Apex Law is producing a four-part series on increasing the value of your business by making your intangibles, tangible. This post on trade secrets is the third installment of the series, and it is particularly useful for the DIY business owner because the scope and strength of trade secret protection rests on the actions that the business takes to maintain its secrets. There’s no state filings or formal trade secret process. You might think you have protections to certain trade information, but failing to have even one employee, distributor or manufacturer sign a nondisclosure agreement (“NDA“) could be fatal to protecting that information.
This post will discuss the means by which a company can go about protecting its trade secrets, potential remedies available if a trade secret is misappropriated, and the consideration of whether a trade secret could be better protected by registering for a patent.
What is a trade secret?
Trade secrets include a broad category of inventions, patterns, compilations, programs, devices, methods, techniques, or processes that derive independent economic value from not being generally known to, or readily ascertainable by, the general public who could obtain economic value from its disclosure. A trade secret becomes a business commodity if it rises to a level of originality, novelty, or utility and a company goes to great lengths to maintain its secrecy against a wake of competitors. Unlike other categories of intellectual property (e.g. patents, copyright, trademarks), trade secrets are not registered with a state or federal agency; the scope and strength of legal protection is based on the amount of private protections the company itself puts in place.
What protections should I put in place?
Because the scope of trade secret protection depends on the actions of the businesses, if you maintain trade secrets you must take reasonable steps to safeguard them against public disclosure. It may sound obvious, but a trade secret has little value once it is in the public domain. Businesses must implement policies and procedures, communicating to employees, agents, or third parties entrusted with the information, that it is confidential and that disclosure is forbidden. Past means involved tangible techniques (i.e. lockboxes and safes), but today’s digital world often requires that companies use a mix of traditional methods with new technological devices and software. Additionally, the importance of ensuring that employees are unable to disclose your trade secrets, and specifically be hired away for such knowledge by a competitor, cannot go understated. The following list includes some of the methods by which a company can keep trade secrets confidential:
- First, identity what your company considers to be a trade secret (you cannot protect a high valued commodity if it goes unidentified);
- Limit or restrict the number of people who have access to the information (keep it to a “need to know” basis);
- Utilize password protected folders and a company-wide login system to restrict or monitor who has access to electronically stored information;
- Break-up or fragment the process or formula so that no one employee knows it from beginning to end;
- When negotiating a deal, seeking an investment, or otherwise working with a third party, be sure that an NDA is in place first before disclosing confidential trade secrets;
- Use employment agreements that contain non-compete and confidentiality provisions;
- Work to retain employees that have access to confidential information (a happy employee is a loyal employee);
- Add a confidentiality policy to your company’s employee handbook;
- Ensure the return of all corporate documents from those employees that quit or are otherwise terminated;
- Label all documents and electronic materials pertaining to trade secrets as proprietary or confidential;
- Keep files physically locked-up, in a restricted access area, or use a file check-out system.
Remedies for disclosure.
So you put into effect a plan to protect your trade secrets, take all the above precations and still, there is a leak of information, what next? Remedies available for the misappropriation of a trade secret draw from Washington State’s adoption of the Uniform Trade Secrets Act (“UTSA“). The UTSA provides a direct cause of action for misappropriation against anyone who unlawfully obtains and uses its trade secret to gain an unfair competitive or commercial advantage in the marketplace. Improper means of acquisition by a competitor include theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.. For further context, eDiscovery (electronic discovery) refers to the legal process of discovering electronic data that is potentially relevant to litigation. An individual or business that acquires a trade secret through improper means may be enjoined from using the information attained and will be liable to the originator for damages that result from actual loss caused by the misappropriation.
Trade secret limitations and patent protection alternatives.
Reliance on a company’s diligence in maintaining a confidential system and relying upon state trade secret protection is not, however, a guarantee that the information will never enter the public domain or become public knowledge. The risk of a competitor discovering the process or mechanics involved in the creation of one’s invention or commodity is a real and present risk. Ownership of a trade secret will not provide assurances of exclusive right in its use; trade secret laws do not protect against honest third party discovery or reverse engineering. A worst-case scenario in relying on trade secret protection can also materialize if a competitor independently comes up with the same invention, receives a patent registration for the invention, and then requires you to pay a licensing fee for use or production of your own idea.
For many businesses, the decision is whether to maintain their new commodity as a trade secret or to go ahead and file a patent application. “Patents require the inventor to provide a detailed and enabling disclosure about the invention in exchange for the right to exclude others from practicing the invention for a limited period of time.” In other words, the “secret” will become known to the public in exchange for the patent holder’s exclusive right to use the invention.
As will be discussed in the fourth installment of this series, some inventions or manufacturing processes will simply not meet the patentability criteria and can only be protected as trade secrets, but many items crossover into both categories. If an invention can be reversed engineered, independently developed, or if the cost to maintain confidentiality is exceedingly high, then there is a strong incentive to protect the idea by filing for a patent. Overall, the decision entails balancing factors related to both commercial costs and business strategy.
In making such a decision, the trade secret owner must be methodical, but also timely. Time is often of the essence, and an inventor developing under the guise of trade secret protection will lose the opportunity to patent an idea if he or she fails to file an application within one year of when the invention is first put into public use or offered for sale. A common practice in today’s market is to seek and obtain a patent on that part of technology that is likely to be easily re-created, while maintaining related information or processes in confidence. Of course, making the decision between a patent filing and using trade secret protections is complicated, so hiring a professional is a highly recommended.
Whether using patent law or trade secret protections, the point of this post should be clear. You can greatly increase the value of your business by making sure that your secret sauces stay secret and stay protected. It’s one thing to simply tell an investor or potential buyer that you’ve kept a process secret for your business’s advantage, and it’s quite another to show them the processes in place to maintain secrecy.
The article provided above is for general information purposes only and should not be relied on as specific legal advice. This article does not form an attorney-client relationship. If you have any questions about this article, please feel free to contact Peter J. Smith at firstname.lastname@example.org
This article was authored by guest blogger McKenzie Holden, a 2L at Seattle University School of Law and legal intern at the Apex Law Group.