It's Monday Morning. Do You Know Where Your Trade Secrets Are?

Published as "When It’s None of Their Business," Legal Times, June 20, 2005

The information age has made it even more important for businesses to protect their confidential data from misappropriation by competitors, former employees, or others who want to benefit from a company's most valuable asset, its intellectual capital. Many companies do not realize that a wide array of business information may, in fact, be protected under trade secret law.

Trade secret law provides broader legal protection of confidential business information than most might imagine. We all know that inventions, including machines, processes, and methods may be protected under our federal system of patent law. However, most vital information used in today's businesses does not meet the criteria for patent protection. Owners of such information may choose not to patent some information, since that involves disclosure of the information in return for a limited monopoly. Trade secrets, however, can last forever if they are adequately protected.

The Uniform Trade Secrets Act of 1990 (UTSA) is the primary source of legal protection afforded trade secret owners. Today, 42 states and the District of Columbia have adopted some version of UTSA.

What may be protected as a trade secret? A trade secret can be almost any information used in the operation of a business, which is both sufficiently valuable and secret enough to allow a business a competitive advantage. There is no need for invention or novelty, which are among the requirements for patent protection.

The courts have considered a number of nonexclusive factors when determining whether or not trade secret protection is available. These include whether the trade secret:

  • is known only by its owner;
  • is adequately guarded from disclosure by its owner;
  • gives its owner a competitive advantage over others;
  • was expensive and difficult to develop; and
  • is difficult to recreate or be acquired by others.

The Trade Show Rule

A good rule of thumb is this: Is it the type of information you would not divulge at a trade show? Would your competitors actually pay to use such information? Then it is likely a trade secret.

Examples of things courts have held to be protected under trade secret law include: bidding systems and data, business forms, clustering technology, computer programs, customer lists, design manuals and drawings, design specifications, financial information, food recipes, formulas, manufacturing plans, pricing information, product sketches, software development tools, and testing data.

Trade Secret Misappropriation, Available Remedies, and Avoiding Misappropriation

Misappropriation occurs when trade secret information is obtained through breach of a confidential relationship or by other improper means, and such information is used, causing the trade secret owner to sustain damages. Where actual or threatened misappropriation occurs, a number of remedies may be available: various injunctions, court orders to return or destroy information, or damage awards. Some states, and the federal government, also provide criminal sanctions for trade secret misappropriation.

Swift action by obtaining injunctive relief often minimizes any damages to the trade secret owner. However, where they can be proven, compensatory damages are available, such as lost profits, loss of value of the information where disclosure occurs, lost research and development costs, and in some states, a reasonable royalty. UTSA provides that damages may include both actual losses, and the defendant's unjust enrichment, as long as they do not overlap. Where intentional conduct can be proved, exemplary damages may be recoverable as well. Although attorneys' fees are generally not available in pure trade secret cases (but may be available if other causes of action apply, such as breach of contract), UTSA gives courts discretion to award attorneys' fees if the defendant's misappropriation is willful and malicious.

Reasonable Steps

It isn't necessary to take unreasonably expensive steps to maintain trade secrets. A trade secret owner must take only "reasonable" steps to ensure the secrecy of information. Courts have held the following measures "reasonable" under some circumstances to maintain the confidentiality of trade secrets:

  1. Advising employees of the confidentiality of the trade secret information.
  2. Limiting access to business information to a "need to know" basis.
  3. Controlling access to physical facilities where trade secret information is located.
  4. Obtaining non-disclosure agreements from third parties before allowing them access to such confidential information.

Come up With a Plan

Developing and implementing a plan to protect your confidential business information is essential. Here are a few steps you can take:

Conduct employee background checks. Implement procedures to thoroughly check prospective employees' and third parties' work background, references, and previous civil/criminal actions.

Execute written agreements. Require employees, third parties, and others who may have access to proprietary information to sign the appropriate confidentiality agreements, non-disclosure agreements, and/or non-compete agreements.

Educate your work force. Educate employees on the confidential nature of company information, their duties to guard against disclosure, and the consequences they face if they fail to do so. Give employees frequent written and verbal reminders regarding the importance of protecting confidential information.

Institute an information control policy. Develop information control policies to ensure that confidential information is restricted to a "need to know" basis. Prohibit the discussion of confidential information using non-secure devices, such as cell phones, or in non-secure locations such as public places (e.g. elevators, restaurants etc.), and implement policies to notify employees that their internet, e-mail, phone, and use of other communication devices may be monitored.

Secure your virtual and physical facilities. Implement adequate security measures to protect your physical and virtual facilities from breaches.

Audit your trade secret portfolio. Identify and inventory your intellectual capital by conducting systematic audits of your trade secret portfolio. Such audits should be part of your company's broader intellectual property audit.

Conduct exit interviews. Interview all departing employees to ensure that all confidential information remains with the employer and to address any concerns that the departing employee may have about compromises in security. The exit interview provides a good opportunity to reiterate the duty of confidentiality. Require departing employees to sign documents acknowledging their understanding of the company's trade secret policies, the existence of the company's trade secrets, their exposure to trade secrets, their return of any and all company information, their description of any items they are departing with, and an acknowledgement of their continuing duty - even after employment - to hold such information in confidence.

Nominate someone to take charge of managing the appropriate procedures and policies required to protect your trade secrets. Designate someone within your organization as the chief trade secret officer. This person is assigned to anticipate any attempted theft of valuable company information, prepare for the initiation of aggressive trade secret protection measures, and serves as the "go-to" person for reporting suspicious activity or concerns relating to trade secrets.

Blogger Leaks

A recent ongoing case in California, Apple Computer, Inc. v. Doe 1, 2005 WL 578641, addresses the conflict between a journalist's privilege not to reveal a source and a trade secret owner's right to discover who may be leaking its confidential information. Apple filed a complaint on December 13, 2004 alleging that unnamed bloggers leaked confidential information about unreleased Apple products to several websites. The information contained an exact copy of a detailed drawing of one product taken from confidential internal slides clearly labeled "Apple Need-to-Know Confidential." In addition, technical specifications were copied verbatim and posted on the websites.

In its attempts to discover the source of these leaks, Apple subpoenaed an e-mail service provider to obtain e-mail messages identifying the individuals providing the bloggers with Apple's information. The bloggers filed a motion for protection against Apple's subpoenas, claiming they are "journalists" entitled to keep their sources confidential.

In considering the bloggers' motion, the court accepted Apple's allegations about its trade secrets, and that the information divulged fell squarely under California's version of the UTSA and the Penal Code, concluding that it constituted stolen property. The court did not make a determination regarding whether the bloggers were journalists.

The court observed that Apple's subpoena called into question issues and competing values of great significance, namely, a conflict between the bloggers' claim to "free speech" (anonymous speech) under the First Amendment and Apple's undisputed right to protect its intellectual property. The court, in denying the bloggers' motion for a protective order, noted that the journalist's privilege is not absolute, that the United States and California Supreme Courts have emphasized that trade secret laws apply to everyone - regardless of status, title, or chosen profession. The bloggers in the Apple case have appealed the court's denial of the requested protective order.

Although we await the California appeal court's ruling, the Apple case demonstrates the need for vigilance in protecting trade secret information. Even though the proprietary information involved in the Apple case was marked "Apple Need-to-Know Confidential," someone (not revealed by the court, but likely an Apple insider) chose to ignore its confidential nature and posted it on the internet. This recent case underscores the importance of an effective and proactive trade secret protection program.

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