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A Trade Secret Primer

OCTOBER 1988

Almost all high-tech companies depend to some extent on trade secret law to protect significant portions of their technology, regardless of any copyrights or patents they may hold. As a result, it is important for every business person and professional involved with high technology to be familiar with the principles of trade secret protection. The following primer is an introduction to this area of the law.

What is A Trade Secret? although trade secret law varies from state to state, almost every state applies the following two-part definition: first, a trade secret must be something which is used in business and gives its owner a competitive advantage. Second, the owner of a trade secret must take reasonable measures to maintain its secrecy.

The range of information that may be encompassed under the first part of this definition is very broad, and includes formulae of all sorts, manufacturing processes, compilations of information (of virtually any kind), business management information, customer lists, business strategies, and proprietary algorithms and design concepts, whether incorporated in computer software or used in some other manner.

What Are “Reasonable Measures” To Maintain Secrecy? The activities which constitute “reasonable measures” to maintain a trade secret vary from case to case, but only “relative” rather than “absolute” secrecy is required. At the very least, the owner of a trade secret should require all persons (including employees) allowed access to the trade secret to execute confidentiality agreements. Some courts have held that it is not enough merely to have an employee sign a nondisclosure agreement at the outset of employment and assume that this completely protects all trade secrets to which the employee is exposed during the course of employment; the employer must emphasize those specific aspects of an employee’s work which are subject to confidentiality restrictions.

How Can A Trade Secret Be Lost? Some courts have held that trade secret status may be lost by as little as a single “unprotected” disclosure, for example, a disclosure without a confidentiality agreement. Although this is an extreme view, it is critical to realize that most courts take literally the requirement that a trade secret be treated as such at all times. Several unprotected disclosures will almost certainly result in the loss of trade secret rights.

How Can A Trade Secret Be Legally Discovered? It is permissible to legally obtain a product which incorporates a trade secret, e.g., by purchasing it, and reverse engineering the product to discover the secret. However, it is important to recognize that many products containing trade secrets are not sold but licensed, with express restrictions against reverse engineering. For example, computer software in object code form is usually licensed under terms that prohibit the reverse engineering of the program’s object code into source code. (As discussed in the article on the recent case of Vault v. Quaid, above in this issue, this restriction may not be enforceable when it is imposed in a shrink-wrap license.)

What Are Some Of The Basic Differences Between Trade Secrets And Patents?A patent arises only as a result of an express grant by the federal government following a long and expensive application process, while a trade secret does not require any state or federal action in order to exist. It is possible for a trade secret to be eligible for patent protection, but the requirements of originality and novelty are far stricter for patentability than for trade secrets, and many things that can be protected as trade secrets are not eligible for patent protection.

A patent provides protection for 17 years from its date of grant, but after the 17 years expires, the invention is unprotectible in any manner. A trade secret, by contrast, may be of perpetual duration.

During the period that a patent application is being considered by the Patent Office, the application is not available to the public, so that the trade secret status of the contents of the application may be maintained in the event that the patent is denied.

What Are The Basic Differences Between Trade Secrets And Copyrights?Copyright law protects only the “expression” of an idea, not the underlying idea itself, and therefore its scope of protection is much narrower than trade secret law. If there is only one way to express an idea, copyright law provides no protection at all. Copyright and trade secret protection often are mutually exclusive, since the publication of a work reveals the work to the public, thereby giving up any claim of trade secrecy.

TLB Comment: It is imperative that high technology companies maintain adequate trade secret protection programs. Such programs include restricted access policies, use of various standardized non-disclosure agreements, and other measures depending on the company’s size, industry and particular circumstances.