A trade secret can be a business’s most valuable intellectual property. It might be a secret recipe for a company’s signature product. Or it might be a key piece of code that helps a business differentiate itself from its competitors. Unlike a patent, which exchanges secrecyfor a period of market exclusivity, a trade secret needs to be kept closely under wraps. Businesses that derive significant value from trade secrets need to take steps to protect them.
Like almost every state, California has adopted a version of the Uniform Trade Secrets Act (UTSA). Under the UTSA a trade secret is defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process” that has two key, related features. The first is that the information derives “independent economic value” from the fact that it is kept secret from the public and other people (such as competitors) who could “obtain economic value from its disclosure or use.” The second feature is that the information “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
The UTSA provides that owners of trade secrets can pursue legal action against misappropriation. The key feature of misappropriation is that it involves a degree of unsavory behavior by someone in the chain of events leading to the trade secret’s disclosure. Specifically, misappropriation involves an act of disclosure or acquisition of the trade secret by“improper means,” an open-ended concept that includes theft, bribery, fraud, and espionage (including hacking). Improper means also includes breach of a duty to keep the trade secret confidential. To be sued for misappropriation a defendant must have known or had reason to know that the trade secret was obtained by improper means. A suit for misappropriation can seek actual damages, damages for unjust enrichment, and an injunction to prevent the wrongful actor from continuing to use the trade secret.
The misappropriation remedy has important limitations. Information has to qualify as a trade secret to be subject to a misappropriation lawsuit. It also has to have been obtained by improper means. If a company willingly or sloppily discloses trade secrets to a competitor or to someone who doesn’t have an obligation of confidentiality, the information will cease to be a trade secret. Once this protection is lost it is unlikelythat the previous owner can assert control over it again.
For a company with trade secrets, it is vital to devise and implement strategies that will satisfy the UTSA’s “reasonable efforts” requirement. Solutions will depend on the company’s scale and resources, but there are general principles that will apply to every business.
• Identify trade secrets with specificity. To be properly defended a trade secret has to be well defined. The more a trade secret’s boundaries are understood the easier it will be to compartmentalize and manage. This may be easier for some companies than for others: a single secret ingredient in a food may not change with time, while a piece of code may have numerous variations.
• Use confidentiality agreements. Consistent use of confidentiality agreements is essential for protecting trade secrets. Anyone who will have access to trade secret information should be bound by a confidentiality obligation. Many companies simply ask everyone they do business with to sign a nondisclosure agreement. Employees should also be subject to contractual obligations. To be effective, confidentiality agreements need to be carefully tracked and vigorously enforced.
• Internal controls. Companies can adopt a range of policies and procedures to control their trade secrets. In addition to contractual obligations employees need to be trained in how to handle trade secrets. Protected data should be accessible only to people who need to know and who have been properly trained. Processes and systems should be put in place that will allow routine monitoring of who is accessing secrets. Limits should also be put in place on how data can be stored and shared, such as by prohibiting printing of hard copies.
• Avoid third-party disclosures. By definition, once information is shared with a third party it’s no longer a “secret” unless a careful contractual structure is put in place. This problem affects any business that works with contractors, especially if contractors will have access to the company’s systems. It becomes even more important in joint venture contexts where the partner in the joint venture can also potentially exploit the information.
A good approach to these and other matters is to develop a comprehensive trade secrets policy. In the course of drafting the policy managers and executives can explore solutions as a team. A policy is only as good as the efforts taken to enforce it. For many companies it is necessary to designate specific people to take charge of the company’s trade secret protection program.
Formulating a comprehensive strategy for managing a portfolio of trade secrets requires careful consideration of a company’s current and future activities. For more than 14 years Christopher Peil has advised Silicon Valley clients on intellectual property matters. We can help your business examine its practices and plan strategies that will satisfy the “reasonable efforts” requirement.