Frequently Asked Questions: Trade Secrets
What are trade secrets?
"Trade secrets" is the legal term for confidential business information. A good nonlegal definition of a "trade secret" is a secret belonging to a business. This information allows your company to compete effectively. Examples of trade secrets include customer identities and preferences, vendors, product pricing, marketing strategies, company finances, manufacturing processes and other competitively valuable information.
Under the Uniform Trade Secret Act, information must meet three criteria to qualify as a trade secret. First, the information must not be "generally known or readily ascertainable" through proper means. Second, the information must have "independent economic value due to its secrecy." And third, the trade secret holder must use "reasonable measures under the circumstances to protect" the secrecy of the information. These requirements are explored throughout these frequently asked questions.
Why protect trade secrets?
Failure to adequately protect your company's proprietary information will allow your competitors and ex-employees to reduce your profits. The trade secret laws will help prevent such misfortune if your company acts in accordance with its requirements.
Imagine if your top employee left your company. The employee had learned every major area of your company. S/he was an invaluable asset to the company. Now imagine if that employee set up his/her own business in direct competition with you or became an employee of your toughest competitor. You can stop this individual if your company protected its business information properly under the trade secret laws. Proper protection requires action today to be ready for tomorrow.
How long is a trade secret protectable?
Information is protectable as long as the information fits the definition of trade secrets. This can be moments or decades.
What is the geographic scope of protection of a trade secret?
Trade secret protection is a state right. A vast majority of states, including Minnesota, have adopted the Uniform Trade Secret Act. Other states have a law or laws similar to the Uniform Act. Foreign countries have similar laws, although, the particular country should be checked before reliance is placed on trade secrets in a foreign country. The rights will seem to be national or international in scope, since registration of trade secrets is not required and since most states and foreign countries protect trade secrets.
What remedies are available when trade secrets are misappropriated?
Control of the information can be recovered along with payment of damages. Attorney fees and/or exemplary (e.g., punitive) damages can be recovered in an exceptional case. Criminal penalties are available in cases of theft.
What is meant by "not generally known?"
Information known to someone or known to non-competitors is still capable of being a trade secret. In fact, more than one competing company can claim trade secret rights in the same information independent of one another. Information generally known to one's competitors is not a trade secret.
Trade secret protection can be lost through publishing the secrets. Be careful in disclosing information if secrecy of the information is important. Trade secrets are often lost through disclosures in the absence of a confidentiality agreement.
What is meant by "not readily ascertainable?"
Information that is readily ascertainable is not capable of trade secret protection. The method of manufacturing your product (perhaps a new shoe design) is not a trade secret if someone can learn how to make your product by simply examining the product.
What is "reverse engineering?"
Reverse engineering is the determination of someone else's trade secret information via examination and testing of publicly available information. While the amount of effort needed to reverse engineer can show the information is readily ascertainable, this defense applies even when the reverse engineering is difficult and the information is not readily ascertainable. Reverse engineering is a complete defense, since it shows the information, trade secret or otherwise, was properly acquired from public sources of information.
What can one do if the information has or may become "generally known or readily ascertainable?"
Your company may still protect the information even if the information is or might become generally known or readily ascertainable. Patents (design and utility), copyright, and trademark laws will provide protection for certain information even when the information is generally known or readily ascertainable. Contracts can also provide rights that exceed the bounds of trade secret law. A decision to pursue patent protection instead of trade secret protection is an involved decision that should be discussed with competent counsel. Such a decision, however, turns in part on your likelihood of succeeding on showing the information "is not generally known or readily ascertainable."
What must one do to protect trade secret information?
A trade secret holder must use "reasonable measures under the circumstances" to protect the confidentiality of the information. The better this step is performed the less likely the trade secret holder will have problems in the future and the future problems will be more easily resolved.
Under this requirement, one may tend to compartmentalize or itemize activities, since any discussion must consider each particular activity separately. To compartmentalize places undue stress on the words "reasonable measures" to the exclusion of the words "under the circumstances." Instead of compartmentalizing, one should consider each specific activity as a single part of a larger whole - that whole being the total circumstances surrounding the treatment of the information.
How should one use non-disclosure agreements?
Non-disclosure agreements should be signed before a person sees, hears or otherwise learns confidential information of the company. In the case of a new employee, the agreement should be signed before the first day of work. If they sign after they start working or otherwise obtain access to the information, they should be given something of value in exchange for their signature (this may be necessary to make the contract binding). The agreement may contain, in addition to a non-disclosure provision, a provision requiring the employee to not compete with the employer for a period of time following the termination of employment. Non-disclosure agreements are not used with just employees, but rather anyone who has access to the confidential information.
A distinction needs to be made between agreements which have been read and those which have not. An agreement that has not been read may provide contract rights, but does not provide significant notice value. Agreements in Minnesota may also need to specify specific types of information that needs to remain confidential. Vague contracts provide little, if any, notice. Consider agreements for everyone who may have contact with sensitive information. Give the signer of the agreement a copy and place the other in the file.
Signed contracts, along with audits, are perhaps the most powerful tools in trade secret law. Beyond notice, contracts can be used to broaden the trade secret holder's rights and provide basis for asserting misappropriation (i.e., breach of contract). A well prepared non-disclosure/ non-compete contract is a must. Court's seem to decide for trade secret holder's in the presence of a contract and against the holder in the absence of a contract.