The Trade Secret-Contract Interface

The Trade Secret-Contract Interface Deepa Varadarajan * ABSTRACT: Contracts play a dual—and dueling—role in trade secret law. On the one hand, non-disclosure contracts serve an important evidentiary role, helping owners prove key elements of a trade secret claim (e.g., reasonable secrecy efforts). Because of this evidentiary role, trade secret owners routinely use confidentiality contracts when sharing information with employees, business collaborators, and consumers. This Article suggests that contracts have a pivotal evidentiary role in trade secret cases because of their notice function. Unlike patent law, trade secret law does not impose formal application or disclosure requirements on putative owners. Thus, non-disclosure contracts are one of the few ways to notify recipients of information about the existence and scope of claimed trade secrets. Contracts’ centrality to trade secret law can create doctrinal tension, however, when owners draft provisions to evade trade secret law’s requirements and limitations. For example, trade secret owners impose contract provisions that prohibit reverse engineering, avoid ongoing secrecy precautions, prevent the use of non-secret or publicly available information, and incorporate employee non-compete clauses. Such provisions conflict with trade secret law, but owners can nonetheless enforce them through breach of contract claims. The pervasive use of contract law to evade trade secret limitations can undermine important policy concerns, such as promoting cumulative innovation and protecting employee mobility. This Article offers the first comprehensive account of trade secret law’s uniquely co-dependent yet complicated relationship with contract law. I consider various legal mechanisms to strengthen the ex ante notice function of contracts and deter uses of contract that pose particular risks to trade secret law’s underlying policy concerns. * Assistant Professor of Legal Studies, Department of Risk Management and Insurance, J. Mack Robinson College of Business, Georgia State University; Secondary Appointment, Georgia State University College of Law. For helpful comments, I thank Laura Heymann, Michael Madison, Sean Pager, Nirej Sekhon, Jeremy Sheff, Eva Subotnik, and participants of the Junior Scholars in Intellectual Property (“JSIP”) Workshop at Michigan State University, the Academy of Legal Studies in Business (“ALSB”) Annual Meeting, and the St. John’s Intellectual Property Colloquium. All errors are my own. 1544 IOWA LAW REVIEW [Vol. 103:1543 I. INTRODUCTION ........................................................................... 1544 II. UNDERSTANDING TRADE SECRETS AS INTELLECTUAL PROPERTY .................................................................................... 1548 A. O RIGINS OF T RADE S ECRET L AW ............................................ 1548 B. C ENTRAL F EATURES OF T RADE S ECRET L AW ........................... 1550 C. I NFORMATION ’ S “D UAL F UNCTION ” AND I NTELLECTUAL P ROPERTY L AWS ’ B ALANCING A CT ........................................ 1553 III. THE EVIDENTIARY ROLE OF CONTRACTS IN TRADE SECRET LAW ............................................................................................. 1556 A. E VIDENCE OF P LAINTIFF ’ S R EASONABLE S ECRECY P RECAUTIONS ....................................................................... 1557 B. E VIDENCE OF D EFENDANT ’ S “M ISAPPROPRIATION ” .................. 1558 C. V IEWING THE E VIDENTIARY R OLE OF C ONTRACTS T HROUGH THE L ENS OF N OTICE ............................................................ 1560 IV. THE EVASIVE ROLE OF CONTRACTS IN TRADE SECRET LAW ....... 1563 A. E NLARGING T RADE S ECRET S UBJECT M ATTER ........................ 1564 B. A VOIDING O NGOING R EASONABLE S ECRECY P RECAUTIONS ...... 1566 C. E LIMINATING THE R EVERSE E NGINEERING D EFENSE ................ 1568 D. U SING N ON -C OMPETE C LAUSES TO C IRCUMVENT T RADE S ECRET R EQUIREMENTS AND L IMITATIONS ............................. 1571 E. T HE R ELATIONSHIP B ETWEEN C ONTRACTUAL P ROCESS AND S UBSTANCE ........................................................................... 1573 V. DOCTRINAL MECHANISMS TO SCRUTINIZE TRADE SECRET-EVASIVE USES OF CONTRACT LAW ................................ 1576 A. T HE L IMITS OF P REEMPTION ................................................. 1578 1. Preemption Arguments Pre-DTSA ............................. 1578 2. Preemption Arguments Post-DTSA ........................... 1580 B. M ISUSE D OCTRINE AND T RADE S ECRET L AW ........................... 1583 C. R EINVIGORATING C ONTRACT L AW ’ S N ON -E NFORCEMENT D OCTRINES ........................................................................... 1587 VI. CONCLUSION .............................................................................. 1590 I. INTRODUCTION Contract law and intellectual property law have a complicated relationship. On the one hand, intellectual property owners use contract law to share proprietary technologies, creative works, and information in efficient ways. On the other hand, intellectual property owners can dictate contract terms that deviate from intellectual property law’s default rules. Laws 2018] THE TRADE SECRET-CONTRACT INTERFACE 1545 governing patents, copyrights, and trade secrets impose eligibility requirements and limitations to balance the interests of intellectual property owners against users, follow-on innovators who build on existing works, and the public. 1 These legislatively calibrated balances can be undermined when firms employ contract terms to restrict information uses that intellectual property laws permit. The question of whether intellectual property laws are just default rules that parties can contract around or fixed policy judgments has generated significant scholarly debate. 2 Much of it has analyzed (and criticized) copyright owners’ imposition of non-negotiable licenses (e.g., “clickwraps” and “shrinkwraps”) when selling access to mass-market software. 3 These pervasive licenses, which often condition user access on contract terms that eliminate various limits built into copyright law (like fair use), threaten to become a form of “privately legislated intellectual property.” 4 1 . See infra Part II.C. 2 . See, e.g. , Jonathan M. Barnett, Why is Everyone Afraid of IP Licensing? , 30 HARV. J.L. & TECH. 123, 124–25 (2017); Mark A. Lemley, Beyond Preemption: The Law and Policy of Intellectual Property Licensing , 87 CALIF. L. REV. 111, 118–33 (1999); J.H. Reichman & Jonathan A. Franklin , Privately Legislated Intellectual Property Rights: Reconciling Freedom of Contact with Public Good Uses of Information , 147 U. PA. L. REV. 875, 876–83 (1999). 3. Such licenses come in various forms, including “shrinkwrap” licenses, which are wrapped in plastic and accompany software, “clickwrap” licenses, which are electronically transmitted and require a party to click “I agree” before downloading software or accessing a site, and “browsewrap” licenses, which condition use of a website on terms that are typically accessed via hyperlink. Collectively, these types of restrictive agreements have been referred to as “terms of use” licenses. See Mark Lemley, Terms of Use , 91 MINN. L. REV. 459, 459–60 (2006) [hereinafter Lemley, Terms of Use ]. A voluminous body of intellectual property law scholarship addresses the impact of such adhesive consumer licenses on policy concerns underlying intellectual property laws. See generally Julie E. Cohen, Copyright and the Jurisprudence of Self-Help , 13 BERKELEY TECH. L.J. 1089 (1998); Niva Elkin-Koren, Copyright Policy and the Limits of Freedom of Contract , 12 BERKELEY TECH. L.J. 93 (1997); Mark A. Lemley, Intellectual Property and Shrinkwrap Licenses , 68 S. CAL. L. REV. 1239 (1995) [hereinafter Lemley, Intellectual Property ]; Maureen A. O’Rourke, Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms , 45 DUKE L.J. 479 (1995). In addition, a voluminous body of contract law scholarship critiques adhesive consumer licenses, focusing less on their threat to underlying IP policies and more on their broader threat to traditional notions of assent and salience that undergird and legitimize private contracting. See generally NANCY S. KIM, WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS (2013); MARGARET JANE RADIN, BOILERPLATE: THE FINE PRINT, VANISHING RIGHTS, AND THE RULE OF LAW (2012); James Gibson, Boilerplate’s False Dichotomy , 106 GEO. L.J. 249 (2018). 4. Reichman & Franklin, supra note 2, at 882. Intellectual property law scholars have also raised concerns about copyright and patent owners’ use of contract law to evade the first-sale or exhaustion limitation that applies to sales of informational goods. See Ariel Katz, The First Sale Doctrine and the Economics of Post-Sale Restraints , 2014 BYU L. REV. 55, 141 (suggesting that IP owners’ ability to contract around the first sale doctrine should be permitted only in “limited circumstances”); Aaron Perzanowski & Jason Schultz, Digital Exhaustion , 58 UCLA L. REV. 889, 892 (2011) (describing “first sale’s practical benefits and the problem of its increasing marginalization”); Guy A. Rub, Rebalancing Copyright Exhaustion, 64 EMORY L.J. 741, 748–49 (2015) (arguing for certain restrictions on copyright owners’ ability to contract around the exhaustion limitation). 1546 IOWA LAW REVIEW [Vol. 103:1543 Largely absent from this voluminous literature is a comprehensive treatment of trade secret law’s complicated interaction with contract law. 5 Such an analysis is warranted, for firms routinely rely on a combination of trade secret law and contract law to protect technical innovations and business information. 6 Compared to other forms of intellectual property, trade secret law has received comparatively less scholarly attention. Yet, in recent years, trade secrets have become more significant—both in economic and legal terms. 7 Just two years ago...