The intellectual property your company owns is the foundation of your business. Protecting this intellectual property is essential to extracting its value and in taking advantage of the opportunities that arise from it. One type of this intellectual property is trade secrets.
Unlike other intellectual property, such as patents, trademarks, and copyrights, trade secrets aren’t meant to be disclosed to enhance the public good. They are meant to be kept as a secret part of your business to provide you with an advantage over your competitors.
What Are Trade Secrets?
Trade secrets are information (1) that has actual or potential value, (2) that isn’t generally known in your industry (and therefore provides you with an advantage over your competitors), and (3) which you’ve made “reasonable efforts” to keep secret and confidential. Trade secret information doesn’t have to be novel, but it does need some “modicum of originality”. Simply calling information a “trade secret” won’t work.
Trade secrets can include positive and negative information. For example, information about a drug compound that doesn’t work on a targeted disease can be just as valuable as information about a drug compound that does. This negative information can help a drug company avoid spending large sums of money on something that doesn’t work.
General examples of trade secrets include:
- Customer lists
Specific examples of trade secrets, and among the most famous, are:
- The Coca-Cola recipe
- The Google search algorithm
- The formula for Listerine
- McDonald’s Big Mac special sauce recipe
How Can I Protect My Trade Secrets?
Unlike patents, trademarks, and copyrights, no registration or other action is needed to get and keep legal protection for a trade secret. If all three requirements for establishing a trade secret above are met, and continue to be met, protection is automatic and perpetual.
The perpetual nature of a trade secret can sometimes provide an advantage over a patent when it comes to an invention. A patent application for an invention is published and any trade secrets it incorporates are made public. In addition, while patent protection for an invention, and the patent owner’s exclusive right to exploit that invention, last 20 years after filing, once this period expires, anyone can use or exploit the invention without compensation to the patent owner. In contrast, a trade secret may be protectible and the owner may recover damages for its unauthorized acquisition and use, for as long as it’s a trade secret.
Here as some of the “reasonable efforts” you can make to show a court that you intended to keep your trade secret information secret. Note that extraordinary measures (e.g., putting them in a bank vault) aren’t necessary.
- Mark trade secret materials as “confidential”.
- Limit access to trade secret materials to individuals with a genuine need to know them by, among other things, locking them away after business hours.
- Maintain appropriate security over computers through which someone could access your trade secrets.
- Require those who have, or could have, access to trade secret materials to sign nondisclosure agreements.
How Can I Enforce Legal Protection for My Trade Secrets?
Once a trade secret has been made public, it loses its protection and can’t be enforced. Examples include distribution to vendors without restriction, sale of a product to the public where the trade secret is fully disclosed by the product, accident, or government requirement such as a label for medication.
However, trade secrets which are made public due to misappropriation (i.e. acquisition, disclosure and/or use without the owner’s permission, and with the knowledge that it is a trade secret) may still be enforced. The following are examples of trade secret misappropriation:
- A person who has a fiduciary duty (i.e. a legal or ethical obligation of trust) to the owner of a trade secret, discloses that trade secret. A fiduciary is automatically bound to protect the owner’s trade secrets by virtue of their routine contact with that trade secret as part of their duties. An example of a fiduciary is a member of a company’s board of directors.
- A person acquires a trade secret directly from the owner, or through others, as a result of theft, bribery, fraud, or breach of contract.
- A person discovers a trade secret by accident or mistake and discloses that trade secret knowing, or having a reason to know, that it is a trade secret.
- A person is bound by a nondisclosure agreement with the owner of a trade secret, in which he/she promises not to disclose or use that trade secret without the owner’s permission, and discloses or uses it in violation of that nondisclosure agreement.
Note that, if an owner’s trade secret is discovered independently by someone else (i.e. without misappropriation of the owner’s trade secret), the other person can’t be prevented from disclosing or using that trade secret. For example, it’s permissible to lawfully purchase a product and “reverse engineer” it (i.e. disassemble or analyze the product in order to duplicate it) to determine any trade secrets incorporated into that product.
Enforcement of misappropriated trade secrets can be in federal or state court:
- The federal Defend Trade Secrets Act (DTSA) applies nationwide and gives claimants who use, or intend to use, their trade secrets in interstate commerce, a right to file a lawsuit for misappropriation in federal court. In addition to seeking recovery of damages for misappropriation, a claimant under the DTSA can ask the court to “seize” stolen trade secrets if there are “extraordinary circumstances”. However, the proof and other requirements needed to obtain a seizure order are higher than typically required for an injunction.
- The DTSA also has a whistle-blower provision. This provision gives immunity protection against any criminal or civil liability under state or federal trade secret law to anyone who reveals a trade secret if the disclosure was made to report or investigate an actual or alleged violation of the law.
- Finally, the DTSA permits employees, contractors, and consultants to disclose the trade secrets of their employer in so-called anti-retaliation lawsuits against their employer. In an anti-retaliation lawsuit, an employee, contractor, or consultant sues their employer for retaliating against them for reporting a suspected violation of the law. As part of this lawsuit, they can disclose their employer’s trade secrets to their attorney and use them in court as long as the trade secrets are filed under seal and disclosed only with a court order.
States also have laws prohibiting the misappropriation of trade secrets. These laws exist in every state and most are based on a model law known as the Uniform Trade Secrets Act. State law claims for misappropriation aren’t preempted by the DTSA. This means that a victim of trade secret misappropriation can simultaneously exercise their remedies under federal and state law.
An owner’s remedies for trade secret misappropriation under either federal or state law include:
- Recovery of the owner’s actual loss from sales that were lost because of the misappropriation, including lost profits.
- Compensation for loss of trade secrets.
- The profits made by the defendant (i.e. the person or company that misappropriated the trade secret).
- Punitive or exemplary damages where the misappropriation was willful or malicious.
- An injunction to make sure the trade secret is maintained as a secret during the lawsuit.
If you believe your trade secrets have been misappropriated, Becker Law LLC can help. We are committed to helping creatives, freelancers, and small or medium businesses reach their full potential by protecting their valuable trade secrets. Schedule an on-demand consultation today to discuss your options in greater detail.