The Virtual Lawyer - Trade Secrets

by David Crocker

Published 1998-01-01    Printer-friendly version

In my practice, I am continually bombarded with questions about intellectual property protection. Tell me about copyrights, tell me about patents, my clients ask. Well, the uninitiated client usually mentions copyrights and patents first because they are unaware of the less glamorous but potentially more useful concept of the "trade secret." The depressing reality is, much of your confidential business information or work product may not be patentable subject matter or sufficiently original to qualify for copyright protection. Also, filing for patent or copyright registration ultimately involves full or partial disclosure of the very same cards that you hold close to your vest. But what are you going to do? Your business is growing. Your employees, not to mention consultants, potential suitors and sundry visitors, all gain some insights into your company's inner workings. You may be giving away the store on a daily basis.

Protecting That Special Sauce

Now, just what is a "trade secret?" A "trade secret" is any information having economic value due to the fact that it is not known or obtainable by competitors. In short, it is closely held information that gives you the competitive edge. It doesn't have to be high-tech, only valuable in the hands of competitors. It can be as prosaic as Colonel Sanders' fried chicken recipe or as arcane as the alchemist's formula for turning lead into gold. As noted, most trade secrets would not qualify for patent or copyright protection. Most trade secrets would not qualify for such protection in any case. Likewise, if your special sauce is known to competitors already, or is lifted from the Betty Crocker cookbook, then it is not, by definition, a trade secret. It's got to be something not generally known to your competition.

Just Because I'm Paranoid . . .

Yes, courts take the idea of trade secrets seriously, but you must take steps to protect your secrets in order for a court to award you damages or grant an injunction in the event of illegal disclosure. This is not paranoia, but common sense. That means you should institute a program or procedure to protect your confidential information. Here are a few suggestions:

First, mark all confidential documents. Stamp them with a big bold stamp stating that the document is confidential and that it may not be reproduced, published or disclosed without your written authorization.

Second, maintain physical security at the office. At a minimum, institute a "clean desk" and "locked file cabinets and desk drawers" policy. Confidential documents should not be left lying around when not in use, particularly any hard copy of source code. Lock them up when not in use. At the end of the day, make sure your office is locked.

Third, take reasonable measures to ensure computer security. These steps may include any or all of the following: (1) use of passwords, (2) placing terminals and other peripherals in a secure location to which access is restricted, (3) putting "fuses" into software to detect unauthorized access, (4) programming your computers to restrict the ability to copy software without special instructions, (5) keeping software in encrypted form, or (6) use of secret software codes to identify the employees who created it. The more valuable the particular item, the more of these steps you will wish to take.

Fourth, use nondisclosure agreements for employees, visitors, contractors, consultants and suitors. This is the most important single step you can take. The nondisclosure agreement for "new hires" should recite that the "consideration" for the agreement is the employment itself. For existing employees, you should provide a raise or some other consideration in conjunction with the signing of the agreement. This is due to the fact that some courts will find insufficient consideration for an agreement of this sort in the mere fact of continued employment. To be legally enforceable against existing employees, you must give them some other legally sufficient "goody" in exchange for the agreement to sign.

Don't Drive Yourself Crazy

One very important point: for a trade secret to be recognized by the courts, its protection must be reasonable under the circumstances. Remember, every piece of information is not necessarily a trade secret. Use common sense about what information would be harmful to the company if disclosed. Trying to protect every single scrap of information is both burdensome and unnecessary (not to mention paranoid). Like an exercise program, trade secret protection must be sustainable: if it is too onerous, you probably won't do it.

Dealing with Miscreants

Now, what are your options should some bad actor "misappropriate" your trade secrets? Assuming that the miscreant did obtain the secret by improper means, you can obtain several forms of legal relief. Obviously, you want the secret to remain a secret. You can therefore request a court to issue an injunction to prevent further disclosure. At the same time, if the person has already used the trade secret for profit, then you can request the court to award you actual damages for your economic loss or, if that amount is difficult to calculate, the court can order the offender to pay you a reasonable royalty. In cases where the misappropriation is deemed "willful" and "malicious," the court may order the award of punitive damages. Most important perhaps, the court may order the losing party to pay the winner's attorneys' fees. Oh, the bliss.

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