To: New Jersey Law Revision Commission

MEMORANDUM

To: New Jersey Law Revision Commission

From: Staff

Re: Uniform Trade Secrets Act

Date: July 7, 2008

As directed by the Commission at its April meeting, Staff has since reached out to other attorneys expert in intellectual property and/or unfair competition and trade secrets law with regard to a proposed New Jersey adoption of the UTSA. Staff’s proposed New Jersey version of the UTSA has now been reviewed by two law professors, most recently, Professor David Opderbeck of Seton Hall School of Law. In addition to the feedback already received from James P. Flynn of Epstein Becker & Green, P.C., Staff has obtained additional comment from Peter J. Pizzi of Connell Foley and anticipates comments from two other attorneys expert in the area, William Heller of McCarter & English and Robert G. Shepherd of Mathews, Shepherd, McKay & Bruneau, P.A. The attorneys who have reviewed the UTSA and proposed modifications at Staff’s request have expressed that their views are personal to them and do not represent the views of their respective law firms, partners or clients.

All those who thus far have reviewed the UTSA favor its enactment in New Jersey. Varying suggestions have been made for modification to the UTSA for adoption in New Jersey, the most significant of which were already incorporated in the version submitted by Staff at the April meeting. However, additional changes are incorporated in the attached revised version based on the recent comments received.

Most important, there is unanimous agreement that the revisions to Section 8 of the uniform law, as proposed in Staff’s April submission, are sound and should remain a part of any New Jersey version of the UTSA. The modifications made to Section 8 will distinguish New Jersey’s version of the UTSA from any other state version.

Additional changes made in the most recent attached version (i) alter language added in Section 2, pertaining to the definition of “reverse engineering” (which was not in the original uniform law but added to Staff’s proposed New Jersey version of the uniform law) to accommodate the concern that the phrase “fair and honest method” could create an unnecessary ambiguity, (ii) rearrange the order of the sentences in Section 5, pertaining to Attorney Fees, to address the concern that as currently worded, this section suggests that the attorneys’ fees provision was intended to deter bad faith claims when in fact it was intended to provide an additional remedy for good claims with the “bad faith” remedy included as a counterweight, and (iii) add language creating a presumption in favor of granting protective orders in connection with discovery proceedings in Section 6, pertaining to Preservation of Secrecy in order to address the perceived need to link this provision to existing New Jersey law. Additional suggestions thus far proposed were not adopted by Staff in the attachment for various reasons of clarity and consistency.

PROPOSED AMENDMENTS TO UNIFORM TRADE SECRETS ACT FOR ADOPTION IN NEW JERSEY

(Based upon the 1985 Amended Version of Official Uniform Law as modified by NCCUSL)

SECTION 1. SHORT TITLE. This [Aact] shall be known and may be cited as the Uniform Trade Secrets Act.

SECTION 2. DEFINITIONS. As used in this [Aact], unless the context requires otherwise:

(1) “Improper means" includes is defined as theft, bribery, misrepresentation, breach or inducement of a breach of a an express or implied duty to maintain the secrecy of or to limit the use or disclosure of a trade secret, or espionage through electronic or other means, access that is unauthorized or exceeds the scope of authorization, or other means violative of a person’s rights under the common law of this State;

(2) "Misappropriation" means is defined as:

(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(ii) disclosure or use of a trade secret of another without express or implied consent by a person who

(A) used improper means to acquire knowledge of the trade secret; or

(B) at the time of disclosure or use, knew or had reason to know that his the knowledge of the trade secret was derived or acquired through improper means; or

(I) derived from or through a person who had utilized improper means to acquire it;

(II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(C) before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake through improper means.

(3) "Person" means is defined as a natural person, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.

(4) “Proper means” includes discovery by independent invention, discovery by reverse engineering, discovery under a license from the owner of the trade secret, observation of the information in public use or on public display, obtaining the trade secret from published literature, or discovery or observation by any other means that is not improper.

(5) “Reverse engineering” is defined as the process of starting with the known product and working backward to find the method by which it was developed so long as the acquisition of the known product was lawful or from sources having the legal right to convey it by a fair and honest method, such as the purchase of the item on the open market.

(6) "Trade secret" means is defined as information, without regard to form, including a formula, pattern, compilation, program, device, method, technique, design, diagram, drawing, invention, know-how, plan, procedure, prototype or process, that:

(i) 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

(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

SECTION 3. INJUNCTIVE RELIEF.

(a) Actual or threatened misappropriation may be enjoined. Upon application to the court, an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.

(b) In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.

SECTION 4. DAMAGES.

(a) Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation or other circumstances renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.

(b) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection (a).

SECTION 5. ATTORNEY'S FEES. If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorney's fees and costs, including a reasonable sum to cover the service of expert witnesses, to the prevailing party. If (i) willful and malicious misappropriation exists, (ii) a claim of misappropriation is made in bad faith, or (iii) a motion to terminate an injunction is made or resisted in bad faith, the court may award reasonable attorneys’ fees and costs, including a reasonable sum to cover the service of expert witnesses, to the prevailing party. For purposes of this section, a claim of misappropriation is made or continued in bad faith or a motion to terminate an injunction is made or resisted or continued in bad faith if it is undertaken or continued solely to harass or maliciously injure another or to delay or prolong the resolution of the litigation; or it is undertaken or continued without any reasonable basis in fact or law and could not be supported by a good faith argument for an extension, modification or reversal of existing law.

SECTION 6. PRESERVATION OF SECRECY. In an action under this [Aact], a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting with a presumption in favor of granting protective orders in connection with discovery proceedings, in accordance with R. 4:10-3 (g), and which may also include holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

COMMENT

Language has been added to this Section to link this provision to existing New Jersey law pertaining to protective orders as set forth in R. 4:10-3 of the Rules Governing the Courts of New Jersey.

SECTION 7. STATUTE OF LIMITATIONS. An action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.

SECTION 8. EFFECT ON OTHER LAW.

(a) Except as provided in subsection (b), this [Aact] displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret but in any action for misappropriation of a trade secret brought against a public entity or public employee, the provisions of the “New Jersey Tort Claims Act” (N.J.S. 59:1-1 et seq.) shall supersede any conflicting provisions of this act.

(b) This [Aact] does not effect:

(1) contractual remedies, whether or not based upon misappropriation of a trade secret;

(2) other civil remedies that are not based upon misappropriation of a trade secret; or

(3) other civil remedies based upon misappropriation of confidential information not rising to the level of a trade secret but otherwise protectable under the common law of this State; or

(4) criminal remedies, whether or not based upon misappropriation of at trade secret.

(c) This act does not affect the disclosure of a public record required by P.L.1963, c.73 (C.47:1A-1 et seq.) or by P.L.1983, c.315 (C.34:5A-1 et seq.), or limited by P.L.1995, c.23 (C.47:1A-1.1 et seq.) Any determination as to whether the disclosure of a public record constitutes a misappropriation of a trade secret and the rights and remedies with respect thereto shall be made pursuant to the law in effect before the operative date of this act.

COMMENT

Subsection (b) (3) has been added to preserve the causes of action for confidential information not rising to the level of a trade secret but otherwise protectable for the reasons as expressed by the New Jersey Supreme Court in Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285 (2001.)

Subsection (c) was in Assembly Merkt’s original bill and reproduced here solely for that reason. We have not received any comment or done research to determine whether the second sentence of this subsection is necessary.

SECTION 9 UNIFORMITY OF APPLICATION AND CONSTRUCTION. This [Aact] shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this [Aact] among states enacting it.

SECTION 10. SEVERABILITY. If any provision of this [Aact] or its application to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of the [Aact] which can be given effect without the invalid provision or application, and to this end the provisions of this [Aact] are severable.

SECTIION 11. TIME OF TAKING EFFECT. This [Aact] takes effect immediately and does not apply to misappropriation occurring prior to the effective date. With respect to a continuing misappropriation that began prior to the effective date, the [Aact] also does not apply to the continuing misappropriation that occurs after the effective date.