Written by Dylan W Wiseman From IAM on March 10, 2025
Many US businesses continue to focus upon protecting trade secrets as a crucial part of their intellectual property portfolio. The advantages are obvious: trade secrets can last for an indefinite period of time, companies can be nimbler and avoid educating competitors about technological advancements and trade secrets protection does not present the expensive and time-consuming processes required to maintain a patent portfolio. Given its wealth of technology firms, life sciences companies and AI and machine learning businesses, California was among the early adopters to advance its competitive position by protecting trade secrets.
As the fourth largest economy in the world, California’s laws regarding trade secrets drive its innovation economy.1 California’s economy is obviously a function of its great universities and stellar climate. However, its economy is also driven by the combination of its statutory protection of trade secrets and its laws regarding free and fair competition. Since 1985, California has protected trade secrets through its California Uniform Trade Secrets Act (CUTSA).2 Additionally, since the era of the Gold Rush, California has rejected covenants not to compete between employers and employees.3 For example, in California, an employee can have coffee with their co-workers in the morning, leave to work for a competitor that same day and have happy hour with their new co-workers.4 Thus, California’s definition of a trade secret and its policy favouring employee mobility ignite its economy.
At the federal level, Congress has only recently sought to replicate California’s trade secret protections and its hostility toward employment covenants not to compete. Congress enacted the Defend Trade Secrets Act (DTSA) in 2016. Since then, the federal court system has seen an increase of cases alleging trade secret misappropriation.
Under the Biden administration, the Federal Trade Commission (FTC) issued a proposed rule eliminating non-compete provisions in employment agreements. That rule took effect in April 2024. In September 2024, a federal judge in Texas issued an order blocking the FTC from enforcing the rule. The Biden administration’s FTC then filed an appeal to overturn the Texas court’s ruling.5
However, since taking office, Donald Trump has indicated that his FTC appointee’s will likely withdraw the appellate challenge. In a surprising turn of events, in January 2025, a group of entrepreneurs sought to intervene in the appellate challenges claiming they are harmed by the imposition of workplace non-compete provisions.[6] The FTC opposed the entrepreneurs’ efforts to intervene, and the court has yet to rule on the intervenor’s petition. Practically speaking, even if the intervenors are successful, the Trump administration is widely expected to withdraw or substantially modify the FTC’s non-compete rule.
The Uniform Trade Secrets Act and common law
To provide an overview of trade secret laws in the United States, it is necessary to discuss briefly the National Conference of Commissioners on Uniform State Laws’s (the NCCUSL) efforts in the late 1970s and early 1980s to bring ‘uniformity’ to trade secrets disputes by drafting the Uniform Trade Secrets Act (UTSA). Prior to the NCCUSL’s efforts, trade secrets were a matter of common law, and there existed a patchwork of states with varying definitions of what qualified as a trade secret, what uses were actionable and what remedies were available.7 The UTSA’s common definitions sought to bring certainty and predictability to trade secrets disputes, particularly for companies with business in multiple jurisdictions. As of December 2023, all states, with the exception of New York, have adopted a version of the UTSA.
The UTSA’s definition of a trade secret is found at Section 1, and provides:
- ‘Trade secret’ means information, including a formula, pattern, compilation, program, program, device, method, technique, or process, that:
- derives independent economic value, actual or potential, from not being generally known to, and not 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. (Emphasis added.)
California’s important modification to the definition of a trade secret
California’s legislature has modified the UTSA’s definition of a ‘trade secret’. As a result, California’s CUTSA is more employer-friendly than the model provisions found in the UTSA. In particular, California’s version of what qualifies as a ‘trade secret’ is more favourable to driving innovation than the UTSA’s definition. As described in ABBA Rubber Company v Seaquist, 235 CalApp3d 1, 22 (1991):
Section 1, subdivision (4)(i), of the Uniform Trade Secrets Act, as proposed by the National Conference of Commissioners on Uniform State Laws, refers to 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 ….” (14 West’s U. Laws Ann. (1990) U. Trade Secrets Act, § 1, p. 438, italics added.) However, when the Legislature adopted that provision as Civil Code section 3426.1, subdivision (d)(1), it deleted the highlighted phrase. That deletion apparently resulted from arguments that conditioning the scope of a trade secret on the extent to which the information was not readily ascertainable would “‘mudd[y] the meaning of the term trade secret’” and “ ‘invite[] the various parties to speculate on the time needed to discover a secret.’” ([internal citations omitted], Senate Com. on Judiciary, Selected Bill Analyses (1984) Assem. Bill No. 501, pp. 5-6.)
In short, California’s Legislature chose to exclude from the definition that only information that the industry already knows can be categorised as a trade secret, as opposed to that which the industry could easily discover. Therefore, under California law, information can be a trade secret even though it is readily ascertainable, as long as it has not yet been ascertained by others in the industry.
The California definition of a ‘trade secret’ is found at California Civil Code section 3426.1, and provides:
- ‘Trade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
- Derives independent economic value, actual or potential, from not being generally known to the public or to 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.
Because the ‘not readily ascertainable by proper means’ language was stricken, under California’s definition of a ‘trade secret’ a company’s innovations are not subjected to after-the-fact second-guessing about how long it would take to reconstruct the trade secret. By rejecting the ‘not readily ascertainable by proper means’ standard, California’s statutory definition of a ‘trade secret’ enables employers to invest in technological advancements that are actually unknown to competitors without risking speculative trial testimony that could undermine an employer’s innovations.
The State Bar of California’s Patent, Trademark and Copyright section, which is the precursor to its current California Lawyers Association Intellectual Property Law Section, advanced its objection to the ‘not readily ascertainable by proper means’ standard. That singular, well-documented revision to the UTSA helps drive California’s innovation economy.
The State Bar underscored the risks to innovation by expressing:
If a scientist could discover within six months’ time a complex formula through reverse engineering or a literature search, the confidential information could be considered readily ascertainable. The Bar questions whether a firm would have an actionable claim if a competitor misappropriated business information which it soon would have discovered through legitimate scientific means.(Senate Com. on Judiciary, Selected Bill Analyses (1984) Assem. Bill No. 501, pp. 5-6.)
By eliminating the ‘not readily ascertainable by proper means’ language from the definition of a ‘trade secret’, the California legislature cleared the path for technology firms to invest heavily in cutting-edge research without fear that if their trade secrets were misappropriated their investment would evaporate by speculative second-guessing from hired experts seeking to conclude their advancements were theoretically ‘readily ascertainable by proper means’. For example, if a pilotless car firm invests heavily in camera technology and software enabling the car to avoid a crash, under California’s definition the company would not have to worry that several years later at trial it would confront a paid expert claiming the technology was ‘readily ascertainable by proper means’. That simply is not part of the analysis of what constitutes a trade secret. By doing so, California opened the door to early-stage angel funders, private equity and venture capital firms to invest in start-ups with a clearer understanding of the risk landscape. The profound impact of modifying California’s definition of a ‘trade secret’ contributed significantly to its innovation economy.
A handful of states follow California’s lead
With few exceptions, almost every state adopted the ‘not being readily ascertainable by proper means’ standard found in the UTSA.8 Colorado, Illinois, North Carolina and Oregon followed California’s lead and declined to adopt the ‘readily ascertainable by proper means’ standard found in the UTSA’s definition of a ‘trade secret’. As a result, the states that declined to adopt the ‘not readily ascertainable by proper means’ standard are uniquely positioned to compete in the innovation economy. This is evidenced by the thriving tech hubs located in Colorado’s Silicon Mountain, Illinois’ Silicon Prairie, North Carolina’s Research Triangle and Oregon’s Silicon Shire.
Outside of California and the handful of states that followed its lead, technology firms remain burdened with situations in which their trade secrets can be stolen, and they still have to face at trial speculative testimony about how long it could take to ‘readily ascertain’ the stolen trade secret. Those states (identified in footnote 8) should consider amending their versions of the UTSA to remove this hurdle to innovation.
The Federal Defend Trade Secrets Act and the FTC’s proposed ban on non-competes
Citing a report by the Commission on the Theft of American Intellectual Property, the US Senate’s Report on the Defend Trade Secrets Act of 2016 (the Senate Report) argued that ‘annual losses to the American economy caused by trade secret theft are over $300 billion, comparable to the current level of U.S. exports to Asia’ and that ‘trade secret theft has led to the loss of 2.1 million American jobs each year and that each year the illegal theft of intellectual property is undermining the means and incentive for entrepreneurs to innovate’.9 Quoting a study by Pricewaterhouse-Coopers LLP and the Center for Responsible Enterprise and Trade, ‘the annual cost of trade secret theft may be as high as $480 billion’.10 According to then Attorney General Eric Holder: ‘There are only two categories of companies affected by trade-secret theft: those that know they’ve been compromised and that don’t know yet.’11
Accordingly, the DTSA amended the federal Economic Espionage Act of 1996 to create a civil remedy for the misappropriation of trade secrets.12 By doing so, Congress elevated trade secrets to the same stature as patents, copyrights and trademarks. The DTSA defines ‘trade secret’ in a manner that is different than California, and has many of the same elements of the UTSA’s definition of a ‘trade secret’. The DTSA provides at 18 USC section 1839(3) that:
[T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
- (A) the owner thereof has taken reasonable measures to keep such information secret; and
- (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information;
The federal definition of a ‘trade secret’ kept the ‘not being readily ascertainable through proper means’ standard found in the UTSA.
Immediately after the DTSA’s enactment, in 2017, there were 1,394 federal district court lawsuits alleging DTSA violations.13 Interestingly, ‘[t]he number of trade secret cases filed in 2022 was comparable to the numbers of cases filed each year from 2013 to 2016, prior to the enactment of the DTSA’.14 ‘Since 2017, the number of trade secret cases filed each year has declined gradually but steadily, eventually reaching the number filed in 2022 that was comparable to the number filed in 2016.’15 The decline in volume could be attributable to several factors. Most trade secret misappropriation disputes involve employees who departed for a competitor, and cases that previously were brought in state courts. Federal district courts are generally more hostile toward plaintiffs than state courts. Additionally, federal civil juries require a unanimous verdict. By contrast, state courts typically do not require a unanimous verdict. Thus, since the DTSA’s enactment, the decline in cases may suggest a return of plaintiffs to state courts.
As the FTC’s non-compete rule will likely be blocked by the Trump administration either through the court process or by modifying or withdrawing the rule. Eliminating the FTC’s rule will hamper competition in those jurisdictions which permit workplace covenants not to compete. If anything, many jurisdictions will fall further behind California’s strong economy, which is driven by its unique definition of a trade secret coupled with its abolishment of workplace non-compete terms.
Whether or not the FTC’s ruling survives anticipated legal challenges, US employers should consider transitioning their best practices to become more like what California has done for decades. In doing so, the issue will become the flow of information, not the flow of employees. California’s tech workforce is 1.88 million strong – nearly twice as much as the next ranked state – and added more jobs than any other state between 2010 and 2022.16 The strength of California’s innovation economy indicates that its legal model around trade secrets and non-compete terms is very attractive to Millennial and Gen Z workers.
To become more aligned with California’s approach, US employers will need to implement concrete plans to protect trade secrets, such as confidentiality agreements, intellectual property assignment terms and trade secret audits, and deploy technological measures to safeguard claimed trade secrets. With the FTC embracing California’s approach toward non-compete agreements, employers may likely need to litigate to protect claimed trade secrets. Trade secret litigation is fast-paced, often brutally hard fought and highly specialised, so employers should seek experienced counsel.
Conclusion
This overview of trade secret law in the United States helps explain why California has led and will continue to lead the way in the innovation economy. California’s unique definition of a ‘trade secret’ and its position invalidating covenants not to compete have driven its economic success.
With the United States now having a largely standardised definition of a ‘trade secret’ under the UTSA and DTSA, the trend of protecting trade secrets as crucial intellectual assets will continue for decades to come.
Regardless of when or if the FTC’s rule takes effect, employers in states where non-compete terms are currently permitted should consider pivoting to focus on protecting trade secrets as a means to protect their competitiveness. That pivot will enable them to attract and retain talented, entrepreneurial workers who want to avoid being encumbered by non-competition clauses. That pivot should address confidentiality agreements, intellectual property assignment provisions, trade secret audits and technological protections. Given the unique, hard-fought and fast-moving nature of trade secrets disputes, employers should also pay careful attention to only hiring counsel with a proven record of taking through verdict multiple trade secrets disputes.
