What every company owner should be aware of about trade secret legislation.
Questions
What exactly is a trade secret?
What kinds of information may trade secrets safeguard?
What rights are conferred by trade secrets?
How can a company safeguard its trade secrets?
When someone steals or inappropriately discloses sensitive information, how can a company pursue its rights?
Is stealing trade secrets illegal?
States that have enacted their own version of the Uniform Trade Secrets Act
Table of Contents
What exactly is a trade secret?
Intellectual property includes trade secrets. Most jurisdictions’ laws define a trade secret as any formula, pattern, physical object, concept, technique, or collection of information that both:
provides the owner of the information with a competitive advantage in the marketplace, and is handled in a manner that, barring unlawful acquisition or theft, may reasonably be anticipated to keep the public or rivals from knowing about it.
Here are some instances of possible trade secrets:
The formula for an energy drink, survey methods used by professional political pollsters, cookie recipes, a new innovation for which a patent application has not yet been submitted, marketing tactics, manufacturing procedures, and computer algorithms are all examples of inventions.
Unlike other types of intellectual property, such as patents, copyrights, and trademarks, which normally need registration to be completely effective, trade secrets are basically a “do-it-yourself” kind of protection.
You do not register your trade secret with the government to protect it; you just keep the knowledge hidden. Without any legislative limits term, trade secret protection lasts as long as the secret is kept private. Trade secret protection, however, ceases if a trade secret is made public.
What kinds of information may trade secrets safeguard?
Copyright, patents, and trademarks are common kinds of intellectual property protection. Trade secrets, on the other hand, are an incredibly beneficial kind of protection that often safeguards significant technical or sensitive knowledge. Here are some examples of what trade secrets may protect:
Ideas that provide a competitive edge to a business, allowing a firm or person to obtain a “head start” on the competition. This might involve, for example, a new sort of product or marketing strategy.
Competitors’ knowledge that a product or service is under development, as well as its functional or technical features, such as the inner workings of a new software program.
Marketing strategy, pricing and price statistics, and client lists are all examples of useful company information.
So-called “negative know-how,” which refers to knowledge gained during research and development on what not to do or what does not operate properly. This knowledge is often nearly as useful as the working items or procedures.
Almost any other knowledge that has some value and is not widely recognized among rivals. This might contain a list of clients rated by the profitability of their firm, for example.
What rights are conferred by trade secrets?
A trade secret owner has the authority to prohibit the following individuals from copying, using, or benefitting from its trade secrets, or from revealing them to others without permission:
People who are automatically bound by a duty of secrecy not to divulge or use trade secret information, such as any employee who comes into regular contact with the employer’s trade secrets as part of their employment. This might include, for example, a member of a company’s Board of Directors or leadership team.
Individuals who get a trade secret by unethical methods such as theft, industrial espionage, or bribery.
People who learn of a protected trade secret by accident or error, yet have reason to believe that the knowledge is protected.
People who sign nondisclosure agreements (also known as confidentiality agreements or “NDAs”) promise not to reveal trade secrets without the owner’s permission. This might be the most efficient technique for the owner of a trade secret to establish an obligation of secrecy. See Using Nondisclosure Agreements to Protect Business Trade Secrets for additional information.
One set of persons cannot be barred from exploiting knowledge that is protected by trade secret legislation. These are the individuals who find the “secret” on their own, without resorting to unlawful methods or breaching agreements (such as NDAs) or state laws.
It is not a violation of trade secret legislation, for example, to examine (or “reverse engineer”) any legally acquired product to establish its trade secret.
Consider the popular glue XCEL Glue, which is created from a trade-secret-protected recipe. Phil, a chemist, examines XCEL’s contents, identifies its makeup, and recreates the formula. Phil may lawfully create and sell his own glue using this knowledge. Similarly, Phil may try to figure out XCEL’s client list using publicly accessible data, such as the names of those who follow XCEL on Facebook.
How can a company safeguard its trade secrets?
Simply naming something a “trade secret” does not make it one. A company must act actively to demonstrate its intention to keep the information hidden. This entails adopting particular safeguards in terms of confidentiality. Some businesses will go to great lengths.
Coca-formula Cola’s (perhaps the world’s most renowned trade secret) is held in a bank vault that can only be unlocked by a resolution of the Coca-Cola Company’s board of directors. Only two Coca-Cola workers are ever aware of the recipe at the same time; their names are never revealed to the public, and they are not permitted to travel on the same aircraft.
Fortunately, significant trade secrecy safeguards are seldom required. Although you should take reasonable efforts to preserve any trade secret information, you do not need to convert your business like an armed camp to do so.
Sensible protections include labeling papers holding trade secrets as “Confidential,” putting trade secret materials away after business hours, ensuring computer security, and restricting access to secret information to those who have a justifiable need to know. These measures would demonstrate to a court that you desire to keep the information private.
Nondisclosure agreements are the most popular and successful technique to safeguard trade secrets (NDAs). Courts have consistently stated that the use of nondisclosure agreements is the most crucial approach to keep secret information private. Find out more about nondisclosure agreements or make one online.
When someone steals or inappropriately discloses sensitive information, how can a company pursue its rights?
Every state has a legislation that makes stealing or disclosing trade secrets illegal. The Uniform Trade Secrets Act (UTSA), a model legislation written by legal professors, is the source of the majority of these statutes. At the conclusion of this FAQ, there is a list of states that have implemented some form of the UTSA.
A trade secret owner may assert his or her rights against someone who steals sensitive information by requesting that a court issue an order (an injunction) barring future disclosure or use of the secrets. A trade secret owner may also seek monetary compensation for any economic loss incurred as a consequence of the trade secret’s unlawful acquisition and use. Here are some instances of occurrences that may result in trade secret litigation:
Sarah, a former C-com employee, divulges C-com trade secrets to her new employer (whether orally or in writing).
Mary breaks into a computer company’s network and gets the specifications for a new silicon chip. She sells the data to a competing computer corporation.
Sheldon is a software programmer that works for Diskco as an independent contractor. Sheldon signed a nondisclosure agreement with Diskco, but subsequently reveals Diskco secrets to a competitor.
To win a trade secret infringement action, a trade secret owner must demonstrate:
that the allegedly privileged knowledge gives a competitive advantage, and that the information is kept secret.
Furthermore, the trade secret owner must demonstrate that the knowledge was unlawfully obtained by the defendant (if the defendant is accused of commercially exploiting the secret) or improperly revealed by the defendant (if the defendant is accused of leaking the information).
The Doctrine of “Inevitable Disclosure”
In certain situations, a firm may prohibit a former employee from working for a rival if the company can show that employment with the competition would always result in the revelation of trade secrets.
What factors make disclosure “inevitable”? PepsiCo successfully argued in a 1995 case that a former executive could not work as Chief Executive Officer of Gatorade/Snapple because the executive could not help but rely on PepsiCo’s trade secrets as he plotted Gatorade and Snapple’s new course, giving the competitor an unfair advantage over PepsiCo.
Some jurisdictions have rejected the unavoidable disclosure theory because it violates an employee’s fundamental right to change jobs. In many circumstances, courts will decline to apply the concept unless there is further evidence of bad faith, deception, or employment by a rival with inferior technology. Finally, the court will have to decide on a very fact-specific issue depending on the unique circumstances surrounding the employee’s knowledge.
Is stealing trade secrets illegal?
The intentional theft of trade secrets is a criminal under federal and state law. The Economic Espionage Act of 1996 is the most important federal legislation dealing with trade secret theft (EEA).
The EEA gives the United States Attorney General broad authority to prosecute any individual or corporation implicated in trade secret theft and penalizes willful stealing, copying, or receipt of trade secrets. Individuals may be penalized up to $500,000 and businesses up to $5 million for infractions. A violation may additionally face up to 10 years in jail. The government has the authority to confiscate and sell all stolen property and revenues.
The EEA applies not just to thefts committed inside the United States, but also to thefts committed outside the United States if the thief is an American citizen or company, or if any act in furtherance of the crime was committed in the United States. If the theft is committed on behalf of a foreign government or agency, the corporate fines may be doubled and the prison sentence can be increased to 15 years.
Many states have also made trade secret infringement a felony. In California, for example, acquiring, disclosing, or using trade secrets without authorisation is a criminal. Violators may face a $5,000 fine, up to a year in prison, or both. Trade secret theft is classified as larceny under California Penal Code Section 499(c).
