Truth 37. Trade secrets: Guard them carefully
Most businesses, including start-ups, have a wealth of information that is critical to their success but does not qualify for patent, trademark, or copyright protection. Some of this information needs to be kept secret to help a business maintain its competitive advantage. An example is a business’s customer list. A business may have been extremely diligent over time tracking the preferences of its customers, helping it fine-tune its marketing message and target past customers for future business. If this list fell into the hands of one or more of the company’s competitors, its value would be diminished, and it would no longer provide the company a unique competitive advantage.
A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owner of the information with a competitive advantage in the marketplace. Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, and similar material. Unlike patents, trademarks, and copyrights, there is no single government agency that regulates trade secret law. Instead, the theft of trade secrets is made illegal by a patchwork of state and federal economic espionage laws.
Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, and similar material.
What qualifies for trade secret protection?
Not all information qualifies for trade secret protection. In general, information that is known to the public or that competitors can discover through legal means doesn’t qualify for trade secret protection. If a company passes out brochures at a trade show that are available to anyone in attendance, nothing in the brochure can typically qualify as a trade secret. Similarly, if a secret is disclosed by mistake, it typically loses its trade secret status. For example, if an employee of a business is talking on a cell phone in a public place and is overheard by a competitor, anything the employee says is generally exempt from trade secret protection. Simply stated, the general philosophy of trade secret legislation is that the law does not protect a trade secret unless the owner has protected it first.
Businesses can maintain protection for their trade secrets if they take reasonable steps to keep the information confidential. The strongest case for trade secret protection is information that is characterized by the following:
Is not known outside the company
Is known only inside the company on a “need-to-know” basis
Is safeguarded by stringent efforts to keep the information secret
Is valuable and provides the company a competitive advantage
Was developed at considerable cost, time, and effort
Cannot be easily duplicated, reverse-engineered, or discovered
Trade secret disputes
Trade secret disputes arise most frequently when an employee leaves a business to join a competitor and is accused of taking confidential information along. For example, a marketing manager for one business may take a job with a competitor and create a marketing plan for the new employer that is nearly identical to the plan being worked on at the previous job. The original employer could argue that the marketing plan that the departed employee was working on was a company trade secret and that the employee essentially stole the plan and took it to the new job. The key factor in winning a trade secret dispute is that some type of theft must have taken place. Trade secrets can be lawfully discovered. For example, it’s not illegal for one company to buy another company’s products and take them apart to see how they’re assembled.
Trade secret disputes arise most frequently when an employee leaves a business to join a competitor and is accused of taking confidential information along.
A company damaged by trade secret theft can initiate a civil action for damages in court. In denying the allegation, the defendant typically argues that the information in question was independently developed (meaning that no theft took place), was obtained by proper means (such as with the permission of the owner), or was innocently received (such as through a casual conversation at a business meeting). Memorization is not a defense. An employee from one business can’t say, “All I took from my old job was what’s in my head” and claim that just because the information conveyed wasn’t in written form, it’s not subject to trade secret protection. If the courts rule in favor of the business that feels one of its trade secrets has been stolen, the firm can stop the offender from using the trade secret and obtain substantial financial damages.
The best way to protect trade secrets is through physical measures and written agreements. Physical measures range from placing security fences around buildings to restricting access to sensitive files like customer lists. Written agreements are also key. For the best protection, a business should ask its employees to a sign a nondisclosure agreement at the time of original employment. A nondisclosure agreement is a promise by an employee or another party (such as a supplier) not to disclose a company’s trade secrets.