Trade Secrets

Although the strengthening of patents by the institution of the Federal Circuit Court of Appeals in the 1980s may have caused trade secret law to receive less attention as a form of protection for intellectual property, trade secrets can nevertheless be the best form of protection in many cases. For example, even though many of its ingredients are well known, the formula for the Coca Cola® brand soft drink, first developed in the late 1800s, is still considered a trade secret. Certain kinds of valuable information, such as customer lists, cannot be protected by patents, but can be protected as trade secrets. Where a trade secret is patentable, trade secret protection may be used instead of a patent or while the patent is pending.

What is a Trade Secret?

The law of trade secrets varies somewhat from state to state, but in general, a trade secret can include any confidential information that provides a competitive advantage.

Courts generally look at the following factors in determining whether something is a trade secret:

  • How secret the information is. Trade secrets must not be known to the public or be readily ascertainable by the public.
  • The efforts made to protect the secrecy of the information. A trade secret owner need not use heroic measures but must use reasonable precautions to maintain the secrecy of the information.
  • The value of the information. A trade secret owner must have an advantage over those who do not know the secret.
  • The amount of effort or money a trade secret owner spends developing the information. The more expenditures or efforts made developing the information, the more likely it will be considered a trade secret.

A wide range of types of information has been given trade secret protection, including, for example, computer programs, manufacturing methods, scientific processes and formulas, food recipes, codes for determining discounts, and customer lists. Trade secrets do not include general skills acquired by employees.

Setting Up a Trade Secret Protection Program

Implementation of a trade secret protection program is valuable evidence that the information subject to the program is maintained in secrecy. The more formal this program, the more likely the information will be treated as a trade secret by the courts. Such programs should at the very least include agreements with employees and other people who have access to the confidential information sought to be protected, as well as rules about keeping such information safe from outsiders. Employers should also consider putting confidentiality agreements in place concerning the disclosure of confidential information to contractors, suppliers, licensees, customers or other entities.

An employee who becomes privy to trade secret information has a duty that arises out of the employer/employee relationship to maintain the information in confidence. However, the absence of an express confidentiality agreement may be considered evidence that the information is not a protectable trade secret, and the absence of a contract will limit the remedies available to the employer. Cautious employers include a non-disclosure or confidentiality covenant in their employment agreements with key employees.

Confidentiality agreements executed in the employment context require employees to keep trade secrets confidential and refrain from using the trade secrets except in the furtherance of the employer’s business. These agreements are typically executed before or at the time that a new employee joins a company and often contain provisions regarding the ownership of any patents or technology developed by the employee as well. It is also wise for employers to screen new employees to ensure that they are not bringing a former employer’s trade secrets with them, perhaps unwittingly subjecting the new employer to liability. When an employee leaves, it may be useful to review the employee’s confidentiality obligations during an exit interview, and have the employee acknowledge, verbally or in writing, that the obligations are understood.

Rules regarding the marking, tracking and safekeeping of confidential documents can also show the value and confidentiality of the information. Confidential documents and other items should be labeled as such, and employees should be kept informed as to what material is considered confidential by the employer. Other security measures can include computer security procedures (such as passwords and encryption), sign-in/out logs, visitor badges, escorts, security guards, surveillance, procedures for disposing of obsolete material, and review of all publications and speeches for confidential material before they are made public. Although some measures, such as requiring that certain information be locked in a safe, may seem like overkill, having such a rule in place can be very powerful evidence in a trial regarding the misappropriation of that information. Each employer or proprietor of a trade secret must determine what steps are necessary and appropriate for the protection of its confidential information within the context of its business operations.

Enforcing Trade Secrets

An owner of a trade secret who believes that the trade secret has been or will be wrongfully disclosed can bring a civil action against the wrongdoer to enjoin the disclosure and recover damages. In some circumstances claims can be bought against the wrongdoer’s new employer as well, particularly where the new employer is a competitor of the trade secret owner and has encouraged or stands to benefit from the misappropriation. Most trade secret claims are brought in state court, although jurisdiction may lie in federal court as well. A trade secret case can be based in contract (e.g., an employee breaches a contract to keep secret a manufacturing process) and/or in tort (e.g., a competitor uses industrial espionage to obtain information about a secret manufacturing process). It is often appropriate to assert other claims, such as unfair competition or misappropriation, as well. Depending on the law of the particular state, damages may include the plaintiff’s lost profits, the defendant’s profits, or a reasonable royalty. Punitive damages and attorney’s fees may also be available.

Trade secret protection does not apply where another person has developed an idea or invention independently, or has obtained the information legally, such as by review of published literature.

Differences Among Trade Secret and Patent, Copyright and Trademark Protection

The different types of intellectual property – trade secrets, patent, copyright and trademark – have different purposes, different strengths and different weaknesses. In many cases, a proper strategy for protecting a new product line will involve several different types of intellectual property. Choosing the best strategy for protecting intellectual property depends on which type of protection is available, the degree and type of protection afforded by each method, the cost of obtaining protection, and the value of the intellectual property to its owner.

Trade secret law protects confidential information from improper appropriation. Unlike a patent or copyright, a trade secret can exist forever and does not require government approval. A patent is not concerned with secrecy. It protects the information, but only if the information meets the strict requirements for patentability, which many trade secrets do not. A copyright does not protect information, and does not concern secrecy. Rather, it protects the expression of an idea against copying and not the underlying idea. Trademark and trade dress protection is meant to protect consumers from being misled about the origin of a product or service and, unlike trade secret protection, is not intended to prevent competition in the underlying goods or services.

Patent protection can provide several advantages over trade secret protection. In many cases, trade secret protection is impossible or impractical because of the nature of the information (e.g., the invention is mass marketed and can be reverse engineered) or because of other circumstances (e.g., the engineers move freely among competitors in the industry). In such cases, patent protection may be the only way to protect adequately an invention. Moreover, to prove misappropriation of a trade secret, one must show that the trade secret was improperly appropriated, but to prove infringement of a patent, one does not need to show improper appropriation or copying. Indeed, the infringer may be liable even if the infringer was unaware of the patent or of the patent owner. For these reasons, among others, patents are generally considered to be stronger than trade secrets, although patents have a limited life (discussed below).

On the other hand, a trade secret may not be patentable, and trade secret protection may be the only means for protecting the information. Trade secret protection has several other advantages over patent protection. Trade secret protection can last indefinitely if properly handled, but patents have a limited life. (Utility patent applications filed on or after June 8, 1995 have a term of twenty years from the earliest effective filing date. Design patents have a term of fourteen years from the patent’s date of issuance.) Moreover, trade secret protection is available from the first day that the trade secret comes into existence; trade secrets do not require government approval. A patent can be enforced only after it has been issued by the Patent and Trademark Office. Patent prosecution typically takes two to three years, and can be expensive. Further, obtaining a patent requires a very complete disclosure that eventually becomes available to the public, eliminating any trade secret rights that may have existed in the material disclosed.

Like patent protection, copyright protection may be available where trade secret protection is absent. Copyright law protects original works of authorship that are fixed in a tangible form of expression, such as computer software, books, paintings, sculptures and films. Even where the owner cannot prove actual damages, it may be able to recover statutory damages of up to $150,000 per work infringed in the case of willful infringement. A copyright can be enforced only after obtaining a copyright registration, which typically takes a number of months. Where infringement has occurred, the owner can request expedited processing. Applying for copyright registration can potentially cause a loss of trade secret rights, because a copy of the work must be deposited with the U.S. Copyright Office together with the application for registration. In some cases, including, for instance, applications for registering the copyright in computer software, the Copyright Office will accept an incomplete deposit that omits confidential material. Government fees are low ($30 per application) and attorneys’ fees for obtaining a copyright registration are relatively low as compared with patent prosecution.

On the other hand, some trade secrets may not be subject to copyright protection. For instance, methods, processes, and customer lists or lists of other data, though not protected under copyright law, may be protected under trade secret law. Copyrights, unlike trade secrets, have a limited life (though a longer life than patents): copyright protection for works created on or after January 1, 1978 is limited to the author’s lifetime plus 70 years (or the earlier of 95 years from publication or 120 years from the year of creation, for anonymous or pseudonymous works or works made for hire).

If you would like further information concerning trade secret litigation, or would like to discuss a trade secret matter, please contact an attorney in our Litigation Practice Group.