A "trade secret" is broadly defined as any formula, pattern, device or compilation of information which is used in a business, unknown to others, and gives the business a competitive advantage.
The following types of business information are often "trade secrets":
- unpatented inventions and processes, unique products, future product designs/models and research projects;
- valuable, nonpublic company documents: drawings, blueprints, laboratory notebooks, test data and training manuals;
- marketing, purchasing, planning and customer information; and
- financial, accounting, recruiting and legal information.
Under U.S. law, trade secrets are protected by common law (unwritten judge-made law), state civil statutes and federal and state criminal statutes.
Trade secret protection differs significantly from patent protection. Patent protection is available only for certain types of unique inventions, processes and designs. Trade secret protection is available for all types of ideas and information, so long as they are secret and provide a competitive advantage. In addition, patent protection only lasts for a set period of time, which in the U.S. is generally 20 years after the date of filing an application, while trade secret protection may last indefinitely.
Patent holders may exclude anyone, even someone who independently develops the same idea from practicing the invention or using the design disclosed in their patent. The owner of a trade secret has no protection against persons who independently develop the same idea or invention.
1. Identify your company’s valuable trade secrets.
The first step in protecting your company’s trade secrets is to identify them. In determining whether information should be regarded as a trade secret, consider the following factors:
- Is the information known outside of your company?
- Is the information widely known by employees and others involved with your company? Have measures been taken to guard the secrecy of the information?
- What is the value of the information to your company? What is the potential value to your company’s competitors?
- How much effort and/or money was expended by your company to develop the information?
- How difficult would it be for others to acquire or duplicate the information?
After your company’s trade secrets have been identified, you can implement protection mechanisms that are appropriate to the nature and value of those secrets.
2. Develop a trade secret protection policy for your company and put it in writing.
To protect your company’s trade secrets, it is advisable to have a written Trade Secret Protection Policy. A written policy has several advantages. First, it tells employees how to identify and protect the company’s trade secrets. Second, it assists management in those situations where trade secrets must be revealed to outsiders. Third, it demonstrates your company’s commitment to trade secret protection, which can be important in litigation.
3. Educate your employees about your Trade Secret Protection Policy and monitor their compliance.
The goal of a Trade Secret Protection Policy is to make it difficult, or impossible, for your competitors to obtain access to your trade secrets. Your company’s employees can be a serious threat to that goal. Employees often reveal trade secrets inadvertently. In addition, unscrupulous employees may reveal trade secrets for personal gain, and terminated employees may reveal trade secrets for revenge. By educating your employees about the importance of trade secret protection, and the risks they run if they violate your secrecy procedures, you can minimize the likelihood that your trade secrets will be disclosed.
Trade secret protection should be discussed with employees before they are hired, periodically throughout their employment and upon leaving the company. At pre-employment interviews, new employees should be given a copy of the Trade Secret Protection Policy and the company’s commitment to trade secret protection should be explained. It should be made clear to all new employees that disclosure of trade secrets may result in termination of employment and/or legal action. Employees who will have access to valuable trade secrets should be required to sign confidentiality agreements obligating them to keep your company’s trade secrets confidential.
It is advisable to schedule periodic presentations to reinforce and update employees on the company’s trade secret protection goals and procedures. These meetings should be held at least once each year and attendance should be mandatory. You may want to solicit employees’ suggestions on how to improve the system. Employee involvement in the development and maintenance of the system may strengthen their commitment and vigilance.
Before an employee leaves your company (whether to retire, to take a job elsewhere or because he has been terminated), it is important to schedule an exit interview. At the interview, the employee should be reminded of his ethical and legal obligations to maintain the company’s trade secrets. If the employee previously signed a confidentiality agreement, it should be reviewed. In addition, it may be advisable to have the employee sign an acknowledgement of his continuing secrecy obligations. The employee should be asked to return all notes, papers and documents relating to the company.
4. Restrict trade secret access to employees with a legitimate, business-related, need to know.
The more people who know a secret, the harder it is to keep. To reduce the risk of trade secret disclosure, companies should limit the number of employees with access to sensitive information.
To do this, and still utilize a trade secret to its fullest advantage, disclosure should be limited to employees who require such information to perform their duties for the company. In addition, the amount and nature of trade secret information revealed to an employee should depend solely upon his "need to know." If an employee can perform his job effectively with limited information, he should be given only the amount of information needed.'
5. Mark documents containing your company’s trade secrets.
To be effective, a Trade Secret Protection Policy should include a uniform system for marking secret documents. Without such a system, your company may not be able to prove that a document was disclosed in confidence. All documents containing trade secrets should be clearly marked with a legend or notice stating:
- the name of the trade secret owner;
- that the document is confidential or contains trade secrets; and that disclosure is strictly prohibited.
For example, an appropriate legend might state:
WARNING: THIS DOCUMENT CONTAINS TRADE SECRET INFORMATION OF ______________. UNAUTHORIZED DISCLOSURE IS STRICTLY PROHIBITED AND MAY RESULT IN SERIOUS LEGAL CONSEQUENCES.
To ensure that the legend is reproduced accurately and consistently, it should be printed on stamps distributed to clerical personnel.
6. Physically isolate and protect your company’s most important trade secrets.
Your company’s most important trade secret documents should be stored in a separate, locked depository. Depending upon the number and bulk of the documents, an appropriate depository might be several rooms or a small safe or locked drawer. The purpose of such physical security measures is to restrict or eliminate access by third parties and unauthorized employees, prevent trade secret theft and provide a mechanism for tracking access to secret documents. Only a small number of specified individuals should have access to your company’s trade secret depository. It may be advisable to require two authorizations for access to critical documents. All persons reviewing or taking documents from the depository should be required to sign a log and indicate which documents were reviewed or taken.
The amount of time any money which should be devoted to physical security measures varies greatly between companies.
7. Maintain computer secrecy.
Trade secrets in computer files are just as important as those contained in written documents. Therefore it is essential to control access to all computer files containing trade secrets.
At a minimum, access to computer files containing trade secrets should be restricted to authorized employees. This is typically accomplished by giving each employee a password and only permitting certain passwords access to restricted files. In addition, computer tapes, discs and other storage media should be physically isolated and locked up in the same manner as confidential documents. Under certain circumstances it may be advisable to restrict access to computer terminals and other hardware.
It is also advisable for computer files to contain a legend preceding and following sensitive information. For example, once access to a secret file is obtained, the computer user might see the following legend:
THIS DOCUMENT (OR DATA) CONTAINS TRADE SECRET INFORMATION OF ______________ AND MAY ONLY BE VIEWED BY AUTHORIZED PERSONS. UNAUTHORIZED VIEWING OR DISCLOSURE IS STRICTLY PROHIBITED AND MAY RESULT IN SERIOUS LEGAL CONSEQUENCES.
Such a legend probably will not deter intentional misconduct, but may prevent accidental or inadvertent disclosure.
Various types of computer secrecy mechanisms are available and must be tailored to your company’s computer hardware and software.
8. Restrict public access to your facilities.
Not all trade secrets are embodied in documents. Some are visible to anyone walking through a company’s plant. The type of machinery used, the way in which a manufacturing line is arranged, the physical handling of work in process and finished products – all of these may qualify as trade secrets and may be revealed to visitors to your company’s facilities. Similarly, trade secrets may be readily available to anyone walking through your company’s offices – through overheard conversations, documents left in plain view and unattended waste baskets. To avoid disclosure of trade secrets in these situations, it is essential to control access to your facilities.
It is advisable to require all visitors to sign in with a receptionist or guard when entering company facilities. In addition, all visitors should be required to wear a visitors’ pass at all times. Visitors to sensitive areas should be accompanied by a company representative and should be warned that everything they see and hear must be held in confidence. Under certain circumstances, it may be prudent to require visitors to sign a confidentiality agreement or acknowledgement.
9. Deal cautiously with third parties – use confidentiality agreements.
Often, companies must share their trade secrets to exploit them fully. Information may be most valuable when it is licensed to others or forms the basis for a joint venture or similar cooperative arrangement. Moreover, consultants, financial advisers, computer programmers and other independent professionals often cannot best advise you unless they understand your business including some of your trade secrets. However, before revealing trade secrets to outsiders, it is essential to consider carefully how, and to whom, trade secret information will be revealed.
- Know the (intended) recipient. Before sharing trade secret information with outsiders, try to determine whether they can be trusted. Do they have a reputation for honesty? Do they appear to be careful with their own information?
- Disclose the least amount of information necessary. Like employees, outsiders should be given access to the least amount of information necessary to achieve your company’s objectives.
- Mark all confidential documents given to outsiders. The trade secrets legends discussed above are particularly important when exchanging documents with outsiders.
- Require signed confidentiality agreements from all outsiders before giving them access to company trade secrets. The importance of this point cannot be overemphasized. Whether your relationship with the outsider is new or established, or is expected to last for a long or short period of time, it is essential to obtain a written confidentiality agreement. Without such an agreement, it may be difficult or impossible to protect shared information.
- Before entering into a joint venture or similar arrangement, the parties should negotiate and sign a detailed agreement addressing ownership and protection of confidential information. Joint ventures typically involve two types of confidential information – information contributed by the venturers and information developed as a result of the venture. The joint venture agreement should address ownership and protection of each type of information, both during and after the joint venture.
To maintain the secrecy of your company’s trade secrets, you must be able to prove that (i) prior disclosures have been necessary for business reasons and (ii) reasonable control has been exercised over the recipients’ use of the information. Confidentiality agreements are the best forms of proof of these elements.
10. Be careful and consistent with unsolicited submissions.
Companies often receive unsolicited suggestions, inventions, ideas and similar items from others. To avoid claims that unsolicited information was stolen or that a confidentiality obligation was breached, your company should formulate procedures to handle unsolicited disclosures. The procedures may include:
- notifying (in writing) all persons submitting unsolicited disclosures that your company will not enter into a confidential relationship with the submitter;
- requesting a submitter to sign an acknowledgement that your company is not obligated to use the information and owes no duty of confidentiality; and alerting your company’s legal department or counsel if an unsolicited submission relates to ideas or inventions that the company is presently developing.
Article courtesy of McGuire, Woods, Battle & Boothe LLP.