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Understanding Trade Secrets, Part 1: What They Are and Simple Measures You Should Take To Protect Them

Many people talks about trade secrets, but surprisingly few know what they are, or how to protect them. If your business relies on specialized knowledge that is not publicly available, you should have a basic understanding of trade secrets law. If you’re thinking about quitting your job and starting a business that will compete with your current employer, you should know enough to determine whether your business plan might be based on your current employer’s trade secrets, and the consequences if that turns out to be the case. If you have questions about trade secrets, do not hesitate to consult an attorney who practices in the area.

1. What is a Trade Secret?

Most states define a trade secret as any formula, pattern, physical device, idea, process, method, or technique that both (a) provides the owner of the information with a competitive advantage and (b) is treated in a way that reasonably prevents others from learning it without violating the law.

So long as you make reasonable efforts to protect the secrecy of economically valuable information, you have a trade secret. Examples of trade secrets include:

  • Business information, such as marketing plans, profit and pricing information, and customer or client lists
  • Information obtained from your own research and development
  • Information stored on computer databases
  • Inventions
  • Manufacturing techniques and methods
  • Software codes
  • Business ideas that offer a competitive advantage, such as ideas for a new product or service

2. What kinds of “reasonable efforts” must be made to protect trade secrets?

Reasonable efforts depend on the circumstances, including the ease with which others can acquire the information, the extent to which the information is known outside of the company, and the value of the information. Commonly used examples of reasonable efforts include:

  • Disclosing the information only to those who need to know it, such as investors, vendors, employees, and consultants, and obtaining their written promise not to use it for any purpose other than what has been expressly allowed or disclose it to anyone else (this is a “non-disclosure agreement,” or “NDA”)
  • If the information is stored electronically, encrypting the information, limiting access, and electronically branding the information as “Confidential Trade Secret”
  • If the information is stored physically, such as in a prototype device or lab notebook, keeping the device or notebook under lock and key, limiting access to it, and labeling it as a “Confidential Trade Secret”
  • If the information is a manufacturing process, limiting access to the plant, segregating discrete operations so that few people are involved at every step of manufacture, limiting access to the manufacturing facility, and the like

The legal protection available for trade secrets lasts as long as the information is kept confidential. Once a trade secret has been disclosed to the public, its legal protection ends. Many efforts to preserve the confidentiality of a trade secret are relatively inexpensive and a matter of common sense. You may want to consult an attorney about the adequacy of your trade secret protection efforts.

3. What legal rights does the owner of a trade secret have?

The owner of a trade secret can prevent others from copying, using, or benefiting from the trade secret or disclosing the secret to others.  Trade secrets are protected against individuals who:

  • are bound by confidentiality and/or nondisclosure agreements
  • acquire the trade secret through improper means, including theft, espionage, or bribery
  • acquire the trade secret from people who do not have the right to disclose the information
  • knew the information was a protected trade secret

Only a person who has discovered the trade secret independently, without using illegal means or violating trade secret laws, may use the information.

4. How long does a trade secret last?

Trade secrets can be legally protected forever, so long the owner scrupulously makes reasonable efforts to keep the information confidential.

5. What types of legal relief are available to the owners of trade secrets?

A court can order one who has obtained a trade secret improperly from using or disclosing it, by issuing a temporary restraining order or injunction. A court can also require one who has improperly obtained a trade secret to pay money damages to the owner for any economic injury suffered as a result of the improper use or disclosure of the trade secret. Sometimes this may take the form of royalties.

One who intentionally steals trade secrets can be prosecuted for a crime under either federal or state laws. The court may levy fines of up to $500,000 and ten year prison terms to individuals, and fines of up to $5,000,000 against corporations that have engaged in espionage.