What You Need to Know about Keeping Trade Secrets

The trouble with copyright law is that while it protects the expression of an idea, it does not protect the idea itself. On the other hand, while patent law protects ideas, patent owners are afforded only a limited period of protection, in consideration for having to disclose to the public the secrets of their innovation. By contrast, under trade secrets law, an idea that can be kept secret, like the famed Coca Cola formula, can enjoy legal protection for the lifetime of the trade secret, which could be many, many years.

With the enactment of the Defend Trade Secrets Act of 2016 (DTA2016), Trade Secrets Law entered a new epoch. Traditionally, trade secrets law has been a patchwork of various laws, sometimes inconsistent with one another.  The DTA2016 federalizes the definition of trade secrets, provides that trade secrets owners can use the federal courts to enforce their rights, and establishes a new mechanism for allowing owners to obtain emergency relief to prevent misappropriation. The kinks need to be worked out, but the bottom line is that the effort to create a national standard portends the day when trade secrets law could become the premier body of federal law protecting intellectual property rights.

As defined in the DTA2016, for “information,” broadly defined, to be considered a trade secret, “the owner . . . has taken reasonable measures to keep such information secret; and the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”    Under the model Uniform Trade Secrets Act, which has been adopted in some form by more than 40 states, the definition of “trade secret” is much the same as the DTA2016 definition.

Assuming that the information in question is the sort of information from which its owner can derive actual or potential value, the issue becomes what does it mean to take “reasonable measures” to keep such information secret?   In considering this question, trade secrets owners need to understand that the question of whether a trade secret has reasonably been kept secret will be the first order of evidence in establishing the owner’s right to relief, so the “reasonable measures” taken should be documented in the form of policies, procedures, and regular audits detailing where the protected information is located and who has had access to it.  Since an owner has the ultimate burden of proof on this issue of “reasonable measures,” their failure to devise and follow a trade secrets program intended to evidence such measures could sound the death-knell of a bona fide trade secrets claim.

So, what “reasonable measure” should an owner consider? The answer to this question can depend on several factors, such as how large the organization is that owns the trade secret; how many people will need to have access to it; what level of complexity is implicated in accessing the trade secret, and how easy or difficult would it be to reverse engineer the trade secret. In the case of Carol and the Beelzebub Cake (which we discussed in a previous article), the easiest approach was to keep the recipe under lock and key, and only disclose it to third parties who had committed to a non-disclosure agreement. To develop the evidence necessary to prove “reasonable measures,” Carol might want to take a picture of the desk drawer and key to show how her trade secret is stored and have a log detailing when the recipe was retrieved and by whom.

As Carol’s Beelzebub Cake empire grows and her organization becomes more complex, however, the lock and key method of protecting her recipe may become less feasible. The recipe may also need to reside on a computer file so it can be accessed by employees to make the confection or disclose it to manufacturers or licensees. Such a file would, of course, need to be password protected or encrypted to prevent access by unauthorized persons. Who accesses the file would need to be clearly documented and, of, course, copies of contracts, containing confidentiality provisions, and non-disclosure agreements would need to be indexed and stored as evidence that Carol was trying to control how and to whom her famed recipe was being disclosed.

Ultimately, Carol may need to delegate the responsibility of overseeing the implementation of her trade secret protection program to a partner or manager, who would be responsible for ensuring that the trade secret is segregated from other types of information; that access is restricted on a “need to know” basis; and that, when access is granted, there is a log that shows who had access and the circumstances under which access was granted. Finally, the manager would need to ensure that everyone who was granted access was governed by some covenant of confidentiality to discourage intentional disclosure and as evidence that Carol was taking reasonable measures to keep her trade secret, well, secret.  For most businesses, trade secrets extend far beyond recipes to include software source code, engineering specifications, product formulas and, indeed, any information from which its owner could conceivably derive independent economic value.

In our next segment, we will explore how larger organizations manage their trade secrets protection programs and what resources, in the way of software and outside services, may be available to help a business manage them.


Related content:

Copyrights, Trade Secrets, and the Saga of the Beelzebub Cake

Small Business Corporate Governance: Fiduciary Duties

Non-Disclosure Agreements- Protecting Business’s Proprietary Information


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