[BreachExchange] Protecting your trade secrets

[Audrey McNeil]

http://www.lexology.com/library/detail.aspx?g=84b27804-7f96-4e28-aeba-d73f20e9d71f

This is a short overview of the main aspects of trade secret law.

A trade secret is confidential business information.  New York and some
other states also require that the information be in use and provide a
competitive advantage.  Trade secrets can be technical in nature, such as a
formula, plans, or a device, or they can relate to business operations,
such as lists of vendors or customers, or marketing plans.

Governing Law

Trade secrets are protected in every state either by statute or principles
of unfair competition.  The most prevalent law is the Uniform Trade Secrets
Act, which has been adopted in some form in all but three states. The
successful plaintiff in a trade secrets lawsuit may be entitled to an award
of damages as well as some form of injunctive relief.  In addition, some
states have statutes making it a crime knowingly to participate in the
theft of a trade secret.

The United States has also enacted the Economic Espionage Act of 1996,
which creates two federal crimes involving trade secrets: (1) economic
espionage, knowingly to steal a trade secret intending to benefit a foreign
government or foreign agent; and (2) the general theft of a trade secret
relating to a product that is produced for or enters interstate commerce.
These offenses, respectively, are punishable by (1) up to $10 million in
fines and up to 15 years in jail, or (2) up to $5 million in fines and up
to 10 years in jail.

Essential Elements

The essential elements of any trade secret are that:

the information is neither generally known in the trade nor publicly
available;
the information has some independent economic value giving the owner a
competitive advantage;
the owner has not publicly disclosed it; and
the owner has made reasonable efforts to maintain its secrecy.

Unlike a patented invention, a trade secret does not require novelty
because it is not protected against independent discovery.

Value

Often the deciding factor in a trade secret case is whether the owner
expended considerable time and money developing the trade secret.  Also
inherent in every trade secret case is the notion of unfair competition or
improper conduct.  If the accused has achieved a significant saving in time
and money by obtaining the confidential information that could not be
readily acquired from other sources, then a court will more likely protect
the trade secret.

Secrecy

The other major issue in any trade secret situation is whether the
information owner has taken reasonable steps to protect its secrecy so
that, except by use of improper means, it would be difficult to obtain the
information.  Absolute secrecy is not required.  A trade secret will be
protected even if you have disclosed it to employees or others having a
secrecy obligation.  Conversely, no trade secret protection exists for
matters that are generally or publicly known, or are completely disclosed
by products sold to the public either directly or through
reverse-engineering without infringing any patent rights.

The easiest way to lose a trade secret is to disclose it without an
expressed or implied obligation of secrecy.  For this reason, you should
take care to include confidentiality provisions in all contracts with
vendors, potential business partners, or others who may gain access to the
confidential information.

Employment Issues

Most trade secret disputes arise in the context of the employer-employee
relationship.

Employers.  Employers often view every piece of valuable information that
their employees acquire as company property. Therefore, many require
employees to sign explicit confidentiality or noncompete agreements as a
condition of employment.  Unless such agreements are unreasonable in scope
or duration, they may prevent a worker from accepting employment in
competition with a former employer.

Employees.  An employee, however, may understandably feel that his or her
skills, knowledge, and experience are personal assets that can be sold to
the next employer.  Employees who leave jobs where they had access to
confidential technology or business information should examine any
employment agreement that they are asked to sign.

Implied obligations.  Where no written confidentiality agreement or
employment policy exists, the law will still imply an obligation not to use
or disclose an employer's confidential information if the employee knew or
should have known that the employer wanted such information to remain
secret. Moreover, under the “doctrine of inevitable disclosure,” some
courts impose non-competition restrictions upon certain high-level
employees even in the absence of a confidentiality agreement.  These
implied obligations, however, may not apply to general information an
employee learns as the result of employment.

Steps to be taken by employers.  From the employer's perspective, there
should always be clearly defined and communicated policies, written
confidentiality agreements regarding intellectual property ownership, and
restrictive employment covenants where appropriate.  Employers should also
take special care to designate sensitive materials as confidential, and to
restrict access to their trade secrets on a need-to-know basis.  Even the
posting of signs on company premises restricting access to areas where
confidential technology is used may provide critical evidence.

Conclusion

The law of trade secrets, although simple in concept, is difficult to apply
in practice.  Every situation involves balancing the interests of the trade
secret owner with the public interest in making non-confidential, useful
business information freely available. Cases are usually decided on the
economic value of the secret, the degree of secrecy maintained by the
owner, and the bad faith of the defendant.  The loss of a trade secret by
an owner, or a court injunction and damages levied against a defendant, can
be a disaster.
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