These Five [Easy] Steps to Identify and Protect Your Trade Secrets are intended to be useful to a broad audience to kick-start this blog. Publicly traded companies (and small businesses) can almost always improve how they identify and protect their trade secrets.
Despite adoption of the Uniform Trade Secrets Act (“UTSA”) in almost all fifty states, law on trade secrets and restrictive covenants to protect same may still vary significantly from state to state. For example, in South Carolina, courts have required new consideration for an employment agreement with restrictive covenants, such as non-compete and non-disclosure provisions. For an illustration of how choice of law can impact the outcome of an employer / employee dispute, see Jonathan Pollard’s recent blog post on airline service trade secret litigation, highlighting differences between Florida and Minnesota law.
Small businesses do not always know how they will grow, and do not have off-the-shelf employment agreements with non-compete and non-disclosure provisions for new employees. For this reason, small businesses may be deprived of the opportunity to use employment agreements to protect their trade secrets in states like Minnesota and South Carolina. Other states like Florida, and California have held “continued employment is adequate consideration for an employer’s modification of a unilateral contract.” The UTSA is not intended to distinguish trade secret ownership between large and small businesses. In fact, provisions in the UTSA for enjoining a “threatened misappropriation” of trade secrets should, arguably, be construed to protect small business trade secrets.
Below are 5 tips / steps, non-exhaustive, that small and large businesses can use to better identify and protect their trade secrets:
1. Identify Your Intellectual Property (IP). This requires a general understanding of commonly protected types of IP, namely:
- trade secrets,
- trademarks, and
Patents provide exclusive rights to practice an invention in exchange for full disclosure. A trade secret can be an invention similar to a patent and could be patented, but if not patented within one year of sale or disclosure, it is best to maintain as a trade secret. A trade secret can be as simple as a customer list, or perhaps disclosure of a future publication. In contrast to a patent, a trade secret may provide protection indefinitely, if maintained as confidential. A trademark protects a “trade name” or a product name and is associated with the goodwill your business or product has accumulated after years of good service to your customers or clients. Copyright can have overlap with trade secrets and patents, particularly with respect to software, but that is for another blog post.
To better understand what can be a trade secret, read the definition of a trade secret in the UTSA. As you can see, many things can qualify as a trade secret, not just super-secret formulas. The vagueness of the UTSA definition of a trade secret was recently criticized by Judge Posner in an Economic Espionage Act case (criminal case). Often the most important fact in litigation is how the owner protected [or failed to protect] the trade secret information, and limits dissemination accordingly, which leads to tip number 2.
2. Limit Distribution of Trade Secret Information!!! The primary factor that courts look to in determining if the party claiming ownership of a trade secret is: what steps did the owner take to reasonably protect the trade secret information? The three ring binder formula book in a locked cabinet from the 1980’s has been replaced with digital information, such as a 32 GB flash drive that is smaller than a pocket knife. Employers should limit access to only those employees that have a specific need to access and further develop their trade secrets. Ideally, written policies would be in place, even if only a page or two and distributed when hiring, reminding the employees that nothing is to be taken via email, flash drive, DropBox, Google Drive, Mega, or shared outside of the company. Even better if they do not have access to the trade secret information in the first place, unless needed to do their job.
3. Use Covenants-not-to-Compete and Non-Disclosure Agreements with Employees and Vendors. As alluded to above, in some states, this may require the employer to give a “raise” or some other form of “consideration” to be enforceable. This is because some state’s courts have held “continued employment” is not sufficient consideration to support a post-hire employment contract with restrictive covenants. If handled properly, adding an employment agreement may be a way to build upon desirable collaboration and team concepts and remind employees of their value to your company. It is also important to note that restrictive covenants with respect to an individual’s employment will be strictly construed as against the employer, whereas in the sale of a business, that same strict construction may not apply because the seller bargained-for the restriction. The scope of covenants not to compete, restrictions on trade secret use and confidential information should be carefully crafted for each situation. William A. Nolan of Barnes & Thornburg recently provided an illustrative run down of five cases under guise of searching for trends in enforcement, and concludes scales tip slightly in favor of enforcement. To the extent possible, the restrictions should be distinguished from employment knowledge or transferable job skills. Employers should continually evaluate restrictions to enable them to argue the time and geographic scope are necessary to protect the trade secret or legitimate business interests. Also, as stated above, define the state law that will apply.
4. Document the Existence of the Trade Secret. Perhaps this tip should have come sooner as it is implied in the above, but you might be surprised how many times lawyers see businesses with extremely valuable trade secrets that they did not foresee developing and have not taken steps to identify and protect to take advantage of the UTSA and case law interpreting it. Remember, once the trade secret is in use in the market, the owner of the trade secret, like BTO in the 70’s, will soon be very busy “Taking Care of Business.”
5. Seek Advice of Counsel if Confused About Potentially Valuable Trade Secrets. If necessary, ask for an initial consult for a flat fee, so that you can be informed of the options, risks, and rewards for identifying and protecting trade secrets. Many times these things did not seem so important until an employee leaves, taking with him or her: flash drives, other employees, clients, protectable know-how, and then the risks (and costs) to your business could be fatal. Being aware of trade secret protection is a necessity for almost all businesses today. Following these five simple tips will hopefully lead you and your business to even greater future success, and enable you to most efficiently take advantage of laws providing for trade secret protection.