.D. Cal., Feb 15, 2012).

[2] Cal. Civ. Code §3426.1 – .11, sec. 3426.1(a).