Life sciences trade secrets: emerging trends
Trade secrets have long been an important form of intellectual property in the life sciences industry. In recent years, the significance of trade secrets has grown as the industry has become increasingly competitive and workers in the field have been moving between companies with greater frequency.
Legal protection for trade secrets
In the US, trade secrets are protected under both state and federal law. At the state level, the Uniform Trade Secrets Act (UTSA) applies in all but two states. At the federal level, the Defend Trade Secrets Act (DTSA) was enacted in 2016 to provide a cause of action for trade secret misappropriation in federal court. Both the UTSA and the DTSA define broadly the types of information that can be protected as trade secrets. These laws include two important requirements, however. First, the owner must take reasonable measures to keep the information secret. Second, the information must derive economic value (actual or potential) from not being generally known, and not being readily ascertainable, by third parties.
The UTSA and the DTSA each provide a range of potential remedies for trade secret misappropriation, including preliminary and permanent injunctions, damages (discussed below), seizure orders, and attorneys’ fees.
Regardless of the legal regime, life sciences companies must be proactive in deciding whether to protect information as a trade secret, and then taking the necessary steps to ensure that protection is effective.
First decision: should we use trade secret protection?
Not every type of information is appropriate for trade secret protection. For example, the active ingredient of a biopharmaceutical product to be administered to humans would necessarily become public, and accordingly would be the subject of a patent (or, more likely, multiple patents) rather than being kept as a trade secret. But certain types of information—such as manufacturing and testing methods—do lend themselves to protection as trade secrets. An IP owner should be proactive in assessing the best form of protection for each type of information important to its business.
Second decision: how do we protect our trade secrets?
As noted above, under both state and federal law, companies must take reasonable measures to ensure the confidentiality of their trade secrets. This includes internal measures (with respect to employees and contractors) and external measures (with respect to outside partners and other third parties).
Internal protections
A critical first step is to ensure that the company has appropriate written agreements with all employees and contractors concerning confidentiality and ownership of IP. But while those agreements are necessary, they may not be sufficient. It’s important to consider other restrictions, such as restrictions on access to the company’s premises and information. This could include physical access limitations, but also restrictions on the use of smartphones on the premises, ensuring that whiteboards are cleaned after meetings, and other similar restrictions on access to company information. Information technology limitations are also important to ensure that trade secrets cannot be downloaded, printed, or emailed outside the company. In addition to physical and information technology restrictions, exit procedures should be implemented to ensure that departing employees do not leave with electronic or hard copies of the company’s trade secrets. Finally, if trade secrets are especially important to your business, consider cataloguing them and conducting periodic audits to ensure that your trade secrets are appropriately protected.
External protections
Stating the obvious, a life sciences company should have an appropriate confidentiality agreement in place with every third party that may gain access to its trade secrets. But beyond that, each agreement with a partner and other third party should be carefully scrutinised to ensure that it does not grant trade secret licences or other rights to the third party beyond what may be absolutely necessary for the commercial arrangement at issue.
The risk of AI-powered chatbots
ChatGPT and other chatbots powered by artificial intelligence have attracted a great deal of attention of late. These tools have tremendous potential, but they also pose real legal risks. For example, earlier this year it was widely reported that Samsung employees had used ChatGPT to check source code for errors and to summarise meeting notes. Under OpenAI’s terms of use, information shared with ChatGPT is stored on the company’s servers, and OpenAI can then use that information to improve its model unless users opt out. Needless to say, OpenAI’s storage and use of information in that way is inconsistent with the information being maintained as a trade secret. The safest course, for now at least, is to follow Samsung’s lead in prohibiting employees from using ChatGPT and similar chatbots.
How to protect against the trade secrets of others
In today’s environment of high employee mobility, it’s important from a risk management perspective to ensure that your new employees do not bring trade secret misappropriation claims with them. Onboarding of new employees should include steps to confirm that they do not have electronic or hard copies of their prior employers’ trade secrets, for example on a smartphone or laptop, and new employees should be instructed that they cannot use those trade secrets in their new positions.
In the unfortunate event of a trade secret claim being made against your company based on a new hire, the first step should of course be an investigation, under the protection of the attorney-client privilege and the attorney work product doctrine. And if it appears that there may be some risk associated with the claim, then consider appropriate steps, such as moving the employee to a different position, putting the employee on “garden leave” for some period of time, and/or ensuring that the employee has access to separate counsel.
Damages for trade secret misappropriation
Both the UTSA and the DTSA permit flexibility in measuring damages to compensate for trade secret misappropriation. A plaintiff could claim damages for actual loss, or based on a reasonable royalty to be paid by the defendant.
But in the life sciences industry, a trade secret claim may arise long before either the plaintiff or the defendant have a product on the market. Consequently, there may not be actual loss to the plaintiff, and the defendant may not have sales on which a royalty can be levied. In that event, damages could be based on unjust enrichment of the defendant. An unjust enrichment approach is flexible and expansive, and so could encompass a “head start” theory if use of misappropriated trade secrets has enabled the defendant to accelerate product development and save time to market. In recent years, we have even seen unjust enrichment theories used to seek damages based on how much capital a defendant has raised, or the value of a defendant’s stock after going public.
Conclusion
As noted at the outset, the significance of trade secrets has grown as the life sciences industry has become more competitive and workers in the field have become increasingly mobile. But a trade secret can only exist if it is kept secret, and so vigilant protection of your trade secrets is critical.
Anthony Fitzpatrick is co-head of the patent litigation division at Duane Morris. He can be reached at ajfitzpatrick@duanemorris.com
