Companies often find that their most important “trade secrets”— their customer lists, price lists, production methods, product designs, and the like — are no secret at all in the eyes of a court. When a company makes little or no effort to protect its “trade secrets” when it discloses that information to people inside and outside the company, a court will not help the company when it comes seeking protection of important business information.
A federal appellate court1 recently reminded businesses of the importance of implementing and following protective measures — including the use of confidentiality agreements and the marking of documents as “confidential” — to protect their secrets. Such steps are absolutely necessary if your company intends to maintain important business information as a trade secret. The court opinion concerned two companies — a manufacturer and a seller —involved in discussions over the design of a pump motor for swimming pools. The two companies expected to jointly design the pump motor, which the seller would then market and sell on behalf of its joint venture. During the course of discussions, the manufacturer shared with the seller the preliminary studies it had performed, as well as the features and design of the proposed pump motor. The manufacturer never marked these documents as “confidential.” Nor did the manufacturer require the seller to sign a confidentiality agreement. To the contrary, the seller required the manufacturer to sign a one-way confidentiality agreement. (Author’s note: this should have been a warning to the manufacturer).
The manufacturer and the seller were not able to reach an agreement, and the seller walked away from the proposed arrangement. The seller then designed its own pump motor, which the manufacturer alleged was based on the design of the manufacturer’s proposal. Not surprisingly, the manufacturer sued the seller, asserting its pump motor design was a protectable trade secret and that the seller unjustly profited from its unauthorized use of that trade secret. The district court dismissed the suit, stating that the manufacturer took no efforts to protect its information, and therefore even if it was a trade secret, the information was not entitled to any legal protection. The manufacturer appealed.
The federal appellate court in the Seventh Circuit (Illinois, Wisconsin, Indiana) agreed with the district court. The appellate court first noted that the manufacturer did not require the seller to sign a confidentiality agreement, even though the seller had the manufacturer sign one. The court then pointed out that the manufacturer never labeled any of its documents as “confidential.” In ruling against the manufacturer, the appellate court stated, “where one company fails to take any protective steps to shield its proprietary information, it cannot then expect the law to protect it.” The manufacturer had no recourse against the seller’s use of its valuable information.
The lesson is clear: treat your information as a trade secret if you expect a court to treat it as a trade secret. The following are a few steps a company can take to demonstrate that it considers its information valuable, proprietary, and legally protectable:
A company intending to disclose any confidential information outside the company should make sure the other party has signed a confidentiality agreement, often called a Non-Disclosure Agreement, or “NDA.” Even if a company is only discussing the possibility of entering into a business relationship with another company, the company should require a confidentiality agreement be signed before it discloses any information. In addition, when a company discloses any information that it considers confidential, it should mark that information "Confidential" in bold font on each page. If confidential information is disclosed orally, the company should state it is confidential and confirm this in writing. Taking these steps will signal to a court that the company considers its information to be a trade secret deserving of legal protection.
A company must also protect the secrecy of its information internally if it expects a court to treat the information as a trade secret. Employees should sign confidentiality agreements requiring them to maintain the secrecy of any proprietary information. Additionally, internal disclosure of trade secrets should be limited to those employees who have a need to know. The information should be kept in a location that is inaccessible to any outside parties that might visit the facilities. If the company anticipates visitors will be exposed to any trade secrets, the visitors should also sign confidentiality agreements. This can be done as part of the visitor “registration” process.
Taking these steps will help protect a company in the event that another party uses its confidential information. Not only will it give a company additional causes of action (for example, a breach of a confidentiality agreement), but it will demonstrate to a court that the company considers its valuable information to be a trade secret deserving of protection.