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Trade Secrets: Protection Best Practices

Posted in Trade Secrets

By R. Todd Wilson

All businesses have trade secrets. Stated slightly differently, every business has information that it would rather keep confidential. A trade secret can be any useful information that is not generally known. Trade secrets encompass both technical information such as formulas, designs, tools, manufacturing processes, and computer source code as well as business secrets including customer lists, employee lists, financial and accounting data, product plans and marketing plans. Such “confidential” or “proprietary” information is usually essential to the success of the business. Often, however, companies do little or nothing to protect that knowledge.

A trade secret is a confidential practice, method, process, design, or other information used by a company to compete with other businesses. Even failed research and development efforts, so called “negative knowledge,” is a trade secret. In either case, trade secrets cannot cover information that is generally known to professionals in the field or generalized know-how. If others had access to the same knowledge, a company’s ability to succeed, or even to survive, would be significantly impaired. Therefore, trade secrets should be carefully guarded.

As with other forms of intellectual property, trade secrets can be valuable to a company’s growth and competitive advantage. In fact, because technology changes so rapidly, trade secret protection is in some cases the most readily available intellectual property right for many businesses. Additionally, trade secrets can have more immediate economic benefits in that the right to use a trade secret can be licensed or sold. However, in order to be effective, the trade secret owner must take the appropriate steps to protect against misappropriation of trade secrets by its competitors.

Today’s business environment operates at a quickening pace and the workforce is mobile. In many cases, today’s employees and customers turn out to be tomorrow’s competitors. As a result, a trade secret owner must take steps to protect its rights in such secrets against potential misappropriation not only by competitors but also by employees and customers.

The protection of trade secrets is considerably different than that of other forms of intellectual property. Whereas copyrights, patents and trademarks require registration with the appropriate U.S. and international agencies, trade secret protection requires no registration. In fact, there is no agency in the world with which to register a trade secret. A trade secrets remains viable only through the owner’s ability to keep it secret.

Another difference is that, unlike some forms of intellectual property protection requiring registration for protection, there is no expiration date on trade secret protection. So long as a trade secret remains a secret, the law of protection of proprietary information effectively allows for a perpetual monopoly as to that information. Consider, for example, famous cases of long-term trade secret protection such as the formula for Coca-Cola and the eleven herbs and spices in the recipe for Kentucky Fried Chicken which have been protected for many decades.

A significant downside to trade secret protection as compared to other forms of intellectual property protection is that it is relatively easy to lose. A trade secret may be reverse engineered by a competitor such that the secret is learned by working with the end product to figure out its design or the process by which it is made. So long as this is done without violating some other right such as patent, copyright, trademark or contractual protection, reverse engineering can be done legally. In this respect, trade secret provides no minimum protection period as compared to those intellectual property protections which require registration.

Additionally, once proprietary information is disclosed, there is no trade secret protection. Therefore, if a trade secret is disclosed wrongfully, although the owner of the trade secret may be able to take action against the discloser for infringing its intellectual property rights, the trade secret status is lost.

A further drawback is that, unlike the coordinated international protection available to patent holders, trade secret laws internationally are not as developed as in the United States. Some foreign countries fail to provide effective remedies against trade secret misappropriation or wrongful disclosure.

Not all information used by a business or enterprise, however, qualifies as a trade secret. There are three requirements in order to qualify as a trade secret. The information must (1) be valuable, (2) be secret and (3) give some economic advantage over competitors. There are some well-established factors used by courts to determine whether trade secret protection should be afforded to specific information used by a business. These factors include:

-the extent to which the information is known o the relevant portion of the public;
-the extent of measures taken by the owner of the information to reasonably protect the secrecy of the information;
-the value of the information, where the benefit is specifically derived from its not being generally known, to the owner and competitors;
-the amount of effort or money expended by the owner to develop the information; and
-the difficulty of properly acquiring or duplicating the information by others.

Most states have adopted some form of the Uniform Trade Secrets Act, which defines and protects trade secrets. The act is fairly broad and protects almost any information that gives a business a competitive edge. However, the trade secret owner is expected to take reasonable efforts to secure the information’s secrecy.

In order to demonstrate that a businesses information qualifies as a trade secret and that reasonable efforts have been taken to ensure secrecy, the following tips are offered:

Conduct a trade secret audit – Identify each piece of information that requires protection. Create a system of capturing newly created information that requires secrecy. However, do not be over inclusive in the information included as trade secrets because this might trivialize the entirely of the trade secret portfolio.

Keep records – Maintaining a record of the time and investment involved in developing trade secrets helps to demonstrate the value of maintaining the secrecy of the information.

Label documents – Label as confidential any documents that contain or reflect trade secret information. Limit the circulation of such documents. All information in any computer or electronic format should contain a warning about the secret nature of the information and that the wrongful disclosure or misuse of the information will subject the user to legal penalties. Require non-disclosure agreements when any document with confidential information is shared outside the company.

Limit access – Ensure that only employees who need trade secret or proprietary information have access to that information. Secure computers and other depositories of sensitive information. Require passwords for access to such information. Limit public access to the company and require that visitors be escorted when on company property and sign non-disclosure agreements as necessary.

Write good contracts – In contracts with outside vendors, customers and other entities, ensure that strict confidentiality provisions protect any trade secret information disclosed as part of the relationship.

Train employees – Educate the work force beginning with an orientation program that explains the importance of keeping proprietary information secret and the value to the company. Ensure that all employees who will be working with trade secrets receive training and sign a non-disclosure agreement.

Hold exit interviews – For employees leaving the company, require them to return any trade secret materials and remind them of non-disclosure agreements.

Use caution internationally – While the world community is coming to recognize the importance of all forms of intellectual property, including trade secrets, few foreign countries provide effective remedies against trade secret misappropriation. Accordingly, self-help measures are the most effective means of protecting trade secrets abroad. Most importantly, be very careful to whom trade secret information is disclosed. Use different vendors to manufacture different parts of a product, if possible. Exercise caution in connection with foreign travel by employees with trade secret information and guard against loss or theft of papers and laptop computers.