Protecting Trade Secrets is Important to Your Business: How to Implement a Trade Secrets Program

A Bottom-Line Importance

Businesses of every size derive independent economic value and a competitive advantage from a diverse range of "secrets". A "Trade Secret" is broadly defined, and can include recipes, business plans and designs, as well as the results of reverse engineering of another's product. Even negative information can be protected as a trade secret, because it is often valuable to know what does not work to avoid wasting time and resources pursuing a dead end.

The law governing trade secrets in California is contained in California Civil Code Section 3426 et seq . The key for protection is for the owner of a trade secret to proactively maintain the secrecy of any information from which it actually or potentially derives independent economic value.

Protecting Your Secrets

By definition, a trade secret does not include information that is not "secret". This sounds simple enough, but in reality, management and employees may not be aware of, and may not even agree on, what exactly is "secret" information within the company. This situation then increases the possibility that there may be an inadvertent leak of valuable information in presentations, publications, at trade shows, on web sites, or simply while having lunch.

It is therefore incumbent upon every business to identify and classify its trade secrets, restrict access, and educate employees on the importance of adhering to guidelines in order to protect these precious assets. This may be a challenging process, as an over-inclusive program could overburden employees and stifle productivity and innovation, whereas an under-inclusive program could result in a loss of technology and lost economic value. Expert advice can provide invaluable assistance in achieving a balanced, efficient procedure for identifying and protecting trade secrets before accidental disclosure occurs.

Implementing a Protection Plan

The law mandates that a trade secret owner utilize "reasonable efforts" to protect a company's trade secrets. Generally, we suggest a policy tailored to meet the specific needs of a business that is enforced from the top down throughout the ranks of the organization. The plan typically includes the creation and implementation of barriers to complement a periodic audit and identification process. The human resources department can then integrate these protections within every aspect of the employee hiring, training, and exit process.

There are three major barriers that a company can erect to protect their trade secrets:

  1. Physical Barriers: Confidential information should be handled differently than everyday information. It is best to keep it segregated, under lock and key, and/or physically designated as "confidential". Special tactics for protecting electronic information might include read only files, passwords and firewall protection. The comprehensive range of critical information frequently stored en masse on laptop computers presents a unique challenge, especially if one is lost or stolen. We suggest that all company personnel be encouraged to take a "loaner" laptop when traveling, loaded only with the limited information essential for the specific trip.
  2. Disclosure Barriers: A "need to know" policy that limits the scope of the group of people that have access to the entire trade secret provides another type of trade secret protection. For example, a company can significantly reduce the risk of misappropriation if an employee that changes jobs had access to only one aspect of the critical data. Other methods of protecting valuable data include check-in and check-out procedures, document destruction policies, and a review of all publications and presentations to avoid inadvertent dissemination of relevant information.
  3. Contractual Barriers: Contractual barriers include nondisclosure agreements, agreements obligating employees to assign new inventions to the employer, and in some states outside of California, covenants not to compete. (California is a right-to-work state). Consultants and other third parties should explicitly be included in the process to protect a company's valuable intellectual property. Exit interviews with outgoing employees might also be used to reinforce your company's trade secret policies.

Misappropriation of a Trade Secret

Generally, a trade secret is misappropriated if it is acquired by improper means, whether or not it is thereafter disclosed or used. Information that is accidentally or mistakenly acquired might also be deemed misappropriated if there was a reason to know it was a trade secret prior to being used.

For example, a new employer might accidentally misappropriate trade secret information from a new employee, especially one hired from a direct competitor. It would be prudent for employers to take steps to mitigate this occurrence during the hiring process in order to avoid tainting their production process and minimize the risk of being sued.

Trade Secret Litigation

Like many other types of lawsuits, remedies for misappropriation of one's trade secret can include injunctive relief, money damages, punitive damages as well as attorney fees and costs of litigation. However, there are many unique and sometimes subtle intricacies of trade secret litigation that require a client to be well-informed and fully prepared before going forward in filing a lawsuit.

Commencing Litigation

We recommend that trade secret owners understand the risks and hazards of filing a trade secret lawsuit. In particular, in order to proceed with discovery, the plaintiff must first identify the trade secret with reasonable particularity. (NOTE: A protective order will limit the people that have access to the information, but will not prevent at least the opposing party's outside attorneys (and sometimes in-house attorneys) from learning the trade secret.)

The ultimate success in trade secret litigation is often contingent upon thorough preparation before a lawsuit is filed. Initially, it is prudent to carefully review your intellectual property portfolio to decide how narrowly or broadly to define the trade secrets, and analyze what impact the litigation may have on other IP. It is also wise to gather and review all available documentation, including proof of misappropriation, and to determine how you have been damaged before the suit is filed. We also recommend preparing witnesses for depositions, because once started, litigation can proceed very quickly. The plaintiff trade secret owner should also be prepared to post a bond, which is typically required to protect the defendant from lost sales if the plaintiff obtains a preliminary injunction pending the outcome of the trial , but the court subsequently retracts the injunction .

Defending a Lawsuit

The defendant charged with trade secret misappropriation and faced with a plaintiff's request for a preliminary injunction will typically request a very high bond at the outset, which not only protects itself but may also deter the plaintiff from proceeding with the injunction . Defendants will also want to force the plaintiff to clearly identify and define alleged trade secrets very early on. They need to analyze this information in order to be fully aware of the accusations, and to evaluate whether to challenge allegations that the information is "secret" and "of value". (This process would include research and analysis of current industry knowledge and practices.)

In deciding whether to fight the lawsuit, defendants also need to work closely with their attorneys to conduct a thorough investigation to determine whether, in fact, there was a misappropriation. If so, there needs to be an analysis to evaluate whether that secret information was in any way used by the defendant.

There are circumstances where trade secrets are accidentally misappropriated and inappropriately used in the research, development, or production process. Experienced counsel may help identify ways to mitigate the damage, such by isolating, placing on leave, or terminating offending employees; and by implementing clean room procedures to create "uninfected" products. There may also be affirmative defenses to assert, such as licenses/acquiescence, laches or Statute of Limitations.

Achieving Success

Trade secrets have a unique characteristic, in that they are constantly changing as a company grows and evolves. Data that is critical and highly confidential today may tomorrow become a routine element within the collective knowledge of the industry. A business that can thoroughly manipulate the window of opportunity presented by its trade secrets can gain a valuable competitive advantage in the marketplace.  

Side Bar: Distinguishing Trade Secrets from Patents and Copyrights

There is an interplay between trade secrets and patents that extends beyond the scope of this discussion. Essentially, issuance of a patent or publication of a patent application (in the U.S. or abroad) extinguishes trade secret protection, such that the information is no longer secret. Generally, trade secrets provide better protection on information that could easily be "designed around". On the other hand, patents afford better protection on data that can be easily "reverse engineered".

There is usually very little overlap between trade secrets and copyrights, since publication defeats a trade secret. The primary exception to this relates to registering a copyright for computer source code. In this area, the copyright office will allow the preservation of trade secrets.

Overall, it is best to obtain expert advice to decide whether to keep something as a trade secret or proceed with a patent or copyright process. There needs to be an informed analysis and assessment of the data as an integral component of an entire intellectual property portfolio.