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The Best Kept Secret - Is a "Trade Secret!"

Written by: Mark A. Wright

In Order To Protect Your Confidential And Proprietary Information As Trade Secrets, You Must Know What A Trade Secret Is And How To Protect It.


What is a Trade Secret?

The first element in protecting a trade secret is to understand what information is protectable as a trade secret. Trade secrets are not, in and of themselves, registered or recorded. Unlike patents and copyrights, trade secrets are protected by state statutes and common law. Nearly every State statute bases its trade secret law on either the Uniform Trade Secret Act (New Hampshire is one such example) or the Restatements of Torts (which is followed in New York). The New Hampshire Uniform Trade Secret Act defines a "trade secret" as:

`I`nformation, a formula, pattern, compilation, program, device, method technique or process which derives independent economic value, actual or potential, from not being generally known … and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Generally, a trade secret can be almost any information that gives a person a competitive edge, but the law requires that affirmative steps and adequate safeguards be taken against inadvertent disclosure. Some examples of trade secrets are proprietary pricing formulas, customer lists, sales and marketing information, supplier information, manufacturing "know-how" and computer source codes. The best known example of a trade secret is the secret formula/recipe for Coca-Cola®. The Coca-Cola® formula is still secret despite being over 100 years old.

How to Protect Trade Secrets

Affirmative steps must be taken to protect trade secrets. Courts have held that a trade secret is protectable only so long as it remains a secret. Defendants in trade secret cases often try and show that the alleged secret is not a secret at all, often because the company that claims the protection did not take adequate measures to kept it a secret.

One effective way to protect a company's trade secrets is to establish and maintain oversight policies and procedures to prevent inadvertent disclosure of trade secrets by employees and third parties. As mentioned above, the best known trade secret is the formula/recipe for Coca-Cola®. The means employed by Coca-Cola, Inc. to protect the formula have grown legendary, including rumors of no one person knowing the entire formula, those who do know parts of the formula not being allowed to fly on the same airplanes, and underground safes with time locks.

There are a number of steps companies can take to protect trade secrets.

How Many Of The Following Safeguards Do You Have To Protect Your Proprietary Information?

  • Clearly Identifying and Selectively Disseminating Information

    Make information available on a "need to know" basis. Use legends to identify and restrict the use of documents containing trade secrets such as:

    Trade secret: This document contains proprietary and confidential information. Unauthorized use or circulation is strictly prohibited.

    !
  • Employee Confidentiality Agreements

    Obtain confidentiality agreements from all employees who are in contact with propriety information. These agreements must clearly identify what the company considers confidential information along with appropriate provisions and safeguards.

  • Confidentiality Agreements with Independent Contractors
    !

    Temporary or leased employees and independent contractors exposed to trade secret information should sign confidentiality agreements.

  • Policy Statements

    The company's employee manual should inform employees of its policies regarding trade secrets.

  • Non-disclosure Agreements with Suppliers, Customers and Potential Business Partners

    Confidentiality agreements with third parties are critical to protecting trade secrets.

  • Monitor movements of visitors

    Require visitors to identify themselves and register at the reception area.

  • Exit Interviews

    Conduct exit interviews with departing employees:

    • Discuss new positions and involvement in competing products or technology
    • Remind employees of duty of confidentiality and review terms of agreement
    • Discuss information that you regard as trade secret
    • Review any materials employee intends to take from company and confirm that all proprietary information is returned
    • Prepare notes to file of the items covered in the exit interview
  • Protection of Information in Electronic Form and Computer Security Systems

    It is important that companies create appropriate safeguards to protect trade secrets in electronic form. The ease in which an employee can transmit information electronically through internal networks, remote access, the Internet and on floppy disks makes it critical for companies to take affirmative steps to protect its information in electronic form. The following are effective ways to protect electronic information:

    • Password protection of trade secret information
    • Purging passwords of departing employees
    • Using legends on information stored in electronic form
    • Restricting use of internal e-mail messages
    • Placing confidential information on different terminals that are used for Internet access
    • Prohibiting transfer of confidential information to outside computer systems where system is not secure
    • Deleting files before computer equipment is sold or disposed of
    !
!!

Trade Secret Laws (State and Federal)

Once you establish a trade secret, the law provides protection against misappropriation of your secret by others. Misappropriation normally occurs through (1) use of improper means, such as theft or fraud to obtain the secret, or (2) breach of a confidential relationship. In nearly every state, well-developed common law exists to protect trade secrets. Over 40 states have adopted the Uniform Trade Secrets Act. Typically, the Uniform Trade Secrets Act provides for both injunctive relief and monetary damages for misappropriation of trade secrets. It is also possible to obtain damages and an award of attorneys fees where willful misappropriation exists.

In addition to state statutes and common law, a federal law called the Economic Espionage Act of 1996 makes theft or misappropriation of trade secrets a federal crime. Offenses under the Economic Espionage Act could subject a natural person to criminal fines of up to $500,000 or up to ten years imprisonment. Corporations may be fined up to $5 million.

Is Trade Secret Protection for You?

Generally, companies rely on trade secret law because of the shortcomings of other areas of law. One reason to rely on trade secret protection is that trade secrets may potentially last forever, whereas patent and copyright protection expire at the end of a particular term. Moreover, patent law prevents others from using your idea, but some things, such as recipes (e.g., Coca-Cola® formula), customer lists and marketing material are not patentable. Trade secrets also do not need to meet the novelty and unobviousness requirements for patentability. Thus, protecting information or technology as a trade secret may be desirable if patent protection is not available.

Despite the positive attributes of trade secret protection, trade secret laws can have disadvantages. There is no trade secret protection if the secret is discovered by fair means. Trade secrets do not protect against independent creation or reverse engineering. Others may figure out your secret by reverse engineering (disassembling or breaking down something to identify what it is made of or how it works) which will destroy the trade secret. Before deciding whether your idea, invention or information should be treated as a trade secret or patented, you should evaluate the potential for patentability, as well as degree of difficulty, time and expense of reverse engineering.

Companies should do everything they can to ensure that their trade secrets are protected and not disclosed to the public. If access to the trade secret is not strictly controlled and a competitor gains access to it, the competitor may successfully argue that the information is in the public domain and free to be used by anyone.

Even Sausage Can Be A Valuable Trade Secret

Pizza Hut was recently ordered to pay $10.9 million to a company (C&F Packing) for misappropriation of trade secrets which involved a process for making and freezing precooked sausage for pizza toppings. The Court found that the plaintiff, C&F Packing, had kept the process confidential and supplied sufficient evidence that its process was a trade secret, including evidence of written secrecy agreements with suppliers and employees. C&F Packing Co. v. IBP, Inc., 55 USPQ2d 1865 (CAFL)

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