Trade Secret Protection: Everything You Need to Know
Trade secret protection is regulated under the Uniform Trade Secrets Act (UTSA) to protect a person or company's profitable secrets. 8 min read
2. What Is a Trade Secret?
3. Types of Trade Secret Disputes
4. The Uniform Trade Secrets Act
5. States that Have Adopted Some Version of the UTSA
6. What is a Trade Secret Claim?
7. Who You Can Protect Your Trade Secrets From
8. How to Protect Your Trade Secrets
9. Protecting a Trademark
10. Frequently Asked Questions
What Is Trade Secret Protection?
Trade secret protection is regulated under the Uniform Trade Secrets Act (UTSA) to protect a person or company's profitable secrets. Trade secrets are protected without registration or any need for procedural formalities and can be protected for an unlimited time.
What Is a Trade Secret?
The protection of trade secrets is particularly attractive for small and medium-sized businesses. It's important to be aware that there are some conditions that need to be met for the information to be considered a trade secret.
Compliance with some of these conditions could turn out to be more difficult and costly than it may first appear. Conditions vary from country to country, but some general standards exist.
- It needs to be information such as a formula, pattern, compilation, program, device, method, technique, or process.
- It needs to have independent economic value.
- It cannot be generally known or easily figured out by a person who might then gain economic value from it.
- There mustbe obvious and reasonable efforts to maintain its secrecy.
Trade secrets can include things such as:
- Corporate hiring plans that are specifically designed to attract the best employees.
- Human resources tactics that help to prevent wrongful discharge lawsuits and keep employees happy.
- A company's list of current or previous customers.
- Information that relates to manufacturing or labor costs.
- Business plans.
- Strategic planning information about marketing or acquiring other companies.
- Plans or strategies for delivering products to distributors.
- Almost any other information that relates to past, present, or ongoing business activities which are valuable to the business and it is unknown to others who could use it to their advantage.
When a business takes reasonable measures to keep their valuable information secret, anyone who improperly uses or discloses that informationcan be held accountable.
Pretending to have a good faith interest in a partnership and then taking the design as one's own (scenario "A") would seem to most to be an improper way to gain access to information. Breaking-and-entering (scenario "B") to gain information unlawfully would also lead to liability.
A scenario "C" might be something like a photographer standing outside of a car manufacturer's property waiting to catch a glimpse of the new car. Accessing the information this way really only allows you to see information that is readily available to the public and trade secret law does not protect the car maker in this situation.
Types of Trade Secret Disputes
Business Versus Former Employee
When an employee leaves a job, they take things like product designs, manufacturing secrets, customer lists, and marketing plans, with them. All of these things could potentially fall under the umbrella of trade secret law. The same rules apply to current employees who disclose trade secrets in exchange for payment or for some other purpose.
Employer Versus Subsequent Employer
This conflict occurs when a former employee leaves a company with trade secrets, but the dispute is aimed at the new employer who enticed the employee to make the move and to take the trade secrets with them.
Business Versus Former Partner
Partnerships that come to an end can result in one of the departing parties taking trade secrets with him or her.
Business Versus Competitor
If the information about one company is wrongfully obtained by a competitor, such as by trespassing on the target company's land, illegally entering a building, or bribing an employee, the competing company can be held liable.
Business Versus Person Who Discloses
An independent investigator or another party who gains information improperly and discloses that secret information can be held accountable.
Business Versus Agency or Court
There are a lot of situations where a court or government agency may try to force a disclosure of a trade secret. If a court tries to compel cooperation, the party who does not want to disclose their information may claim trade secret protection to convince the court to permit nondisclosure.
The Uniform Trade Secrets Act
Most states have adopted some form of theUniform Trade Secrets Act(UTSA). The UTSA defines and protects trade secrets throughout the United States.
The legal definition varies slightly depending on the state, but a general definition is "a piece of information that has independent economic value by not being generally known and can reasonably be maintained a secret."
The act is pretty broad and protects any information that gives a company a competitive edge, but the company has to take reasonable precautions to protect the trade secret.
States that Have Adopted Some Version of the UTSA
- District of Columbia
- New Mexico
- North Carolina
- North Dakota
- Rhode Island
- South Dakota
- West Virginia
What is a Trade Secret Claim?
If you feel that someone has used your trade secret and is receiving economic value from using it, you can file a trade secret claim. In order to do so, the following must be true:
- The subject matter qualifies for trade secret protection.
- The holder of the trade secret has to prove that reasonable precautions were taken to make sure that the secret information was protected from disclosure.
- The trade secret holder needs to prove that the information was wrongfully acquired by the other user.
Just because someone uses your trade secret doesn't mean there is misappropriation. There are basic situations where obtaining a trade secret is illegal.
- If it is acquired through improper means
- If it involves a breach of confidence
It is possible for trade secrets to be obtained lawfully through independent discovery, reverse engineering, or an inadvertent disclosure resulting from the trade secret holder's failure to take reasonable protective measures.
In some situation, misappropriation of trade secrets is a federal crime under the Economic Espionage Act.
A trade secret owner can enforce their rights against someone who steals trade secret information. The owner asks a court to issue an order, known as an injunction, to prevent further disclosure or use of the secrets.
The trade secret owner can also collect damages based on the economic injury resulting from the trade secret being used by someone else.
To win in a trade secret infringement case, the trade secret owner needs to show that:
- The information that was stolen provided a competitive advantage
- The information was maintained in secrecy
- The trade secret information was improperly acquired or improperly disclosed by the defendant
Who You Can Protect Your Trade Secrets From
The owner of a trade secret can stop the following groups of people from copying, using, or benefiting from his or her trade secrets or disclosing them to others without permission:
- Anyone who is automatically bound by a duty of confidentiality not to disclose or use trade secret information. This includes employees who routinely come into contact with your trade secrets as part of their job.
- People who get the trade secret through improper means such as stealing, industrial espionage, or bribery.
- Someone who knowingly obtains the trade secret from other people who have no right to disclose those secrets.
- People who learn about the trade secret by accident but know that the information was a protected trade secret.
- Anyone who signs a non-disclosure or confidentiality agreement which promises that they will not disclose any trade secrets without authorization from the owner.
There is a group of people that can't be stopped from using information protected under trade secret law. One example is anyone who discovers the secret independently without using illegal means or violating agreements or laws. It is not a violation of trade secret law to analyze or reverse engineer a trade secret.
How to Protect Your Trade Secrets
- Use a warning label: You need to use a written label or sticker to classify and protect your trade secrets. It can be as simple as using a stamp labeled "Confidential" on each page of any trade secret information. You should also consider placing a label on the front cover of any trade secret document with a warning for criminal penalties under the Economic Espionage Act.
- Restrict physical or electronic access to your trade secrets: Only people who absolutely need to know the secret in order to do their jobs should have access to the information. Create passwords for any computer-stored trade secret information. If you have physical copies of things, lock them in a secure filing cabinet. You should also consider shredding documents that have trade secret information on them and not just throwing them away.
- Make everyone sign confidentiality agreements:If you need to give trade secret information to someone outside of your company, then you need to make sure that he or she signs a confidentiality agreement. You should also make sure that all employees, consultants, independent contractors, and business partners routinely sign confidentiality agreements.
- Create policies, procedures, and records: There should be specific ways that trade secrets are handled and procedures to follow when disclosing them.
- Create an information protection team: Trade secret activities should be coordinated through an information protection team with an identified leader who makes sure that all policies and procedures are followed.
- Correct actions and seek improvement: You should have a system in place in the event that there is a problem with your trade secret protection policies. If a problem arises, how will you fix it? Corrective action should not simply deal with that specific incident, but also address the root-cause so that the company's trade secret protection can improve.
- Use caution internationally: Other countries are not required to respect U.S. policies on trade secret protection. If you are conducting business internationally, you should take extra care to understand the trade secret laws there and make sure you are protecting your information constantly.
- Use the "Inevitable Disclosure" Doctrine if necessary: A company can actually stop a former employee from working for a competitor if the company can show that employment with the competitor will likely lead to the disclosure of trade secrets. This law varies from state-to-state.
Protecting a Trademark
There are two kinds of trademarks. You can officially register your mark as a statutory trademark with the U.S. Patent and Trademark Office, which entitles you to use the name in every state. A common-law trademark is yours as soon as you start using a name, whether you register it or not.
- If you intend to go national with your company, you should register its trademark before you even before opens its doors.
- Do a comprehensive search in the USPTO's searchable online database. Look for any mark that could be confused with yours and that is in the same type of business.
- A registered trademark allows you to stop another company from using the same or a confusingly close name or design to the one that you have already registered, but only if the other company started using the name after yours was registered.
- A company that started using the name first is free to continue doing so. It can also limit your entry into that market and object to your application.
- Even if you plan to stay local and don't want to do business out-of-state, you should still register your trademark to avoid potential conflicts.
- Be careful when choosing a name. A name that describes the product or service like Mary's Muffins, is the most difficult to register and defend and should be avoided if possible. The better option is a name that suggests the nature of the business, like Microsoft. The best types of names are fanciful names like Kodak or Xerox, which mean nothing outside of the company's identity. These are the easiest to trademark and to defend against infringement.
Frequently Asked Questions
What rights does the owner of a trade secret have?
A trade secret owner can prevent people from copying, using, or benefiting from their trade secrets or disclosing those secrets to any other person without their permission.
Is stealing trade secrets a crime?
If you intentionally steal a trade secret, then yes, it is a crime. If you are found guilty of violating the Economic Espionage Act, you can be fined up to $500,000. Corporations can be fined up to $5 million. You also risk being sent to prison for up to ten years.
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