Trade Secrets: Protection and Legal Aspects

Posted on Jan 22, 2025 in Business Administration and Innovation Management

Intellectual Property: Trade Secrets

  1. What is a Trade Secret?
    1. Any commercially valuable information
    2. Examples:
      • Trick in production
      • Customer list
      • Business plan
      • Asset to the company
  2. Protecting Trade Secrets
    1. You must make an effort to protect trade secrets
    2. Examples:
      • Policy
      • Procedures
    3. If someone else develops that information independently, that’s permissible
  3. Record Keeping for Trade Secrets
    1. Records should show:
      1. It’s your idea
      2. Identified trade secret
      3. Steps for protection
        • General description
          • Locking doors
          • IT security
          • Keeping papers off desks
  4. Avoiding Trade Secret Infringement
    1. Be diligent in employee intake
    2. Employment policies
    3. Tell employees not to use trade secrets from previous employers
    4. If accused of trade secret violation:
      1. Conduct a study
      2. If there IS a problem:
        • Take remedial action
        • Take a license from the trade secret owner

Implementing and Interpreting the Defend Trade Secrets Act

  1. 2016 – Congress passed the Defend Trade Secrets Act (DTSA)
    1. Amends the Economic Espionage Act
      1. Creates a private civil cause of action for trade secret misappropriation
        • Federal – before this, it was primarily a state issue
      2. Additional layer of protection to state laws
  2. Central Provision – 18 U.S.C. 1837(b) – “An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce”
  3. Defining Trade Secret
    1. All forms and types of financial, business, scientific, technical, economic, or engineering information, if they meet the criteria:
      1. The owner has taken reasonable measures to keep such information secret
      2. The information derives independent economic value
  4. Defining Misappropriation of a Trade Secret
    1. Misappropriation: without permission:
      1. Obtaining a trade secret that was knowingly obtained through improper means or
      2. Disclosing or using a trade secret without knowing either:
        • That it is a trade secret or
        • That it was obtained through improper means
      3. “Improper means”
        • Theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means
        • Does not include “reverse engineering, independent derivation, or any other lawful means of acquisition”
  5. Remedies: Civil Seizure (akin to a temporary restraining order)
    1. Remedies:
      1. The court will authorize injunctive relief
      2. Compensatory damages for either:
        • Actual loss of the trade secret and, in addition:
          • Any unjust enrichment
      3. Double damages for willful misappropriation
  6. Remedies against Former Employees
    1. Injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”
  7. Whistleblowers – Immunity from liability for confidential disclosure of a trade secret

Trade Secret Law

  1. Another form of intellectual property protection
  2. Unlike patent law, you do not disclose information to the public
  3. Protection can last forever
  4. Relatively cheap – no application to the government
  5. Four basic elements of a trade secret:
    1. It has to be information
    2. Can’t be generally known
    3. Prove economic value
    4. Must take reasonable efforts to maintain the secrecy (most important factor)
  6. Typical trade secrets:
    1. Manufacturing processes
    2. Customer lists
    3. Business strategy
    4. Schematic drawings
    5. Source code (can also be copyright protected)

Trade Secret Policies

  1. Trade secret policies differ drastically from large to small businesses
  2. Basic trade secret policy addresses:
    1. Attempt to identify the various types of information which it would potentially attempt to claim is covered by trade secret protection
    2. Notify your employees or personnel that you claim trade secret protection in this type of information
    3. Segregate an attempt to protect the trade secret information in some way
      1. Separate building
      2. Separate file on computer
      3. Control/document who has access to this information
        • Monitor/log access
    4. Email/file document sharing policies
    5. How to interact with a 3rd party
      1. Non-disclosure agreement
    6. Proprietary information invention assignment agreements (PIAA)
      1. Used with employees – includes confidentiality information
  3. Language covering visitors, sharing space.

Trade Secret Audits

Source: David Harris, Trade Secret Audits: Protecting and Valuing Your Company’s Secret Know-How

  1. Trade Secret Audits
    1. 1979 – Uniform Trade Secrets Act – a uniform law adopted
    2. 2014 – 47 states have adopted the act (NY is one of the exceptions)
    3. 1996 – Economic Espionage Act
      1. Only involves trade secrets taken/given to a foreign company
    4. American Invents Act – principally deals with patents
      1. If you had a trade secret before a patent – you are allowed to use the trade secret after the patent is issued to someone else
    5. Patent or Trade Secret?
    6. Protecting American Trade Secrets Act – not approved by Congress as of 2014
      1. Federal protection to trade secrets
    7. Defend Trade Secrets Act – 2016
    8. Insider threat
      1. Employees, joint venturers, collaborators, vendors, – people exposed to trade secrets voluntarily
      2. Have to identify trade secrets
      3. Today’s collaborators are tomorrow’s competitors
      4. NDA
    9. How do you know you have a trade secret?
      1. Not until it’s litigated
      2. Public information collected and used in an unusual way
      3. Customer list
    10. Hallmark Cards vs. Monitor Clipper Partners
      1. Hallmark hired Monitor for research on the greeting card industry
      2. Monitor has another private equity company
        • 5 years later, the private equity company asks Monitor for the Hallmark presentation
          • Used that information in business
          • Hallmark sues for trade secret violation
          • $47 million in damages awarded for simply emailing a PowerPoint presentation
    11. Need a lawyer familiar with trade secret litigation (only 1, don’t use a corporate lawyer)
      1. A trade secret is good forever if you keep the secret
    12. Questions to ask:
      1. What is it that could hurt my business if the competitors had it?
      2. How much would it hurt?
      3. What policies and methods am I using today to protect my trade secrets?
      4. How?
    13. Not all trade secrets are the same
      1. Marketing
      2. Engineering designs
      3. Manufacturing know-how
      4. Sources of supply
    14. Permanent and temporary trade secrets
    15. Trade secrets on LOCKDOWN – formula, etc. – Extra secrecy
    16. Steps to take by audit team and management:
      1. Separate passwords for trade secrets
      2. No off-site transmissions
      3. Lockout employees about to be terminated
      4. No laptop use for lockdown trade secrets
      5. Lockout downloads
      6. Educate the employees
        • Involve, remind employees of the importance
        • Non-disclosure agreements
        • Protecting trade secrets is protecting job security
    17. Documenting Trade Secrets
      1. Keep track of how much time, money, and effort you’ve spent,
      2. Document the competitive advantage, this enhances the chances of success in litigation