By Lee Gesmer
We find that clients are often aware of how to use patents, trademarks and copyrights to protect their intellectual property. However, they seem less confident about how to utilize trade secret law and how it might benefit them. Trade secrets can be a powerful tool and this form of IP protection should always be considered as part of a company’s “IP arsenal.”
What is A Trade Secret?
Although trade secret law varies from state to state, almost every state applies a two-part definition: first, a trade secret must be something which is used in business and gives its owner a competitive advantage; and second, the owner of a trade secret must take reasonable measures to maintain its secrecy.
One benefit of the “competitive advantage” factor is that the subject matter of trade secret protection can be extremely broad – it can include formulae of all sorts, manufacturing processes, compilations of information, business management information, customer lists, business strategies, and proprietary algorithms and design concepts. And unlike patents, which expire 20 years from the date a patent application is filed, a trade secret can last in perpetuity – forever.
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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, independent contractors and perhaps customers) 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 generic NDA 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 should emphasize those specific aspects of an employee’s work which are subject to confidentiality restrictions.
If the secret is maintained on the company’s computers, best practice is to allow only those who need the information to be given password-protected access.
These requirements pose both an advantage and a challenge for business owners. The owner of a trade secret doesn’t register it with a government agency (as one would do with a patent, trademark or copyright). Nor does the owner incur the legal and filing costs associated with these government registrations. Instead, legal protection is based on how the owner manages access to the secret. This may be complicated by the fact that the trade secret is usually held within a company that has physical offices, computer systems, employees, customer contracts and business relationships with people and companies outside the company.
This requires that management establish a trade secret program or policy, ideally written, that human resources and employees be informed of the program and that they follow it to the letter. Unfortunately, even one unprotected disclosure may result in the loss of the trade secret. In a lawsuit to enforce the trade secret against a misappropriator, the trade secret owner will discover that the defendant’s defense strategy is to find any unprotected disclosures and argue that they constitute a waiver of the secret. Several unprotected disclosures will almost certainly result in the loss of trade secret rights.
Trade Secret or Patent?
Companies may be confronted with the choice of protecting a technology as a trade secret or a patent. The law allows you to have one, but not both. One limitation of trade secret protection is that competitors may reverse engineer the secret or discover it independently. While a patent can protect
against these risks, patent protection lasts only 20 years from application. The legal and strategic considerations that go into this decision can be complex and the decision should not be made without careful consideration by experienced legal counsel.
Lastly, there is sometimes a temptation to try to use trade secret law to protect information that doesn’t qualify as a trade secret – in other words, that is generally known or that hasn’t been adequately protected. This problem of “overreach” should be resisted, since courts look on it with disfavor. Overreach in one area may result in a court looking at another area – which may fall in a trade secret “gray area” – with disfavor and tilt the scales against the owner. In other words, by overreaching in one area of its business a trade secret owner may weaken a valid claim for trade secret protection in another.
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