Primer on Trade Secrets
|Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: April 2000
One result of the technology boom in California is the increasing importance of intellectual property. Indeed, we often hear about the traditional forms of intellectual property (including patents, copyrights and trademarks), but, an often ignored is the trade secret.
WHAT IS A TRADE SECRET?
Many companies believe all of their business information is a "trade secret" subject to protection from disclosure to competitors. This, however, generally is not the case. Not all "confidential" business information is a "trade secret" and not all "trade secrets" are afforded protection by the courts. Basically, every bit of confidential information, or technology, that provides your company with a competitive edge may be protectable as a trade secret. But just because the information is proprietary and important to your company's success does not necessarily mean it qualifies as a trade secret worthy of protection under California law.
A trade secret is any formula, pattern, device or compilation of information used by a company that is unknown to others and gives the company a competitive advantage. Examples include unpatented inventions; future product designs and research; non-public company documents such as blueprints, laboratory notebooks and training manuals; marketing, purchasing, planning and customer information; and financial, accounting, recruiting and legal information.
HOW TO PROVE SOMETHING IS A TRADE SECRET?
Any company wanting to protect its proprietary information as a trade secret must be able to prove that the information qualifies as a trade secret. Some of the factors the courts consider to determine what business information qualifies as a protectable trade secret include:
1. Common Knowledge.
The extent to which the information is generally available or known in the community. As the name suggests, a trade secret must in fact be a secret. There is no cause of action for misappropriation of non-secret information. Thus, if a customer or supplier list can be reconstructed by competitors simply by picking up an industry directory or a telephone book, a court may not protect the information as a trade secret. Nevertheless, the key seems to be the specialized nature of the information. If the information was compiled at great time or expense or is not known by the company's competitors, courts will be more inclined to treat the information as a trade secret even though the information could be compiled or discovered from public sources.
2. Limited Disclosure.
The extent to which the information is known by he company's employees. Trade secret information cannot be disclosed to others without an express or implied obligation of confidentiality. If it is, courts will likely find that the secrecy of the information has been forfeited and, therefore, is no longer a trade secret. However, so long as the individuals to whom the alleged trade secrets are disclosed (e.g. employees) have signed a confidentiality agreement and require the information to perform their duties, the trade secrets may retain their status and protection since those to whom the information was disclosed needed the information and were under an obligation of confidence. But be careful. A confidential relationship is a two-way street -- if disclosure is made in confidence, something must make the "disclose" aware that he is under a duty to keep the information confidential. If marketing plans and strategies, for example, are widely disseminated to employees who do not need to know such market information, your marketing plans may not be entitled to protection as a trade secret.
3. Protection and Safeguards.
The extent of the measures taken by the company to guard the secrecy of its information. The more safeguards the company has in place, the more likely the court will find trade secret protection. A few examples of such safeguards are using confidentiality agreements with employees and customers, designating proprietary information as "confidential," and restricted access to trade secret information.
4. Value of the Information.
Another factor often looked at by the courts is the value of the information to the owner and to his or her competitors. What will be the impact on your business if the competition has information you think is confidential? Think about all of the readily available information you presently have about your competitors, their products and business plans. If your competitors have the same information about your company, do you consider them to be in possession of your trade secrets?
5. Time and Expense.
The courts will also consider the amount of time, effort, and money expended by the owner in developing or compiling the information and the ease or difficulty with which the information could be properly acquired or duplicated by others. For example, the formula for Coke® is probably more valuable and important to Coke Cola than the identity of its distributors and, therefore, is more worthy of protection as a trade secret. Likewise, information that is the product of years of field surveys or research will be more deserving of trade secret status than information compiled in a day or two at the local library. Can you identify specific efforts and expenses incurred to compile and develop the information sought to be protected? How long would it take your competitors to duplicate or develop the information thought to be confidential? A business must constantly work at plans that protect its confidential business information. (See information below.)
6. Employee's General Knowledge, Skill and Experience.
Under California law, an employee is free to use his or her general knowledge, skill and experience acquired during employment. Such knowledge, skill and experience therefore cannot be the trade secrets of the employer. But where is the dividing line between an employee's general knowledge, skill and experience and the employer's trade secrets? This is generally the main point of contention in almost every case. The employer believes that the information should be his trade secret while the employee argues that the information falls within his general knowledge, skill and experience. In such a situation, courts typically strike a balance between information that is specialized to the employer's specific business, which will be deemed to belong to the employer, and more generalized information, which the employee must be free to use to work in the career of his choice. For example, an owner of a computer repair shop who trained his technicians to on Apple computers cannot prevent these technicians from working on Apple computers for a competitor (unless the technicians are restricted by specific contractual obligations, such as a covenant not to compete). But, if the owner taught his technicians a specialized technique, such as a testing process not known in the industry, he may be able to prevent the technicians from using this technique without his permission. Bottom line, the employer should attempt to show that the employee is in possession of specialized information or knowledge that is not necessary for the employee to use to practice his chosen profession.
WHAT PROTECTION DOES THE LAW GIVE TO TRADE SECRETS?
In the United States, trade secret law protects information that is valuable to a business, but that may not be eligible for patent protection. Patent protection is available only for new, useful and non-obvious inventions, whereas trade secret protection is available for all types of information, if the information is secret and provides a competitive advantage. Unlike patent protection which is available only for a defined period of time, trade secret protection may last indefinitely. Also, patent holders may exclude anyone from practicing the patented invention, even parties who independently develop the same invention. A trade secret owner, on the other hand, cannot prevent others from independently developing the same idea or invention.
HOW TO PROTECT YOUR TRADE SECRETS.
Following is a list of ten things a company can do to protect its trade secrets.
- Identify the specific information which constitutes "trade secrets".
- Restrict access to that information within your organization by: locking it up, requiring access codes, and limiting the number of employees with access.
- Be sure to mark documents containing trade secrets as "confidential".
- Classify what information you consider confidential in employee manuals.
- Screen speeches, news releases, articles or other information being disseminated by your company or its agents to ensure that marketing or business plans are not inadvertently being disclosed.
- Insist upon the return of all company documents, equipment and property upon termination of employment.
- Make random security checks of employee computer terminals.
- Educate employees about the importance of trade secret protection and the risks involved with violating secrecy procedures.
- Deal cautiously with third parties who out of necessity the corporation must disclose or share some of its trade secrets.
- Formulate procedures to handle unsolicited third party submissions of suggestions, inventions and ideas, to avoid claims that information was stolen or that a confidentiality obligation was breached.
Most trade secrets are disclosed by former employees who go to work for a competitor. To enhance your success in court, a company should have its employees sign an agreement acknowledging that the information sought to be protected is confidential and may not be disclosed. If you later learn that a former employee has taken, used or disclosed your trade secrets, or that your trade secrets have gotten out in other ways, you should immediately contact an attorney. Failure to take prompt and proper action may preclude you from obtaining relief from a court. The traditional remedy for the misappropriation of trade secrets is to seek an emergency preliminary injunction to prevent further use or disclosure, and this type of injunction may be obtained in several weeks. Since an injunction involves quick relief, you must be prepared to go to court within several days of filing papers.
In addition to preparing employee and independent contractor confidentiality agreements, I also aid my clients in conducting "trade secret" audits to enhance the protection of their specific, valuable business information. Proper preparation and planning may enhance the protection of information you don't want your competition to have.
If you have any questions, or would like further information, please call 818-849-5206 or Email Us.
California Business Law attorney, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and is available to serve small and midsize businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.
© 2000 Melissa C. Marsh. All Rights Reserved.