Keeping It Under Wraps with Trade Secrets

A trade secret is something that gives a company a competitive advantage because others in the industry do not know the same thing.  It could be a recipe, a formula, a compilation of data, an algorithm, computer code, and more. It is whatever can be used to gain an edge over competitors by being the sole possessor of the information.

Trade secrets can last for as long as the information remains a secret and provides a competitive advantage.  Coca-Cola has held its recipe secret for 130 years.  A trade secret can be lost, however, if it is not treated like a secret.  Therefore, it is important to identify which information, whether it is in physical form such as a machine, an electronic record, or a set of instructions, is giving the company an edge because no one else knows it.  Trade secrets only work when they are secret.

Once they identified as potential trade secrets, it is important to determine if it is, in fact, secret.  If it has been published or shown in a YouTube video, it isn’t a trade secret no matter how badly you wish it was.  Next, determine if patents or copyrights might be a better protection.  If it is easily reverse-engineered, then trade secret is a bad option as reverse engineering can destroy a trade secret.

Once it is determined that the information is a trade secret, it is time to start treating it as such.  That means limiting it to only being known by people who need to know it.  That means keeping it under lock and key.  That might mean it is kept literally in a locked safe or room when not in use or behind passwords if electronic.  If someone’s job is not dependent on knowing the information, that person does not get access to the trade secret.  If they only know a piece of it, they only get to know that piece.

Those who do get to know it, only get to know it “at work.”  That means the confidential information does not get to go home with them or passed on to others without prior approval each time.

It is also important to mark confidential information as such.  “Confidential” or “Trade Secret” labels should be applied as much as common sense allows.  A folder, stamps, signs can all be used so that people know what is considered a trade secret and act accordingly.

Contracts should be used to ensure everyone knows and is held liable for appropriate actions.  Non-disclosure agreements can be used with employees, vendors, independent contractors, or whoever else may be in contact with the information.  Marking information as a trade secret with strong contract language is very important when dealing with third parties as providing information to a third party without it promising to keep that information secret can destroy a trade secret.

With the new Defend Trade Secrets Act, these non-disclosure agreements must inform employees and independent contractors that although they must keep the information secret, the employee or independent contractor may tell a federal, state, or local government official the trade secret but solely for the purpose of reporting or investigating a suspected violation of law or as part of a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  That does not mean a Coca-Cola employee in the know could tell a city clerk the recipe to Cola-Cola Classic to take the burden of the secret off his chest and claim immunity.  Rather, the disclosure has to be part of whistle-blowing complaint that involves that information.  If it does, then the employee or independent contractor can disclose.  If the company does not include a provision informing of this ability, the company forfeits its ability to collect exemplary double-damages or attorney fees if the company later sues the employee (or independent contractor) for trade secret misappropriation under the DTSA.

Finally, perhaps the most important thing is education.  It is imperative that your employees and others in contact with the information knows what is expected of them and the consequences are both to themselves and to the company if they don’t meet those expectations.

There is no one perfect way to protect a trade secret as it depends on the secret and the company, but the trick is that the company must identify, mark and treat the information as the valuable secret that it is.

DISCLAIMER: The information provided is for general informational purposes only. Posts and other information may not be updated to account for changes in the law and should not be considered tax or legal advice. None of the articles or posts on this website are intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.