The three types of intellectual property (IP) that you hear about the most are patents, trademarks, and copyrights. However, a fourth category of intellectual property, trade secrets, also exists.

Trade Secrets are Governed by State Law

Trade secrets are generally governed by state law, as opposed to the first three types of IP, which are almost entirely governed by federal law. Therefore, the rules can change somewhat from state to state. However, most (46) states have adopted the Uniform Trade Secrets Act (UTSA), so the law is pretty similar in most places. This post will be about trade secret law in general- there could be differences in your state.

Definition of Trade Secrets and Confidentiality Requirement

Trade secrets are any business knowledge or information that is not generally known or reasonably ascertainable and that conveys an economic advantage. A classic example of a trade secret is the formula for Coca-Cola.

The law protects trade secrets if reasonable efforts are  made to maintain their confidentiality. At a minimum, trade secrets should be marked confidential and access to them should be restricted to those employees with a specific need. If you must discuss a trade secret with an outside party, a non-disclosure agreement should be used.

When Trade Secrets are Useful

Trade secrets are generally the protection of last resort. Trade secret protection is relied on when patent, trademark, or copyright protection cannot be obtained or is not adequate. Trade secrets are frequently relied on to protect databases of client or vendor information, market analysis, business plans, office processes, etc.

Trade Secret Remedies

If a trade secret is stolen or given or sold to a competitor by a present or former employee, trade secret protection entitles you to collect damages from both the party revealing the secret and the party receiving it. An injunction preventing the secret from being revealed more widely can also be obtained.

As an example, if Pepsi paid a Coca-Cola employee to reveal the secret Coke formula, both Pepsi and the Coca-Cola employee could be sued for monetary damages and to prevent them from revealing the formula to anyone else. They also could be guilty of a federal crime under the Economic Espionage Act.

Additional Trade Secret Resources:

UTSA full text

UTSA Wikipedia entry

Economic Espionage Act Wikipedia entry

Welcome to another edition of the Legal River podcast, a weekly look at the laws and legal issues facing small to medium size businesses.

Hi, my name is Steve Obenski and I’m an attorney in Washington, DC. Trade secrets are a great way to protect your company’s competitive advantage, and there are some simple things you can do to protect them. In this video, I will discuss what is a trade secret, ways to protect your company’s trade secrets, and some of the limitations of trade secrets compared to patent and other areas of intellectual property law.

So first, what is a trade secret. A trade secret can be almost any information that gives your business a competitive advantage because it is not known to your competitors and because it is kept confidential. For example, if you have a special manufacturing process that is not known to your competitors, if you have a future business plan or marketing strategy that you kept confidential. Laws in most states will protect these business secrets against unauthorized use.

To create and maintain a trade secret, state laws require that there be reasonable efforts to maintain the confidentiality of the information. What’s reasonable is going to depend on the circumstances, the nature of the information and the nature of your business. But for most people, reasonable efforts will include

- marking the word Confidential or Proprietary on any paperwork that contains that trade secret information,
- keeping confidential documents password protected and limiting the distribution of that password, and maintaining physical security of course at your office, with locks or alarms, and
- limiting access to spaces that contain the trade secret information to people who have a need to know that information.

In addition there are two types of contracts that are important in maintaining trade secrets. The first type is the non-disclosure agreement or NDA. NDAs are also called confidentiality agreements or proprietary information agreements sometimes, but they’re really the same thing. NDAs create a contractual relationship between you and recipient of the information, so that if they should disclose that information in violation of the agreement, you could possibly sue them for breach of contract. Using NDAs also helps remove any doubt that you intended to protect that information as a trade secret, and goes a long way towards providing evidence that you were making those reasonable efforts. An NDA is a reasonably simple contract, but the standard form can vary depending on the type of business. So it’s a good idea to consult with your lawyer to determine the right kind of NDA for you.

The second type of contract is a trade secret assignment. If you have employees or independent contractors who are developing important parts of your business, it is a good idea to have a clause in your agreement with them that their work product is the property of your business rather than being something that they can take with them and use for a future employer or a future client. In the case of employees, this can be part of the employment contract or the employee handbook. However, you should probably consult with an attorney to figure out exactly where is the right place for you depending on the type of information. In many states, trade secrets created by employees are owned by the employer automatically by law, but even then, having it in writing for your employees helps make it clear to you, to the employee, and possibly to a court in the future, that you did intend to protect that information as a trade secret and that you’ve made reasonable efforts to keep it confidential.

Let me talk about some of the limitations of trade secret law. Keep in mind a trade secret can only protect you against misuse of company secrets, and does not provide protection if someone else independently develops the same idea as your trade secret. So this is one way that trade secrets are very different from patents. If another company independently develops your patented invention, patent law still provides you a remedy for infringement of that invention.

There are various other advantages and disadvantages of trade secrets versus patents, and it’s a good idea to work with an attorney if you think you may want to use either of these types of protection. Just for example, patent protection can be much harder to obtain than trade secret protection because you need to prove that the invention that you’re patenting is novel and new within your industry. Another issue with patent protection is that you actually have to publish the patient explaining and disclosing exactly how the patented invention works. This is exactly the opposite of a trade secret, where in order to protect it, it actually has to be kept confidential. Finally, it’s worth noting that the duration of patent protection is only about 20 years. Whereas trade secrets can actually last as long as you’re able to maintain the confidentiality of that information.

Finally, I’d like to talk about a special problem that arises if you’re in a high tech industry or an industry where your employees move back and forth between your company and your competitors. In this case you may actually need to take some measures to be sure that your company is not accused of infringing your competitors’ trade secrets. When this is a risk, companies will usually set up what’s called a “clean room.” This usually entails taking careful records to show that only public available sources were consulted in developing the trade secret information, and walling off any employees that may have come in contact in the past with your competitors’ trade secret information. By doing this, you’ll be able to prove that you did develop your technology or strategy independently of your competitors, and it will go a long way towards creating a good defense for you in court if another company or one of your competitors accuses you of infringing their trade secret. You should probably consult a lawyer regarding the best way to set up a clean room depending on your industry and the type of information involved. Also that attorney will probably want to do some careful analysis of any obligations that your employees may have to their previous employers regarding trade secret information they may have come into contact with in their prior jobs.

So this concludes a quick overview of trade secret law for businesses. If you have any questions, please feel free to email me at Steve@Obenski.com or visit my web site at Obenski.com for more information. Please keep in mind that the information provided here is of a general nature only and should not be construed as legal advice. Finally if you have any questions about the podcast in general, please email Podcast@LegalRiver.com. Thank you.

Thanks for listening to this edition of the Legal River podcast. If you have a business law question you would like to see answered in a podcast, please email us at Podcast@LegalRiver.com. To reiterate, all views expressed in this presentation are intended only as a general discussion of the issues and should not be regarded as legal advice. For additional details or advice about a specific situation, please consult legal counsel directly.