An Overview of Trade Secret Protection
Can you keep a secret?
That’s the challenge for intellectual property owners who rely on trade secret protection to secure their sensitive business assets. Unlike patents, most copyrighted works, and trademarks – which must be publicly disclosed in order to seek recourse from competitors who want to steal them – trade secrets have legal value only to the extent that they stay secret.
File a patent on a new chemical or drug, and you can enjoy exclusive legal rights for about 20 years (often less in practical market terms). As long as you keep trade secrets away from prying eyes, however, they last forever. The trade-off? Once they’re out, they’re gone. A no-longer-secret trade secret enjoys essentially no legal protection under trade secret laws.
Just about anything can qualify as a trade secret – formulae, computer programs, business methods, database information, customer lists – basically, any knowledge that has economic value because people such as competitors don’t know about it and could profit from it if they did. It doesn’t necessarily have to be new, different, or unique, as you would expect from patented material and/or even fixed in a tangible form, as with copyrighted works. As long as the information has value because no one else knows about it – and you take reasonable efforts to avoid disclosure – it can qualify as a trade secret.
Pros and Cons
Not surprisingly, there are advantages and disadvantages to using trade secret protection to secure different types of business assets. Deciding whether to patent certain technology – or keep it under wraps as a trade secret – is often a tough strategic call. Usually, the decision rests on the type of information that needs to be protected.
Most intellectual property owners find the indefinite time limit of trade secret protection appealing, assuming that the information can be maintained in confidence and not easily replicated in the market. For example, say that the knowledge you wish to protect is a manufacturing process. If you patent the process, you get protection for about twenty years. Even though your competitors know exactly what you’re doing, they can’t copy your process. When your patent expires, however, it’s open season on that technology.
By contrast, if you rely on trade secret protection to secure your process, your protection lasts forever, as long as the process remains secret. However, if a competitor is able to replicate the process (without stealing your information), such as through reverse engineering, they’re free to do so at any time, and there is usually little or nothing you can do about it. So the question your business faces is: how vulnerable is your knowledge to being replicated or discovered by others? The answer will shape the kind of IP protection you’re likely to seek.
Unlike patents and copyrights that are governed by federal law, trade secret protection derives primarily from state law. The origins of trade secret doctrine date all the way back to a Massachusetts Supreme Judicial Court decision in 1868, and while numerous courts (including federal courts) have weighed in on specific aspects of trade secret law ever since, no federal civil legislation has ever tackled trade secrets directly. Instead, trade secret laws have been enacted on a state-by-state basis.
Minnesota was the first state to adopt the Uniform Trade Secret Act (UTSA) in 1980, and more than forty other states have since followed suit. The UTSA was adopted in the wake of an increasing reliance by businesses on trade secret protection and a desire to codify common law trade secret principles.
Distilled to its essence, under the UTSA and most state interpretations, the existence of a trade secret is established using a two-fold test. First, you must have knowledge or information that derives independent economic value from not being generally known or readily ascertainable. Second, you must have taken reasonable efforts to maintain the secrecy of the knowledge or information. In that circumstance, the UTSA provides protection by prohibiting the “misappropriation” of trade secrets and providing various remedies, including injunctive relief and damages.
“Misappropriation” covers both obtaining trade secrets through improper means and disclosing or using them without consent. The UTSA also casts a broad net to include not only actual misappropriation (where the theft or disclosure has actually occurred), but also “threatened” misappropriation (which some courts have held to include events such as a key employee bolting to a competitor and putting a trade secret at serious risk of disclosure).
What kinds of actions or circumstances create the greatest risk for trade secret owners? Consider the following:
One of your employees or independent contractors who has knowledge of your trade secrets leaves to join one of your competitors
One of your suppliers or distributors also works for a key competitor
One of your licensees, customers, business partners, or employees decides to start a competing business
You disclose your confidential information to a prospective business partner, and the deal falls through
This is not an exhaustive list, just a sample of the many ways in which day-to-day business dealings put your trade secrets at risk of misappropriation.
Protecting Your Trade Secrets
How do you take reasonable efforts to protect your trade secrets? Here are a few key steps:
Put it in writing. Consider keeping a written statement of your trade secret security policy. This provides two advantages. First, “unwritten rules” may wind up being laxly or inconsistently enforced within the organization. Second, documented trade secret policies provide evidence in court of the seriousness of the company’s efforts to protect its secrets.
Let your employees know. A proper trade secret protection plan should make employees aware of the confidentiality of certain information and, where appropriate, periodically remind them of their obligations to keep that information secure. This would include having employees counter-sign written confidentiality agreements. In addition, companies should consider conducting “exit interviews” with departing employees that include a written reminder of their ongoing responsibility to keep trade secret information secure.
Restrict access. “Sorry, that information is on a need-to-know basis.” Where appropriate, keep trade secret information physically separate from nonproprietary information, and restrict access only to those who genuinely require it. Depending on the nature of the intellectual property, this segregation may be as simple as keeping information in a separate filing cabinet, or it may necessitate building an entirely separate and secure facility.
Implement physical security. Consider providing additional security for the information through locked doors, gates, and cabinets. Again, the level of physical security will vary depending on the nature of the information and how the information is used in the business operations.
Consider labeling trade secret documentation. It can be very easy to reproduce, scan, and distribute documents today. Not only should documentation related to trade secret information be treated with special care, but in appropriate circumstances, it may be prudent to label trade secret documents as “SECRET” or “CONFIDENTIAL.” A company may also want to educate its employees who have access to such documents about their status, including the sensitivity of and destruction of trade secret documents.
Extend the security procedures to computer systems. Obviously, trade secrets stored in electronic format are particularly susceptible to theft. The entire subject of information systems security may warrant a thorough review by the organization, to minimize the possibility of external “hacking” or internal security breaches. The same care regarding access and labeling that is extended to physical space or documentation, should extend to computer systems where trade secrets are stored.
Be mindful of third parties. If business associates, prospective customers, or members of the public have access to facilities in which trade secrets are stored or used, take particular care to avoid inadvertent disclosure. This might include accidents (where documents are left carelessly in open view) or even deliberate but unintentional disclosures (such as tour guides or other employees who inform visitors about the project or process within the facility).
Screen speeches and publications where appropriate. Trade secrets often wind up being disclosed unintentionally at trade shows or in magazine articles, publications, press releases, or speeches. Engineers, marketing executives, mid-level managers, and others may exchange ideas with colleagues or share information publicly because they are unaware of its sensitivity. One tool for reducing this risk is implementing a policy of pre-screening all public communications.
Protect yourself with contracts. The nature of many businesses may require a company to disclose its trade secrets to potential buyers, licensees, joint venture partners, or other outsiders. When engaging in these kinds of third-party transactions, consider monitoring the flow of information carefully and documenting the nature of the trade secrets exposed and the specific limited use to which they may be put. This may include specific confidentiality agreements with the third parties.
When properly identified and secured, trade secrets can often be the most powerful of the various forms of intellectual property protection, given the indefinite lifespan they can offer. Trade secret owners can also obtain swift and dramatic relief in court if they act quickly and have taken care along the way to document and follow their trade secret protection plan. But trade secrets are, by their very nature, fragile. A secret only has value to the extent you can keep it a secret.
Randall E. Kahnke, RKahnke@faegre.com
Kerry L. Bundy, firstname.lastname@example.org
© 2006 Faegre & Benson LLP. All rights reserved.