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INTELLECTUAL PROPERTY: CAN YOU KEEP A SECRET?

We often receive calls from companies looking to pursue claims for misappropriation of trade secrets, usually against former employees or business partners. Unfortunately, in many situations, the claims have already been undermined by the company’s own failures to take reasonable efforts to protect its trade secrets from disclosure.

What Is a Trade Secret?

California law defines a trade secret as:

“information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Cal. Civ. Code § 3426.1(d).

Under this broad definition, a trade secret can take the form of just about anything that confers a competitive advantage and is kept secret in order to maintain that advantage. This includes not only highly technical and complicated information such as chemical formulations, computer software, physical devices, and unpatented inventions, but also more mundane items such as vendor and customer lists, bidding processes, and financial information. While business owners can typically identify the information they deem to be proprietary and that gives them a competitive advantage in the marketplace, simply calling it a “trade secret” does not offer protection. Critically, the trade secret owner must take affirmative steps—“reasonable efforts”—to maintain the secrecy of the information or else trade secret protection is lost.

The reasonableness of efforts to maintain the secrecy of confidential information is determined on a case-by-case basis. However, it is well established that when an owner publicly discloses a trade secret or discloses it to someone who has no obligation to protect the trade secret’s confidentiality, the trade secret protections are lost.

What Should You Do to Protect Your Trade Secrets?

The reasonable efforts required to protect your trade secret will depend on the nature of the information. For example, it is rumored that the Coca-Cola recipe is kept in a bank vault and is only known by two employees—whose identities are kept secret, and who are not allowed to fly on the same plane—at any given time. While it is unlikely that such efforts would be reasonably necessary for most businesses, below are some steps that all business owners should consider:

1. Identify Your Trade Secret Information

  • Are there particular categories of information, or particular documents or materials, that need to be kept secret?
  • How is that information being maintained?
  • Who has access to that information?
  • If feasible, create a list of trade secrets, where those trade secrets are located, and the names of all persons with access.

2. Clearly Label or Identify Confidential Information

  • On hard copies of materials, place labels or other legends to clearly indicate “TRADE SECRET,” “CONFIDENTIAL,” “PROPRIETARY,” etc.
  • For electronic files, in addition to ensuring appropriate password protection to restrict access, indicate in the file name that the materials are confidential and include an electronic label or legend on the document, whether in a watermark or in the header or footer.

3. Control Your Confidential Information

  • Maintain all confidential information separately from other routine business records.
  • For hard copies, ensure that all confidential information is securely locked away when not needed.
  • For electronic files, ensure that reasonably sophisticated security measures are implemented to prevent unauthorized access to the files.
  • Provide any confidential information only on a “need to know” basis—the fewer people who have access to and knowledge of the confidential information, the lower the risk of that information being disclosed.
  • Implement document handling procedures for materials that contain trade secret information.
  • Implement a policy for tracking any confidential documents so that they can be traced if necessary.

4. Implement a Written Trade Secret Protection Policy

  • Make sure that all employees and contractors are put on notice that the company maintains certain confidential information and explain generally what information is considered confidential and how it must be treated.
  • Include the policy in your employee handbook and make sure that any contractors sign a confidentiality agreement that incorporates the trade secret protection policy.
  • Periodically remind employees and contractors of their obligations to maintain confidentiality of trade secret information.
  • Reiterate to all employees and contractors that they are bound by contract to maintain confidentiality upon their departure from the company.

5. Require Non-Disclosure Agreements

  • Before any key employee or others are provided access to any trade secret information, require that they sign a non-disclosure agreement.
  • Don’t forget that third parties, including vendors, consultants, or outside IT firms, may also have access to confidential information and ensure that they sign a non-disclosure agreement before providing such access.
  • Ensure that third parties are sufficiently insured against the risk of unauthorized access to, or disclosure of, your trade secret information.

6. Perform Periodic Reviews

  • Periodically review your trade secret protection plan and the associated processes and procedures to ensure that they are being properly enforced, to confirm whether they are effective, and to determine whether any additional or alternative measures should be implemented.

These are, of course, just some of the actions a company should consider taking to protect its trade secrets, and what is “reasonable” will invariably depend on your business and the nature of the information. Nevertheless, if you are a business owner and value your trade secrets, the importance of taking such affirmative actions cannot be understated. Not only will implementing appropriate measures to protect your information strengthen any case for misappropriation of your trade secrets but, more importantly, it will dramatically reduce the likelihood of ever needing to pursue such a case in the first place.

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