Protecting Trade Secrets in an Electronic World

Date: Oct 01, 2002

Overview. A trade secret is any non-public information that is used inthe operation of a business or other enterprise that the business takes "reasonablemeasures" to protect and is sufficiently valuable to afford an actual or potentialeconomic advantage over competitors.

Companies should do everything they can to ensure that their trade secrets areprotected and are not divulged to the general public. This can be achieved by implementing internal trade secret protection programs, as well as through federal and state trade secret laws designed to protect intellectual property assets. These laws include civil actions, where a company can sue for monetary damages or injunctive relief, as well as criminal statutes like the Economic Espionage Act of 1996, which makes the theft or misappropriation of trade secrets a federal crime and allows for both imprisonment and fines up to $5,000,000.

Identifying Trade Secrets. The starting point for the development of acomprehensive trade secrets protection program often is an intellectual property auditdesigned to identify the company's trade secrets and other valuable intellectual property. This audit can be effectively partnered with concurrent trade secret classifications, risk assessments, and trade secret valuations. Not only do these steps make financial sense in helping to secure a company's investments and assets, they also help companies prove potential claims of trade secret misappropriation in court.

Important factors a company should consider in determining whether its information is a trade secret include:

  1. the extent to which the information is known outside the company;

  2. the extent to which it is known by those within the company;

  3. the measures taken to guard the secrecy of the information;

  4. the value of the information to the company or to its competitors;

  5. the amount of effort or money expended by the company in developing theinformation; and

  6. the ease with which the information could be legally acquired or duplicated byothers.

Typical trade secrets can include formulas, recipes, experimental data, diagrams,supplier information, process/manufacturing technology, quality control procedures and sales and marketing information, including customer lists.Virtually anything can be classified a trade secret, as long as it meets the requirements of value and secrecy. Some types of information may have additional legal protections under copyright law.

Trade Secret Laws.There are three well-developed legal mechanisms inplace designed to protect trade secrets:

    • Uniform Trade Secret Act (UTSA): The UTSA provides a civil cause of action for trade secret misappropriation, pursuant to a state's adoption of the Act.Theoverwhelming majority of states have adopted the UTSA, however certain differences between various states' versions of this law may affect the remedies available. Generally speaking, a company may sue to recover monetary damages consisting of lost profits and/or a reasonable royalty for the stolen secret.Injunctions may also be available, offering a wider variety of potential forms of relief. Finally, exemplary damages are awarded under the UTSA if the misappropriation of the trade secret was "willful and malicious."
    • Common law: There are several potential common law causes of action.A company may sue an individual or another corporation for misappropriation of a trade secret under theories of breach of contract, breach of fiduciary duty, or unfair competition. These offer similar forms of relief, and may offer the potential for exemplary damages.
    • Economic Espionage Act of 1996 ("EEA"): The EEA¬† represented a fundamental change in the trade secret law by making theft of a trade secret a federal crime. All types of business information are covered, as well as technical and scientific data. Offenses under the EEA could subject individuals to criminal fines of up to $500,000 or up to 10 years imprisonment, and could subject corporations to fines of up to $5 million. Of course, the government, with its limited resources, cannot prosecute all offenders. For this reason, the company must focus on self-enforcement and use of the civil laws to protect its trade secrets.

Protecting Trade Secrets. Precautions must be taken to protect a tradesecret against loss; it is protectable as property of the owner only as long as it remains a secret.

    • Preventing Disclosures by Employees: One effective way to protect a company's trade secrets is to establish and maintain oversight policies and procedures to prevent the inadvertent disclosure of trade secrets by employees in written publications, seminars, engagements, or at trade shows. This would include establishing and maintaining a policy and practice of advising company employees, on a regular basis, regarding a company's trade secrets and confidential business information. Another effective mechanism is exit interviews. The employee who is leaving should be informed about the obligation not to disclose or use trade secret information without the express consent of the company.

For additional protection against disclosure by former employees, employers may consider two other types of written agreements that can shield a company from inadvertent disclosure or trade secret misappropriation. A nondisclosure agreement prohibits any employee who may have access to trade secrets from either disclosing the secret or using it for any purpose other than the company's business. Non-disclosure agreements differ by individual case, depending on the nature and scope of the agreement and the value of the trade secret.All nondisclosure agreements should include a good description of the trade secret, permissible uses of the trade secret material, a duty of confidentiality, a remedy for non-compliance with the agreement (including injunctive relief), and the term of the agreement (which may last indefinitely.)The reason for such detail is the frequent difficulty companies encounter proving with certainty that a former employee has disclosed a trade secret.

A non-compete agreement that contains a trade secret provision may actually be more useful in certain circumstances than a nondisclosure agreement, for the simple reason that an employer need only prove that the former employee has accepted a job with a competitor. It does not require a showing that the employee has disclosed the trade secret.Enforcing these agreements can sometimes present other challenges, however. For more information on non-compete agreements, click here for website article on Drafting and Litigating Non-Compete Agreements.

    • Protecting Against Third Party Disclosures: In the course of business, it may be necessary to disclose trade secrets to third parties. Trade secrets are frequently disclosed to third party consultants, prospective business partners, or in the course of merger negotiations. Nevertheless, any disclosures to third parties can be grounds for invalidating trade secret protections. It is essential that any such party signs a confidentiality agreement and returns all confidential materials.

Any company that is required to report trade secret information to a government entity should take precautions to ensure that this material is protected from inadvertent disclosures that could void their protections. In addition to labeling all confidential documents "CONFIDENTIAL," companies can typically submit two versions of required government disclosure documents; one without trade secret data for public review, and a confidential version for agency use.It is recommended that the confidential version be placed in a separate envelope with the outside of the envelope marked "CONFIDENTIAL."

For more information on trade secret protection and enforcement, please contact Arthur S. Garrett III, a partner in the firm"s Litigation department, at (202) 434-4248 or garrett@khlaw.com or Matthew M. Wright, a Litigation associate, at (202) 434-4133 or wright@khlaw.com.