Kentucky Trade Secret Law

Kentucky is one of many states that have adopted the Uniform Trade Secrets Act.

Kentucky businesses rely on many forms of intellectual property law to help maintain their competitive advantages. These forms include copyright, trademark, and patent law. Another important form of intellectual property is trade secrets. In Kentucky, what laws protect your business's trade secrets?

Defining Trade Secrets

Trade secrets often comprise customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other business information that provides a company with a business edge. In legal terms, information is more likely to be considered a trade secret if it is:

  • not known outside of the particular business entity
  • known only by employees and others involved in the business
  • subject to reasonable measures to guard the secrecy of the information
  • valuable, and
  • difficult for others to properly acquire or independently duplicate.

Protecting Trade Secrets with Nondisclosure Agreements

Perhaps the most common way for Kentucky businesses to protect their trade secrets is by having employees sign nondisclosure agreements (NDAs), which are enforceable in this state (but not all states). These are written contracts between employers and employees that attempt to prevent the employee from disclosing confidential information after leaving the company.

For example, if you own a bourbon manufacturing plant in Lexington, an NDA with an employee could prevent that person from disclosing your distilling methods to a future employer for a certain period of time. The employee knows that if he or she discloses your proprietary distilling method, or misappropriates it in some fashion, your business will be able to sue for breach of the NDA.

Misappropriation of Trade Secrets in Kentucky

Kentucky is one of many states that has adopted the Uniform Trade Secrets Act (UTSA). Kentucky’s trade secret law can be found at Ky. R.S. Secs. 365.880 et seq.

Kentucky law defines a trade secret as "information, including a formula, pattern, compilation, program, data, device, method, technique, or process, that: (a) 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 (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Kentucky’s version of the UTSA refers to the theft of trade secrets as misappropriation. Under Kentucky law, "misappropriation" refers to the acquisition of a trade secret by someone who knows or has reason to know that the trade secret was acquired by improper means, such as theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy. It also includes the disclosure or use of a trade secret without consent by someone who used improper means to acquire knowledge of the trade secret, for example, an ex-employee who spills company secrets to a rival.

Kentucky's "Reason to Know" Standard

Kentucky prohibits use of trade secrets by a company that has “has reason to know” that the material constitutes a trade secret. This is known as constructive knowledge (versus actual knowledge). In other words, even if a Kentucky company was unaware it possessed purloined trade secrets, it can still be prosecuted under Kentucky law if it should have known.

Penalties for Misappropriation of Trade Secrets in Kentucky

Under Kentucky law, a trade secret thief can be prevented from disclosure by court order, known as an injunction. This is true for both actual or threatened misappropriation under Ky. R.S. Sec. 365.882. The injunction may 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 any commercial advantage that otherwise would be derived from the misappropriation.

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 can a theft that is so bad that the court order would be meaningless.

A victim of trade secret theft can also seek financial compensation that measures the actual loss attributed to the theft or the profits (or “unjust enrichment”) acquired by the trade secret thief. In egregious situations, a Kentucky court can award punitive damages up to twice the amount of any award. Attorney fees will also be awarded in egregious situations where the infringement is done with knowing and malicious intent (although this can be difficult to prove).

Statute of Limitations for Bringing Suit Over Trade Secrets in Kentucky

Pursuant to Ky. R.S. Sec. 365.890, an action for trade secret misappropriation must be brought within three years "after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered." In other words, you must act relatively quickly upon discovery of a potential theft of your company's trade secrets. Courts will not permit you to wait longer than three years before you file your lawsuit.

Federal Law Regarding Trade Secret Theft

In addition to Kentucky’s rules regarding trade secrets, certain federal rules also apply in Kentucky. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen.

The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act. The penalties for a violation of this statute include a potential prison term of 15 years and fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.

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