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Understanding and Protecting Trade Secrets

Part of becoming a successful business is developing unique methods and products. To gain a competitive edge in any industry, you need to utilize whatever makes you stand out from the rest of the crowd. In the age of the internet, where thousands of businesses in your industry are accessible with the click of a mouse, you must have something that separates you from the ordinary.

And just as important, you need to protect that which makes you extraordinary.

The government can help protect the various intellectual properties that make you unique. Registering a trademark can protect slogans and logos, things that make your branding singular. Copyrights protect artistic works. And patents guard against the stealing of inventions and ideas.

But there’s one form of intellectual-property protection that falls under the responsibility of the company to protect: trade secrets.

Trade secrets cannot be filed or registered with the government. Instead, enforcement of trade secret law only occurs after the holder of a trade secret feels their information was unlawfully attained. For this reason, understanding what constitutes a trade secret and coming up with methods to protect those secrets is vital.

Perhaps the most famous trade secret in the world is Coca-Cola’s secret formula, which was created in 1886 and has been held secret ever since. Other examples include KFC’s secret recipe and WD-40’s formula.

Because of the nebulous nature of trade secrets and their enforcement, understanding how they work can be a bit cloudy. So follow along as we try to uncover the truth about trade secrets.

What Is a Trade Secret?

A trade secret is information that offers economic value to a business in its secrecy. It can be any information that, by remaining clandestine, offers a business a competitive edge. Reasonable actions to maintain the secrecy of the information must be taken for it to be considered a trade secret.

Prior to the 1985 enactment of the Uniform Trade Secrets Act, trade secret law varied greatly from state to state. The Uniform Trade Secrets Act was drafted to standardize trade secret regulation. Although trade secrets are still regulated at the state level, the UTSA became a template of sorts that states can modify and enact according to their preferences. As of this year, 47 states have enacted the UTSA, the exceptions being New York, North Carolina and Maryland.

The UTSA sought to codify trade secrets. It requires each of the following four elements to be present for trade secret classification:

  • It consists of information: In the case of trade secrets, information is given a broad definition. It can be a design, a pattern, a process, a formula, a technique, a code or a program. It may also be financial and operational information, marketing plans or even a customer list.
  • It must derive economic value from its secrecy: The secrecy of the information must benefit the holder and, as a result, hold economic value.
  • It must not be known by the public or the rest of the industry: Public or industry disclosure nullifies any advantage given to the holder of a trade secret.
  • It must be treated as a secret and be subject to reasonable efforts in maintaining its secrecy: A holder that fails to protect its trade secret and loses it to a competitor through lawful means relinquishes trade secret rights.

Differences Between Trade Secrets and Patents

Both trade secrets and patents protect intellectual property; trade secret and patent regulations both seek to prevent competitors from profiting from a stolen idea. There are, however, major differences between the two.

To acquire a patent, filing an application with accompanying documentation of the innovation is required. With a patent, a temporary monopoly (for no more than 20 years) on intellectual property is granted. In exchange for this monopoly, disclosure on the creation and use of the innovation must be made, and upon the issuance of a patent, the methods of invention are made public knowledge.

Patents typically cost hundreds of dollars to acquire and thousands to maintain. The process of obtaining a patent is tedious and can sometimes take years.

Trade secrets, however, require no filing or disclosure with the government. Trade secret validity is only determined after the claimant feels it was misappropriated. It requires no forms and no waiting period; the trade secret is in-effect as soon as it is developed.

Whereas patents are costly in their application and maintenance, trade secrets are costly in their development and in the means taken to protect the secret. Patent protection is enforced by the government, but trade secret protection is only enforced by the holder of the information.

Unlike patents, if a trade secret is disclosed and made public knowledge, that disclosure would render the secret useless and of little economic value.

Trade secrets can also last indefinitely. While patent protection only lasts for 20 years at most, trade secrets are valid until the information is made public. Once made common knowledge, the secret is lost, becomes valueless and is no longer protected under the UTSA.

Unlike patents, multiple parties may each hold rights to the same trade secret.

Protecting a Trade Secret

By definition, a business must protect its own trade secret. It must use reasonable measures to protect its secrecy in order to maintain a valid trade secret claim. If the business is unable to maintain their information and loses it, the trade secret relinquishes its value, nullifying the claim.

The following are some steps you can take to ensure the protection of your trade secret:

  • Require employees, contractors, vendors and other personnel to sign non-disclosure agreements at the beginning of any relationship.
  • Place confidentiality provisions in form contracts, offer letters and other documents.
  • Require employees to sign non-compete and non-solicitation agreements.
  • Create guidelines regulating what is regarded as confidential and how the information should be treated.
  • Place warning labels on confidential documents.
  • Use locks to restrict access to physical files.
  • Require ID badges for employees.
  • Regulate and tighten procedures for visitors.
  • Require passwords and limit access to computers and networks.
  • Disable departing employees’ access to company voicemail, email and computer networks.

Obtaining a Trade Secret

While patents are protected from competition for up to 20 years, competitors of a trade secret holder are free to obtain and market a trade secret if acquired through legal means.

“Legal means” fall under the following categories:

  • Independent discovery: Unlike patents, trade secrets are not protected against independent discovery. If a competitor independently develops the same information as a held trade secret, that competitor is free to use the information at will. If the same competitor decides to disclose the information, the value of the secret is lost, as is the validity of a claimed trade secret.
  • Reverse engineering: Deducing design techniques and specs by working backwards from a finished product is another legal way to attain a trade secret. Patents protect against reverse engineering, whereas trade secrets do not. This is why patents are favored over trade secrets for certain innovations; for example, a mechanical device can easily be taken apart and reverse engineered.
  • Licensing agreements: Both patents and trade secrets can be subject to licensing agreements. If a patent or trade secret holder wants to license their innovation to a competitor for profit, they are free to do so. Agreements typically include the term and renewal provisions for the license, which then exempts the licensee from infringement claims.
  • Inadvertent disclosure: Failure to maintain the secrecy of information is grounds for loss of a trade secret. Since the UTSA defines a trade secret as information that utilizes “reasonable” means to preserve is secrecy, those that fail to meet this criterion are not considered a holder of a trade secret. The loss of information through negligence (or any act not deemed illegal) allows the secret to become common knowledge.

Acquiring a trade secret through other means is unlawful. Trade secret misappropriation is the use of a trade secret obtained through improper means. “Improper means” include theft, bribery, misrepresentation, breach of confidence and espionage. Misappropriations fall under one of the following categories, which are nearly identical to each other:

  • Wrongful acquisition: Knowingly acquiring a trade secret by improper means.
  • Wrongful use: The use of a competitor’s trade secret without the consent of the holder is unlawful if the secret was obtained through improper means or unlawful disclosure.
  • Wrongful disclosure: Similar to wrongful use, wrongful disclosure is the use of a secret gained through unlawful or incidental disclosure.

Misappropriation can be either deliberate or unintentional. The UTSA doesn’t require intent to prove liability. Thus, it’s important to be aware of where information comes from and how it was acquired to protect yourself from infringement claims.

Remedies for Misappropriation

If a trade secret is obtained through improper means, causing losses for the claimant due to information disclosure, the UTSA can impose civil remedies to rectify the loss. These remedies include:

  • Granting an injunction preventing the actual or threatened use of the trade secret.
  • Ordering compensatory damages paid for actual loss caused by the misappropriation.
  • Ordering compensatory damages paid for the unjust enrichment of the defendant. In other words, the defendant is ordered to pay restitution on the gains achieved through misappropriation.
  • Ordering the payment of royalties if neither damages nor unjust enrichment is provable.
  • Awarding punitive damages (not exceeding twice the compensatory damages) if the misappropriation is deemed willful and malicious.
  • Awarding the recovery of attorney’s fees for bad-faith tactics in trade secret litigation.

Criminal penalties can also be imposed in some cases of trade secret misappropriation.

Since trade secrets are regulated at the state level, these remedies vary, but some federal legislation can be used in misappropriation prosecution. While most of the federal laws applying to trade secret misappropriation are those regulating fraud, the Economic Espionage Act provides a means through which federal law can be used to prosecute trade secret infringement.

The Economic Espionage Act criminalizes misappropriations of trade secrets with the knowledge or intent that the secret will benefit a foreign power. Punishment is a fine of up to $250,000 and/or imprisonment of up to 10 years for individuals and fines of up to $5 million for organizations and businesses.

Conclusion

Keep in mind that this article is a general overview of trade secrets. Since trade secrets are regulated by states, better information on trade secret law can be found by researching your respective state’s civil code. While the UTSA provides a standardized code for trade secrets and their protection, due diligence in regards to local laws is the best way to ensure that your secrets are safe and that you’re avoiding infringement.

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