Your Trade Secrets- Are You Protected?

November 18, 2014

Its Simple- Trade Secrets Are Only Protected Because They Are A Secret 

We live in a competitive world. The extent to which a company is able to protect its trade secrets is an important factor in its overall ability to survive and prosper. In the employment context, complicated legal issues arise when a departing employee is in a position to use and/or disclose confidential information to a competitor.  Remember, a trade secret is only a trade secret because it is a secret!  Once published to the outside world it is hard to claim it is intellectual property anymore as it is no longer a secret.

 An important step in the Legal Risk Management Process (LRM) is to implement processes and procedures to protect trade secrets and confidential information, especially from misappropriation by former employees who move over to competitors.  This is one of the most serious issues involving a company’s IP.  Are you protected?

So- what is a trade secret anyway? 

Understanding What Constitutes a Trade Secret 

Prior to 1979, few states in the U.S. had trade secret statutes, and actions for theft of trade secrets were generally governed by the 1939 edition of the Restatement of Torts. The Restatement defined a trade secret as: 

Any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving material, a pattern for a machine or other device, or a list of customers. See Restatement of Torts section 757 (1939).  

The National Conference of Commissioners on Uniform State Laws approved the Uniform Trade Secrets Act ("UTSA") in 1979. Since then 41 states (including California) and the District of Columbia have adopted the UTSA in some form. Texas and New Jersey have not adopted the UTSA. Under the UTSA, a trade secret is somewhat broader than the definition under the Restatement: 

"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, and not being 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." 

Under the common law of the U.S. and other countries courts generally look at six factors for determining whether information is a trade secret. Those factors are: 

1. The extent to which the information in question is known outside the business;

2. The extent to which the information is known by employees and others involved in the business;

3. The extent of the measures to safeguard the secrecy of the information;

4. The value of the information to the competitor;

5. The amount of effort or expense required to develop or compile the information; and

6. The ease of difficulty with which the information could be properly acquired or duplicated by others. 

The determination of whether information constitutes a trade secret is extremely fact specific, and the courts have reached opposite conclusions on the same types of information depending on the facts presented. Two principal factors create the difference between cases that recognize information as a trade secret and cases that do not. First, courts determine whether the information is truly secret, i.e. not in the public domain or easily accessed. Second, courts determine whether the employer has taken reasonable steps to protect the secrecy of the information. 

 Reasonable Steps a Company Can Take to Protect Its Trade Secrets 

Steps include:  

I.  Physical Security Precautions 

Failure to maintain appropriate physical security may doom a trade secrets claim. Companies should restrict access to its premises generally, and in particular, where trade secrets are located. Security services should enable the company to maintan the physical security of trade secrets- that may be important to show that a disloyal employee entered or left a facility during unusual times. Smaller scale physical security within departments is equally as important. Employees should be required to place confidential information in secured areas such as drawer, locked file cabinets. A security audit should be performed to determine its vulnerability to trade secret theft. 

II. Communicating Confidentiality 

A company or organization should communicate with employees regarding its policies on confidentiality. Confidentiality policies should be included in employee handbooks and employees should receive periodic reminders regarding the confidentiality policy and any contractual obligations regarding confidentiality.

Document control is another essential means to communicate confidentiality. Document controls can be put in place that are simple and routine. Confidential documents may be marked "Confidential" or "Property of XXX." Automated headers and footers will increase the likelihood that the employees will follow the procedure. Upon termination of employment, exit interviews should be conducted to remind the employee of their obligations regarding confidentiality. An effective exit interview should normally include the employee's supervisor and a human resources representative to serve as a witness. An effective exit interview also requires preparation. For example, the employee may be reluctant to provide information regarding his new position of employment. By checking with co-workers and doing some investigation beforehand, the employer may be able to gather important information for the exit. 

Remember, in today’s competitive world, it is quite common to have employee turnover.  One of the most serious aspects of employee turnover is the misappropriation of trade secrets. Companies must be very diligent in protecting trade secrets ( IP is the life blood of most companies) and other IP from theft and infringement.    

So- have you done a risk management audit on your IP and employee related processes? Are you protected from trade secret misappropriation by former employees?  If not, now is the time to take action! 


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