On Jan. 9, New Jersey Gov. Christopher J. Christie (R) signed into law the New Jersey Trade Secrets Act (S-2456/A921) in an effort by the legislature (which unanimously approved the act) and the governor to demonstrate that New Jersey is a business-friendly state.
In one sense, the legislature is really playing a bit of catch-up, as New Jersey is merely the 47th state to pass some variant of the Uniform Trade Secrets Act, upon which the New Jersey act is based. New Jersey, however, has had a long-established and well-developed common law protecting trade secrets, and the act in large measure is merely codifying that existing common law.
Hence, the question arises, has the act actually enhanced the rights of trade secret owners in New Jersey, or said another way, have the legislature and the governor really improved the business climate for New Jersey business owners? The answer would seem to be an emphatic “yes,” though they could have done more.
Before discussing the enhanced protections for trade secrets created by the act, it must be pointed out that the act has in one significant component reduced the rights of trade secret owners by reducing the statute of limitations to three years from six. The reduced duration of the statute of limitations is, however, largely inconsequential as the act adopts the same trigger point for the running of the statute of limitations, which is the date when the misappropriation is discovered or, by the exercise of reasonable diligence, should have been discovered.
Frankly, in almost every case of misappropriation (and certainly every case where injunctive relief would be sought), business and legal considerations will compel action in far less than three years. It simply does not make sense to dally when you know something has been stolen.
The practical consequence of this shortened statute of limitations is the enhanced importance of exercising reasonable diligence to discover misappropriation because the trade secret owner now has half the time to recover from failing to exercise reasonable diligence to discover such misappropriation.
In sum, the revised statute of limitations penalizes only the non-diligent trade secret owner, whose lack of diligence alone raises questions as to the existence and value of the purported trade secret.
Other than the shortening of the statute of limitations, the act overwhelmingly enhances the rights of trade secret owners.
First and foremost, the act enshrines those rights in the law, and more importantly, the significant legal consequences of those who wrongfully disclose or misappropriate the confidential information of others. The definition of trade secrets in the act is broad, essentially encompassing any confidential information that has “actual or potential” (emphasis added) economic value from not being generally known and not “readily ascertainable,” and is subject to reasonable efforts to maintain its secrecy.
Significantly, per the act the information does not even have to be in use in the business at the time of misappropriation, contrary to some case law in New Jersey and trade secret law in other jurisdictions. See e.g., Ahlert v. Hasbro
Inc., 325 F. Supp. 2d 509 , 513 (D. N.J. 2004) (citing Restatement of Torts 757, comment b (1939).
As to the remedies available to trade secret owners, the act expressly provides for injunctions against any actual or threatened misappropriation until the trade secret has ceased to exist. It further provides for damages, including both the actual loss of the trade secret owner caused by misappropriation and the unjust enrichment of the party who misappropriated the trade secret (to the extent not duplicative of actual losses).
The act further provides for punitive damages in the case of willful and malicious misappropriation, though limited to twice the compensatory damages, and it provides for recovery of reasonable attorneys fees and “service of expert witnesses” in such cases.
It should also be noted that attorneys’ fees and expert witness fees are available to prevailing defendants in cases where claims of misappropriation are made in bad faith, a provision designed to protect in particular smaller startup businesses that are harassed by litigation from larger, established competitors attempting to use the litigation process as a weapon to secure a business end.
One of the more significant provisions of the act, which is not taken from the Uniform Trade Secret Act, but rather based upon some New Jersey common law, is a provision that “a person who misappropriates a trade secret shall not use as a defense to the misappropriation that proper means to acquire the trade secret existed at the time of the misappropriation” (emphasis added). This provision is drawn from a line of cases starting with Adolph Gottscho Inc. v. American Marking Corp., 18 N.J. 467, 105 USPQ 398 (N.J. 1955); cert. denied 350 U.S. 834 (1955), but is arguably somewhat more sweeping in its breadth than the case law upon which it is based.
The Gottscho case, for instance, dealt with a subsequent disclosure of a portion of the trade secrets at issue in patents after the misappropriation, and while dicta in Gottscho and subsequent cases support the broad language incorporated in the act, the act now eliminates any issue of limiting the cases to the facts actually at issue in those cases.
More importantly, this broad clause of the act eliminates a frequently argued defense in trade secret cases and arguably conflicts with the act’s definition of trade secrets itself, by severely limiting the defendant’s ability to argue that the trade secret at issue is something essentially known in the field, easily discerned, or “readily ascertainable.”
The act, through its denial of this defense, places the focus of a trade secret claim squarely on the method of acquisition of the information rather than on the nature of the information acquired. Thus, under the act, a breach of fiduciary duty or violation of a nondisclosure agreement in itself can give rise to a trade secret claim even if the information disclosed through such breach was available elsewhere.
This provision, more than any other, seems to underscore the legislature’s intent to make sure the act focused on penalizing “wrongful disclosure of confidential information,” as noted by New Jersey State Sen. Nicholas P. Scutari (D-Union) when the bill was signed into law.
Although the act undoubtedly has enhanced the ability of business owners to protect their valuable business information (while also protecting them from bad faith claims by providing the prevailing party attorney’s fees and expert fees), the Senate Commerce Committee did pull back on one significant portion of the original draft of the act by deleting a provision for a presumption in favor of granting a protective order in such cases.
Instead, the Senate committee replaced the presumption with the provision that the court shall preserve the secrecy of the alleged trade secret by “reasonable means” consistent with the Rules of Court.
The revised language certainly prescribes protection for the trade secret owner and is consistent with the current state of the law. However, courts have been increasingly restrictive on protective orders, and from the perspective of trade secret owners, it would have made a strong pro-business statement if the Senate committee had left intact the original language to let business owners know that if they bring a trade secret action in New Jersey they had a presumptive right to a protective order.
As a practical matter, the revised language likely will have little impact, and courts will continue to provide reasonable protections to the owners of trade secrets, including, in most cases, entering protective orders. In the end, though, an opportunity was lost for the legislature and the governor to trumpet more loudly their desire to make New Jersey business-friendly.
