Trade Secrets

February 13, 2010

Winter 2007 — Almost every business has some information which may be protected as a trade secret.  A trade secret can be a formula, design, process, or almost any other type of any information that gives the owner an advantage over competitors who are not privy to it.  A general definition of a trade secret is: any information used in business, which is not generally known, and which the owner derives some value from by keeping it a secret from its competitors.  Perhaps the most famous example of a trade secret is the formula to the syrup used to make Coca-Cola.  Rumored to be kept in a bank vault in Atlanta, Georgia, and known only to a small amount of people who are contractually bound never to reveal it, the secret has given Coca-Cola a significant market advantage in the soft drink industry for over a century.

For some types of information, like customer lists, trade secret law may be the only protection available; for others, like formulas or computer programs, trade secret protection is chosen over another form of protection, such as patent or copyright.  Trade secret law has several advantages over other forms of protection: broader scope of protectable subject matter, no registration or filing fees are necessary and, perhaps most importantly (and unlike copyright or patent protection), trade secret protection has the potential to last forever.  To put this last advantage in perspective: consider that the patent for aspirin, which was invented in 1897, expired in 1917; Mark Twain’s Huckleberry Finn, which was written in 1884,fell into the public domain in 1940; meanwhile, Coca-Cola, which was invented in 1886, still enjoys trade secret protection.  Had the company chosen instead to patent the formula, it would have been available to the public as early as 1903.

Trade secret litigation most often arises in the employer-employee context.  An extreme example is the recent story of the disgruntled Coca-Cola employee who tried to sell Pepsi the formula for an upcoming Coca-Cola product.  More typically, trade secret litigation occurs when an employee leaves his job to work for a competitor, or to start his own competing business, and the former employer wants to keep the employee from using information he acquired while working for the company.

Trade secret law will protect an owner against the misappropriation of his trade secrets; in this context, misappropriation is considered the unlawful acquisition, use, or disclosure of information demonstrated to be a trade secret.  Wrongful acquisition occurs when a person acquires the trade secret of another and knows, or has reason to know, that the secret was acquired through improper means.  Wrongful use and/or disclosure of another’s trade secret, occurs when one uses or reveals the trade secret of another without the consent of the owner, and the secret was obtained through improper means, or from someone who did not have the authority to reveal it.   Some examples of trade secret misappropriation are:

• An employee who copies information deemed confidential from the hard drive of her work computer without authorization.
• A competitor who obtains information he knows to be a trade secret from the trade secret owner’s former employee.
• A person who discovers secret information through unauthorized surveillance of the company or its employees.

Trade secret law requires the person bringing a misappropriation claim to prove the existence of the trade secret, and not all proprietary information will be considered a trade secret for the purposes of the claim.  In order to demonstrate the existence of a trade secret, an owner will have to show not only that the information was used in business, and was valuable by virtue of being kept secret from his competitors, but that he took reasonable security measures to ensure the information remained a secret.  Many jurisdictions require an owner to prove that the secret was kept secure within the company, in addition to proving the information was not generally known to the public or the relevant industry.  Reasonable security measures are those that restrict access to information and that put those who are allowed access to the information on notice of the existence of a trade secret, and of their duty of confidentiality with regard to that secret.

Some steps that can be taken to preserve trade secret status include:

• Clearly marking applicable files, documents, disks, etc., with a notice bearing the owner’s name, advising that unauthorized use or disclosure is prohibited, and stating the information contained within is “Confidential” and/or “Trade Secret.”
• Requiring employees, vendors, contractors and potential business partners or licensees to sign a contract agreeing not to disclose any trade secrets or confidential information that they may acquire as a result of their employment or business dealings with the company.
• Require the use of user IDs and passwords, and restrict access to confidential files to only those employees that have a business need for them.