Can You Keep a Secret?
Tips on how to Protect your Company's Trade Secret Portfolio
by Adam B. Starr

Trade secrets represent the most valuable form of intellectual property for some companies. In far too many situations, however, trade secret protection is lost because the company fails to take basic steps to protect these assets. This article (1) outlines the basics of trade secret law and (2) identifies several “best practices” for protecting your company’s trade secrets.

1.  Trade Secret Basics

a.  What is a Trade Secret?

Trade secrets are a form of intellectual property, and the holder of a trade secret has a distinct set of rights in that property that are enforceable in court.  The prevailing definition of a trade secret comes from the Uniform Trade Secrets Act (“UTSA”), a national standard that has been adopted, in some form or another, in 46 states.¹

Under the UTSA, for information to qualify as a trade secret, it must meet two criteria.  First, the information must derive independent economic value by virtue of the fact that it is not generally known to, or ascertainable by, persons who could benefit from the information.  Uniform Trade Secrets Act § 1 (1985).  There are few limits on the categories of “information” that can qualify.  Second, the information must be subject to “efforts that are reasonable under the circumstances to maintain its secrecy.”  Id.  Put more simply, a trade secret must (1) derive value from the fact that it is secret, and (2) actually be kept as a secret.

If the information in question does not meet both of these criteria, then it is not a trade secret.  Therefore, a distinction must be drawn between trade secrets and what is often referred to as “confidential information” - i.e. information that the company may consider to be confidential, but which does not meet the UTSA’s requirements.  This distinction is important because many states do not provide protection for “confidential information” absent a valid contract that prohibits the disclosure or use of such information.

Trade secrets have some distinct advantages over other forms of intellectual property such as patents, copyrights and trademarks.  One major advantage is that trade secrets do not need to be registered or go through any approval process with governmental agencies as is required for patents, copyrights and trademarks.  As a result, you can create and modify trade secrets on your own, without government involvement.  Further, the scope of information that can be protected as a trade secret is much broader than with other forms of intellectual property.  See , e.g., Salsbury Laboratories, Inc. v. Merieux Laboratories, Inc., 735 F. Supp. 1537, 1542 (M.D. Ga. 1987) (“a trade secret does not require the uniqueness and novelty of a patent”).  Also, while patents and copyrights expire after a certain amount of time, and trademarks require continued use and renewal of registration, trade secrets have no such limitations.  If properly maintained, trade secrets never expire.

b.  How are Trade Secrets Created and Protected?

Under the UTSA’s first requirement - that a trade secret must have commercial value - there are few restrictions on what types of information can qualify.  In Georgia, for example, the definition of a trade secret encompasses “technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which is not commonly known by or available to the public.”  O.C.G.A. § 10-1-761.  This definition allows for the protection of almost any form of competitive information your business may own.

The second requirement - that you actually keep the information secret - is the most important.  See CVD, Inc. v. Raytheon Co., 769 F.2d 842, 850 (1st Cir. 1985) (“The cornerstone of a trade secret … is secrecy.”); Jager, Melvin F., Trade Secrets Law § 5:15 (2007) (“The single most important requirement of the trade secret law is the obvious one that deserved continued emphasis - that the trade secret must in fact be secret.”).  This is because even if you own information that may fall within the UTSA’s broad definition of protectable information, it only matters if you take steps to protect it.

Further, even after a trade secret is created, it can be lost through failures to maintain secrecy.  This is because once the trade secret “cat is out of the bag,” it is likely impossible to get it back.  In other words, once a trade secret is no longer secret, the legal protections are lost and probably cannot be restored.  See Storage Tech. Corp. v. Custom Hardware Eng’g & Consulting, Inc., 421 F.3d 1307, 1319 (Fed. Cir. 2005) (“Once a trade secret enters the public domain, the possessor’s exclusive rights to the secret are lost.”).

Disclosures that may destroy trade secret protections commonly occur as a result of relationships with employees, business partners and competitors.  With employees, for example, it is important to remember that trade secrets may only be disclosed to those “[in] whom it must be confided in order to apply it to the uses intended.”  Salsbury Laboratories, Inc., 735 F. Supp. at 1542.  Courts have made it clear that distribution of alleged trade secrets to those not entitled to receive it “removes any legal protection it might otherwise have had as trade secrets.”  Servicetrends v. Siemens Medical Sys., 870 F. Supp. 1042, 1074 (N.D. Ga. 1994).  These risks are amplified in the modern age of electronically stored information which can be transmitted easily to those who should not be allowed access.

Because trade secrets are valuable, but easily lost, the following section discusses a number of “best practices” to help you protect and preserve your trade secrets.

2.  Best Practices: How to Effectively Protect Your Company’s Trade Secrets

In practical terms, to take advantage of the protections of state trade secret laws, businesses must know what trade secrets they own and take adequate steps to protect such information.  The following practices are recommended, and in some cases are necessary, to maintain your trade secrets and to enforce your right if these trade secrets are stolen.

a. Trade Secret Audits: Identify, Label and Keep Track of Your Trade Secrets

You should conduct a regular internal audit to identify the information within your company that you maintain are trade secrets.  Those items should be inventoried and labeled in some fashion that identifies them as trade secrets.  In particular, all trade secrets should be marked with obvious visible signs or legends regarding how the information should be handled, including a prohibition against distribution to unauthorized persons or those outside the company.

b. Put Trade Secrets under “Lock and Key” and Limit Access Only to Employees who Need It

As noted above, the law only extends trade secret protection to information that is subject to “reasonable efforts” to maintain secrecy.  But there is no uniform standard for what is “reasonable” and certainly this requirement varies depending on the information in question.  As a basic rule, you should decide what employees actually need access to your trade secrets and restrict access accordingly.  Do not leave trade secret documentation in common areas.

The risk of losing trade secret protection is especially high with electronic documents which are often easily copied and transferred.  If alleged trade secrets are being e-mailed to those who should not have access, a court will be less likely to find that a trade secret existed.  Work with your information technology department to make sure electronic documents containing trade secret information are properly secured.  Here are some suggestions:

• Maintain secrecy by using passwords, restricting access to files, encrypting information, and implementing effective network security.
• Do not store your trade secrets on any electronic media where unauthorized individuals have access, including openly shared network drives.
• Do not post any such information on your website, or otherwise allow it to be placed in the public domain.
• Include a confidentiality legend and notice in company e-mails.

c.   Institute Well-Publicized Trade Secret Policies and Train Your Employees Well

Conducting employee orientations and putting confidentiality policies in place will make it more likely that a court will find information qualifies as a trade secret.  Here are some suggestions:

• When new employees are hired, they should be given explicit instructions about how your company maintains its trade secrets, and what is expected of the employee.
• Include a section on trade secrets and confidentiality in your company handbook and other written guidelines.  Make sure all employees get a copy.
• Periodically send written instructions and reminders regarding confidentiality to your employees.
• When employees leave the company, you should conduct an exit interview in which they are again reminded of their obligation not to disclose trade secret information after their employment ends.
• Be sure to enforce the policies you put in place.

d.   Use Effective Contracts with Employees, Competitors and Business Partners

Confidentiality agreements are one of the most important ways to maintain trade secret protection.  Obviously, certain employees will need access to your company’s trade secret information, and it may be necessary to share trade secrets with prospective business partners, or even competitors, in situations involving joint ventures, potential mergers, and other transactions.  This can be done by utilizing non-disclosure agreements (“NDAs”) whenever you need to share your trade secrets with others for strategic purposes.  Plus, these agreements have another benefit: by requiring employees and third-parties to sign NDAs you not only bolster your trade secret case under the UTSA, you receive the added protections of contract law.

e. Consult with a Lawyer before it is Too Late

Hiring an attorney can go a long way in making sure your company’s trade secrets remain protected and enforceable.  As this article explains, it is crucial that you take steps to protect your trade secrets.  These protections should be put in place as soon as possible.  All too often a company discovers a problem with its confidentiality efforts after a trade secret disclosure has been made, and then it may be too late.  To avoid the loss of valuable trade secrets by failing to meet the applicable legal standards, you should get advice from an attorney who has experience with trade secrets.

Adam Starr, Author (astarr@mmmlaw.com)
John R. Harris, Editor (jharris@mmmlaw.com)
Jack Todd, Editor (jtodd@mmmlaw.com)

¹The UTSA has not been adopted in Massachusetts, New Jersey, New York or Texas, but trade secrets are still protected in those states under other statutes or court decisions.

NOTE:  This article represents the views of the author and does not necessarily represent the views or positions of the firm or of any of its clients.  The information contained herein is of a general nature and is not intended to provide legal advice to or address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that this information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on this information without appropriate professional advice after a thorough examination of the particular situation.

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