Customer list, list of suppliers, business model, food product recipe, marketing plan for 2025, product prototype, product testing results — this is a small selection of information the company owns. Generally, such information is incredibly valuable, and if it is in the hands of the competitor or a former employee creating a competing business, it can cause significant damage to the company.
Almost every agreement includes a confidentiality clause. However, signing an NDA or an agreement that includes confidentiality obligations is not enough for the actual protection of trade secrets. In this article, I will describe what can be protected as a trade secret, what actions and under what circumstances are considered misappropriation of trade secrets and what steps companies need to take to effectively protect their rights.
What can be protected by trade secret?
Under 18 U.S.C. § 1839 a “trade secret” can be all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes. For the businesses, it means that if the requirements (which we discuss later) are met, the business, regardless of the size (startup, small business, international corporation), can protect trade secrets:
- list of clients, potential clients, and suppliers;
- business and marketing plans;
- recipes, manufacturing products, calculations of food and beverage products;
- formulas of ingredients;
- pitch memos;
- prototypes, and other results of R&D activity.
But in order to be protected, it is not enough to simply create the data mentioned above. The company must have taken reasonable measures to keep such information secret, and the information shall not be:
- generally known to the public;
- readily ascertainable through proper means by the public.
Thus, the company must take certain measures to protect trade secrets which are discussed in this article.
When to consider trade secret protection?
If the company has information that is not generally known and could be valuable to competitors and other market players, for example, companies from related industries, then it is worth considering trade secret protection.
Additionally, in some cases, companies that have developed certain computer algorithms and business models that are not generally patentable may consider protecting them as trade secrets.
Sometimes, food formulations and technological methods of processing such products cannot be protected by patents because they are often obvious, although novel and companies are inclined to protect them as trade secrets. Surely, the possibility of patent protection must be assessed by a patent attorney or a patent agent registered with the USPTO.
Trade Secrets Regulation
Trade Secrets Regulations have several layers:
- federal law (by Federal Defend Trade Secrets Act);
- common law, and
- Uniform Trade Secrets Act (UTSA), a version of which was adopted by the majority of states. However, some states, such as New York, have not adopted UTSA.
At first glance, such layered regulation seems complicated, but on the other hand, it also provides a wider range of opportunities: protection under both federal and state law. Thus, to build an effective trade secret protection strategy, it is worth consulting with an attorney licensed in your jurisdiction.
Trade Secret Misappropriation
Under 18 U.S.C. § 1839, misappropriation of trade secrets means:
- acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means or
- disclosure or use of a trade secret of another without express or implied consent.
Typically, the misappropriation occurs between persons that have some relationship, such as:
- employer-employee (sometimes, employer-employee-new employer);
- licensor-licensee or franchisor-franchisee;
- company-vendor;
- manufacturer-distributor;
- parties of R&D projects.
To establish a misappropriation claim, the trade secret owner must prove:
- that the information at issue is a trade secret (for instance, that it is not generally known, and reasonable measures were taken to protect this information);
- that the person misappropriates the trade secret; and
- damages related to the trade secret misappropriation.
Additionally, breach of NDA or NCA claims, or even unfair competition claims, may be claimed as well.
Steps to protect trade secrets
As discussed above, the owner of a trade secret must first prove that the information acquired or disclosed is a trade secret. Based on the definition of a trade secret, the trade secret owner must have taken reasonable measures to keep such information secret.
Such measures depend on:
- the industry (for example, there is an established practice in the food industry that is different from an established practice in the automotive industry);
- the size of the company (reasonable measure will be different in a small company with 1-5 employees and a 20000+ employee international corporation);
- the type of data (recipe v contact list);
- other factors.
The importance of these measures cannot be underestimated. A shining example is the case of Elmer Miller, Inc. v. Landis, where the owner of a small custom tailor shop acquired the business not for its inventory but for its customer list and customer files. Two former employees, who did not sign non-disclosure or confidentiality agreements, opened their store and began to solicit customers. However, the court granted an injunction against the former employees because it emphasized that the tailor had taken reasonable measures to protect the trade secrets.
Reasonable measures that the company should consider in protecting its trade secrets can be divided into the following groups:
- Identification Measures. The first step in protecting trade secrets is to identify what is a trade secret. For instance, if engineers are working on a new prototype, the prototype shall be identified, as well as the employees who are working on it and the employees who have access to it). Sometimes, trade secrets can even be attempts to create a product that failed because this information is valuable as well, and if a competitor can obtain this information, they can at least avoid the cost of working on a similar product by simply understanding what didn’t work for their competitor;
- Contractual measures (NDA, non-disclosure clauses in contracts with partners, employees, NCA);
- Educational measures (implementing onboarding and exit procedures for employees and individual contractors; frequent reminders of such measures by including information in email communication, using it during meetings, following up after major events, for instance, after approval of the annual marketing plan);
- Labeling measures (marking documents that are confidential in both paper and digital form; establishing access only for persons that are authorized to use information labeled as confidential);
- Cybersecurity measures (limiting access to the information; establishing password and multi-factor identification policy; creating log books that include events of the disclosure of confidential information).
This is a brief list of possible measures. Speaking of strategy, effective protection requires a proactive rather than a reactive approach, so it is better to secure your business in advance. If you need to:
- build a trade secret protection roadmap for your company;
- consult on NDA or NCA;
- establish policies to protect your trade secrets in the AI area, or while many of your employees work remotely from homes, and coffee shops while attending conferences or trade shows, you can contact Ortynska Law:
Email: m.ortynska@ortynskalaw.com
Phone: +1 (914) 703-5632