Your Business Trade Secrets Are Mission-Critical Assets - Protect Them!
Posted: December 17, 2020 | News
KFC’s original recipe. The Google search algorithm. Listerine’s secret formula. McDonald’s Big Mac Special Secret Sauce. The recipe for Coca-Cola. WED-40 formula and any business’ customer list. What do all these have in common? They are all legally protectable as “trade secrets.”
“Trade secret” also called intellectual property or proprietary information, is the term used for any non-public method, formula, device, process, or any information that gives a business a unique competitive advantage over its competition. Anything that gives you an advantage against a competitor is highly valuable and worth protecting. Trade secrets come in an endless array of types, for example:
- R&D information
- Software algorithms
Trade secrets can be enormously valuable to a business and can drive its success. Like many companies, small and medium-sized businesses have trade secrets worth protecting—think software source code, customer and vendor information, the special needs and desires of your customers, chemical formulations, manufacturing techniques, and knowhow derived from years of operations.
What Is a Trade Secret?
Trade secrets are among the four types of intellectual property and include patents, trademarks, and copyrights and they are unique because they cannot be registered with the government for protection. Patents must be registered in order to be enforced, while trademarks and copyrights can be registered if the owner so chooses, in order to make enforcement more effective and easier.
The informality surrounding trade secrets can both a blessing and a curse. Specifically, the advantage of a trade secret over a patent is that the former can be maintained indefinitely and does not need to be disclosed (e.g. Coca Cola decided to protect its formula by trade secret law rather than patent, since the latter would require disclosure), whereas a party's exclusive rights granted by a patent are statutorily limited. The disadvantage is that if a party independently discovers the "secret" or reverse engineers it, or the business fails to safeguard the secret ad it leaks out, the business's rights in a trade secret can essentially end and courts may not enforce them.
There are three basic elements that must be met in order for something to qualify as a trade secret:
- The information cannot be generally known by either the public or others in the industry.
If even just one individual outside of the company has knowledge of the relevant information, then the information may not qualify as a trade secret. However, even if distinct pieces of information are all known to others, if a company combines them in a novel way, and that combination is not known, it can qualify as a trade secret.
- The company claiming the trade secret must derive economic value from the information.
Said differently, the information must be valuable to its owner specifically, due to the fact that it cannot be put to use by others. Generally, if another company would need to spend its own resources, either time or money, to acquire or develop that information, then this element will be satisfied.
- The owner of the trade secret must have made reasonable efforts to maintain its secrecy.
If an owner merely hopes or wants something to be kept secret, this element will not be met. Instead, owners must engage in tangible and proactive efforts to keep the information secret.
Examples of measures that courts will look favorably upon would be limiting who at the company has access to the secret information, requiring those who do know of it to sign confidentiality agreements, asking clients who receive trade secret data or information to sign a confidentiality agreement to hold the information in confidence, and protecting the information by keeping it physically protected, such as in a safe or with digital encryption. It is also possible to share trade secrets outside the business, but only so far as necessary to carry out the business and under strict confidentiality agreements and other limitations on the use of the trade secrets.
An example of how a trade secret can be lost arose during a litigation that the author of this blog was involved at one time. Our client was developing a uniquely shaped and designed doghouse. A competitor sued our client for trade secret misappropriation and misuse, claiming it was first to market and our client misappropriated a trade secret. In a deposition in a small shop in Toledo, Ohio, however, we elicited testimony from a third-party witness that the competitor’s design was sitting out in a room just off the entrance and was visible to anyone who walked in the shop. The federal judge in Los Angeles ruled that the competitor had failed to take reasonable steps to maintain the secrecy of the design, and the design therefore did not qualify as a trade secret. The judge dismissed the case.
What Can Be Done to Protect a Trade Secret?
The best way to protect a trade secret is the most obvious way—to keep it secret. The measures listed above under the third element provide a good starting place for what a business owner can do to keep a trade secret away from prying eyes.
If, however, another party does discover and starts using a trade secret, the owner can commence litigation to protect it. There is no governmental body that is on the lookout for trade secret violations, so each company must be on the watch for other companies that start using the trade secret. In order to prevail in a claim against another party, it will be necessary to prove that party stole the trade secret. If the other party independently discovers or reverse engineers the "secret," it will not violate the rights of the earlier adopter.
To increase the chances of prevailing in litigation, management should do its best to clearly, yet securely, document all trade secrets in writing. This can show the judge that the business was indeed the originator of the secret information and did not steal it. Going into litigation with documentation of the economic value of the trade secret and documentation of attempts to keep it secret, will increase the likelihood a judge will find in the company’s favor, rather than after-the-fact attempts to demonstrate those same elements.
While trade secrets are a less "formal" type of intellectual property, they can be an essential part of the value of a company and worth taking steps to preserve.
If you are unsure if your company has a trade secret or want to know more about what you can do to protect it, we recommend you consult with us as the attorneys at North & Nash LLP. Our skilled attorneys have a depth of experience in trade secret protection and litigation and we are able to often avoid costly litigation.
Author: Partners at North & Nash LLP