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Trade Secrets - Protecting the Company Jewels

Trade secrets represent the proverbial “family jewels” of any business. They are the “things” that keep your business ahead of the competition. Trade secrets, unlike state or federally registered trademarks or federally secured patents, are valuable, and derive legal protection from, their secrecy. Generally speaking, trade secrets are valuable because their owner keeps them confidential and, therefore, away from the public domain and secret from competitors – such as the recipe for Coca-Cola.

Trade secrets are statutorily protected. They are not protected by common law or past judicial decisions that do not have a statutory basis. The Uniform Trade Secrets Act, which has been adopted in one form or another throughout the United States, defines a trade secret as:

information, including a formula, pattern, compilation, program device, method,

technique, or process, that: (i) derives independent economic value, actual or potential,

from not being generally known to, and not being readily ascertainable by proper

means by, other persons who can obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the circumstances to maintain its


See, e.g., Cal. Civ. Code § 3426(d)(1)-(2); Nev. Rev. Stat. 600A.030(5)(a)-(b). Thus, in order to qualify as a trade secret the “thing” sought to be protected must meet two requirements: (1) its value or potential value is derived from being kept secret or away from those that can economically benefit from knowing about it; and (2) the person asserting its secrecy must have taken reasonable steps to keep it secret.

Deriving value or potential value from secrecy is often the most critical requirement in order to qualify for trade secret protection. As the above statute states, this value or potential value must be economic. Sentimental value is not enough. That said, a considerable number of “things” used in a business might meet this standard. Obviously, things like proprietary formulas and recipes, such as the Coca-Cola example above, are economically valuable because they are kept secret from competitors and potential competitors.

Trade secret protection, however, expands well beyond these classic proprietary examples. Most importantly, “things” such as internal information relied on for operations can meet this requirement. For example, information such as competitor pricing, non-public financial reports, customer lists, marketing analysis and forecasts, together with other data, reports and similar materials, can have an independent economic value for a business that may not appear readily apparent at first glance. Thus, it is essential that any decision maker in a business consider whether any such information is something that could be used by a competitor or potential competitor for their benefit in the marketplace – whether that benefit is in product development, manufacturing, direct sales, marketing, operations or otherwise. If the answer is yes, the “thing” at issue may very well meet the first element of trade secret protection and it would be prudent to consult qualified legal counsel to assist in any formal analysis. Simply asking the question as to whether the “thing” being considered meets these general considerations, however, places you in a much more advantageous position in maintaining trade secret protection than those who never do so and fail to protect their rights.

To qualify for trade secret protection reasonable steps must be taken to maintain the secrecy of the “thing” at issue. Maintaining the secrecy of the “thing” is also why protection is not granted for materials or information that is disclosed during the application process associated with state/federal trademark and patent registrations. As such, information and materials for which statutory trademark or patent registration are sought generally do not qualify for trade secret protection.

As a threshold matter, the requirement that whatever steps taken must be “reasonable” is always a subject of debate and, often, is strenuously disputed whenever trade secret rights are asserted. What may be “reasonable” to a person asserting protection of a trade secret is almost assuredly unreasonable to the person against whom protection is being asserted. That said, there are a host of generally recognized “reasonable” means that should be considered by any business to maintain the secrecy of trade secret or potential trade secret information, materials, data, processes and the like.

One of the most basic means of reasonably protecting potential trade secrets is through a company’s contractual relationships and interactions with its employees, contractors, vendors and other personnel. First, a classic example of a reasonable step that many company’s take to maintain secrecy of their trade secrets is to place these types of individuals or entities on notice of the existence and confidential nature of information or other materials to which they may have access and of their contractual duty against disclosure. Companies frequently take these steps through non-disclosure agreements or other contractual provisions included in bids, offer letters or other documents. Such agreements or contractual provisions should always be drafted by counsel familiar with the statutory provisions afforded to trade secrets in whatever state or states in which the business operates.

Another basic means of taking reasonable steps in protecting potential trade secrets is through employee guidelines. Companies should advise employees, and anyone else that has access, as to what information or materials are considered confidential and how that information should be handled. Companies should also seriously consider labeling documents or other information as being “confidential” if it considers it as such. Doing so advises employees and others that the company deems the information or material extremely important and not something that should be readily disclosed. Companies should additional consider limiting employee and other individual’s access to information or material it deems confidential.

Beyond the generally recognized reasonable protection means described above, there are even more basic steps that any company should consider in maintaining the confidentiality of information or materials that potentially constitute trade secrets. These are simple steps that are often overlooked by smaller businesses or companies just starting out. For instance, put locks on filing cabinets or doors that contain or where confidential “things” are stored. Restricting who can access such areas and implement a sign-in log for those granted access should also be considered. Additionally, security passwords should also be used for all computers from which confidential information or materials can be accessed. Moreover, not everyone should be granted password access to computers containing confidential information or materials. While the foregoing suggestions seem self-evident, they should certainly be considered. Moreover, their implementation could make the difference in taking the reasonable protective measures necessary to qualify a company’s economically valuable “things” for trade secret protection.

Once material or information qualifies for trade secret protection, the owner is granted significant enforcement rights against threatened or actual misappropriation. Legal counsel should be immediately consulted whenever misappropriation or threatened misappropriation of any company material or information is known or suspected. In such instances, you may be entitled to injunctive relief, actual damages, statutory damages or other remedies.

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