Intellectual Property Primer Series Part 4: Trade Secrets

Here in the final part of the Intellectual Property Primer Series, I will cover trade secrets.

Trade secrets, unlike the other forms of intellectual property law previously covered, is not a creature of federal law; instead, it derives from state case law and statutory law. Most importantly, unlike the other forms of intellectual property law, trade secrets law does not grant a set of exclusive control/use rights; instead, it merely protects the information from wrongful access.

A trade secret is any information that derives economic value from being not known or readily ascertainable by others who could gain value from its use or disclosure and is also protected from acquisition, use, or disclosure by reasonable security measures. Examples of trade secrets include customer lists, manufacturing methods and associated machine blueprints, chemical processes and formulas, computer programs, or marketing data and strategies. Trade secrets are thus further distinguished from other forms of intellectual property, which allow rights holders to put their intellectual property into the public domain with the protection of exclusive rights; in contrast, trade secrets must be kept from the public at all times. However, this offers a significant advantage over patents; where the method of manufacturing a product or performing a process must be publicized in a patent application, for anyone to use once the patent rights expire, under trade secret protection a business’s proprietary information can be kept from competitors as long as the trade secret holder wishes to and can keep the information secret.

Trade secrets protection allows information holders to recover damages from any individual or entity that wrongfully acquires, uses, or releases protected information. However, it does not protect against publishing of trade secrets by their owner, whether such publishing was intentional or not, or protect from efforts by others to discover trade secrets through reverse-engineering lawfully acquired examples or other legal similar methods. And even if trade secrets are wrongfully publicized, once the information enters the public domain, trade secret protection is generally lost forever; by the time this would normally happen, patent rights have been lost. But when businesses wish to keep information out of competitors’ hands as long as possible, they generally opt for trade secrets protection.

Many trade secrets cases are lost on the basis that the owner of the information failed to take reasonable security precautions to protect the information. Factors courts consider when deciding whether owners exercised reasonable security precautions include: the need to disclose the information to employees and suppliers, and the steps taken by the owner to ensure the trustworthiness of those employees and suppliers through, for example, background checks and nondisclosure/noncompete agreements; informing employees and suppliers of the sensitive nature of the information; limiting access, physically and/or electronically, to the information to only when necessary; and keeping track of who accesses the information.

Trade secrets are “misappropriated”, as opposed to being infringed. Misappropriation occurs when: (1) one acquires a trade secret with knowledge or reason to know that the trade secret was acquired by by improper means; or (2) one discloses or uses a trade secret without express or implied consent when one knows or has reason to know the trade secret was acquired through improper means or from a person with a duty to keep the secret. A duty to keep a trade secret can arise if there is a fiduciary duty between the owner and disclosee, or if there is an explicit agreement the disclosee will keep the information secret, or if there is an implied duty; an implied duty cannot be created unilaterally by the owner of the trade secret, but only if the disclosee knew or should have known the disclosure of the trade secret was made in confidence.

If misappropriation has occurred, the injured party can seek an injunction from the court to effect the return or destruction of trade secret documents, and prevent the publication of trade secrets; if misappropriation is caught early enough before the information becomes public, it is possible to preserve trade secret protection. However, where trade secrets have definitively entered public knowledge, courts are reluctant to grant injunctive relief. Where a party innocently comes by trade secrets and materially changes his or her position based on it (for example, starting his or her own business with the information), a court may order equitable relief in the form of a royalty to permit the innocent party to continue to use the information. And of course, in all cases, courts can award actual damages and restitution of wrongful profits.

Although not all start-ups will have trade secrets to protect, when they do, the business is likely to be most vulnerable to misappropriation in the start-up phase, before the business has firmly established itself in the market, and when partners and employees alike have access to much of the firm’s information. If your business has trade secrets, you should be taking reasonable steps to protect the secrecy of the information, beginning with nondisclosure agreements and, where applicable, noncompete agreements. I will discuss NDAs and noncompete agreements in further detail in a future article.

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