Trade Secret Protection: Good Risk Management
Sanford Warren | November 1, 2007
Trade secrets are an integral part of nearly every business operation. However, even though trade secrets are pervasive in modern commercial enterprises, many business owners and managers may not fully appreciate the scope of information that may be protected as a trade secret. Furthermore, it may not be readily apparent as to what steps, if any, must or should be taken to protect confidential business information as a trade secret.
While the general concept of trade secrets may be well-known to many in business, the specific legal requirements for obtaining protection and the scope of available remedies are frequently misunderstood.
The recent disclosure of an alleged plot to sell Coca-Cola trade secrets to Pepsi reminds many business people of the importance of trade secret protection. According to an FBI investigation, the plot involved an administrative assistant at Coca-Cola and two accomplices who offered to sell confidential information about products under development to the "highest bidder." 1 Fortunately for Coca-Cola, one of their competitors, Pepsi, tipped off the FBI who set up a sting operation to uncover the alleged plot. This case is an excellent example of the need to seriously consider the precautions that can and should be taken by every business seeking to protect its trade secrets.
What Constitutes a Trade Secret?
First and foremost, trade secret law is designed to protect confidential business information. Therefore, it is critical to assess the types of information that qualify for protection from improper disclosure, known in trade secret law as misappropriation. At least 45 states have adopted some variation of the Uniform Trade Secret Act (UTSA), 2 which defines a "trade secret" as any information that derives economic value from not being generally known and is the subject of reasonable precautions to maintain its secrecy. Under the UTSA's broad definition, many different types of information may be protected "including formulas, patterns, compilations, programs, devices, methods, techniques, or processes." 3 While the Coca-Cola plot focused on confidential marketing information and valuable samples of unreleased products, protection also extends to less flashy, but equally valuable types of confidential information such as customer lists, databases of client information, and compilations of sales data.
The UTSA definition of "trade secret" also requires that some economic benefit or value be associated with the information not being generally known to the public. In the Coca-Cola plot, it is clear that information about the upcoming products had an intrinsic value to Coca-Cola, a value that would be significantly diminished if the samples were obtained by competitors before the official product launch. Similarly, compilations of data, such as customer contact information, sales data, and other critical business information, are extremely valuable to most businesses and provide a competitive advantage over rivals. Therefore, it is critical to take reasonable precautions to prevent employees, and other persons, from improperly disclosing such confidential information to competitors.
How Are Trade Secrets Protected?
After the alleged misappropriation of trade secrets arises, the issue most frequently contested is the sufficiency of the precautions taken to protect the information. The value of confidential information is generally assumed to be proportional to the steps and precautions taken to maintain the confidentiality of that information. It is only necessary that an employer take "reasonable precautions," not necessarily every possible precaution. 4 Therefore, restricting the disclosure of such confidential information only to employees that must have access to the information is essential.
Confidential information should be maintained using commercially practical safeguards. For example, paper documents containing confidential information should be held and maintained in a locked office or locked file cabinets. Electronic documents having such information should be password-protected or, if possible, have access electronically restricted to only particular users. These precautions are easy to implement and also tend to be the most effective protections against trade secret misappropriation. However, it would be impossible to run a business without disclosing some confidential information to at least some of the employees.
Were Non-Disclosure Agreements Procured?
When employees must have access to confidential information, it is important to ensure they understand their responsibilities and obligations. Therefore, every state allows some form of a non-disclosure agreement (NDA) between employers and employees. NDA agreements are generally entered into at the beginning of the employment relationship, and provide the employee with adequate notice of his or her responsibilities and obligations with respect to confidential information of the business. A smaller number of states may also permit non-compete agreements which preclude an employee from working for a competitor for a limited period of time. 5 Both types of agreements should be carefully tailored, ensuring that the scope of confidentiality is well-defined and that the agreement is not overly burdensome on the employee. A well-drafted NDA, or a non-compete agreement, can be an effective tool in preventing unwanted disclosure and enforcing trade secrets.
Were "Improper Means" Used?
When misappropriation of trade secrets occurs, remedies are generally available if all of the legal requirements for trade secret protection are satisfied. As already discussed, the court will look at whether the information was truly confidential business information and whether reasonable precautions were taken. The courts will also look at whether "improper means" were used to obtain the confidential information. "Improper means" includes both common criminal acts such as theft, bribery, and fraud or misrepresentation, but also traditionally non-criminal activities such as breach of a duty to maintain secrecy, or inducing another to breach such a duty. 6
Conclusion
Businesses should be cautious any time they might inadvertently obtain confidential information, such as when hiring the former employee of a competitor. Therefore, taking precautions, both offensive and defensive, can protect not only your own trade secrets, but also against becoming involved with another's allegations of misappropriation.
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Footnotes
Kathleen Day, "3 Accused in Theft of Coke Secrets," Washington Post, July 6, 2006, at D01.
Forty-five states, the District of Columbia, and the U.S. Virgin Islands have adopted the UTSA or some minor variation of the UTSA. Currently, only Massachusetts, New Jersey, New York, and North Carolina have not adopted the UTSA. However, each of these states still provides trade secret protection to varying degrees under a combination of common law and state statutes.
Uniform Trade Secrets Act § 1 (4) (1985).
SeeE.I. du Pont de Nemours & Co., Inc. v. Christopher, 431 F.2d 1012 (5th Cir. 1970) (holding that aerial photographs of a duPont plant under construction was a misappropriation of trade secrets and duPont was not obligated to conceal the construction site, as such precautions were not reasonable).
See generally, "Check Your Noncompete Clauses," available at www.akingump.com/.
UTSA § 1(1) (1985).
