Most business owners believe that their business has important confidential information which must be protected from competitors. Obvious examples of confidential information are secret formulas or recipes for certain cola drinks or fragrances. But what about customer lists, customer ordering patterns or preferences, pricing formulas, marketing strategies, product designs, sales strategies, and the like? Most business owners would not dream of disclosing these types of information to a competitor. But when an employee resigns or is fired, the former employee may decide to disclose this confidential information to a competitor or the employee may become the competitor. Most business owners believe that everything about their business is a trade secret, but they may be in for unpleasant surprises. Just because a business labels something a trade secret, does not mean that a court will recognize it as a trade secret. The goal of this article is to give business owners a better understanding of what factors courts consider to determine whether a business has a trade secret and what business owners can do to increase the chance of the court finding that their information is a trade secret.
Definition Of A Trade Secret.
In Illinois the definition of a trade secret is very broad. Illinois, like 46 other states, has adopted the Uniform Trade Secret Act ("Act"). The Illinois version of the Act defines a trade secret as:
information, including but not limited to, technical or non¬technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that: (a) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.
While not determinative, the courts in Illinois also look to the following factors to assist them in determining whether information is a trade secret:
- The extent to which information is known outside of the business;
- The extent to which the information is known by employees and others involved in the business;
- The extent of measures taken to guard the secrecy of the information;
- The value of the information to the business and competitors;
- The amount of effort or money expended by the business in developing the information; and
- The ease or difficulty with which the information could be properly acquired or duplicated by others.
In sum, whether the information sought to be protected qualifies as a trade secret depends fundamentally on whether such information has been kept secret.
The Business Must Be Able To Specifically Identify The Trade Secret.
While it may be obvious, before a business can determine whether it has a trade secret, the business has to be able to specifically identify the trade secret. Defining the trade secret in generalities, such as business and strategic planning information, manufacturing information, capacity information, marketing information, customer information and costs, without more, is insufficient. Whether preparing an employment agreement with a clause regarding trade secrets and/or confidential information or suing to stop an employee or third party from taking a trade secret, a business must be able to specifically identify its trade secrets. The more specifically a business can identify and describe a trade secret, the better off it will be.
What Is Not A Trade Secret.
Because trade secret protection depends on both the nature of the information and its secrecy, it is important to understand what is not a trade secret. As a trade secret has to be secret, generalized confidential business information and information that is generally known or understood within an industry is not a trade secret, even if that same information is not known to the public at large. Being the first one to use certain information does not, in and of itself, transform otherwise general knowledge into a trade secret. Otherwise, the first person to use information, no matter how ordinary or well known, would be able to appropriate it to his or her own use under the guise of a trade secret.
Mere legwork in acquiring information on the basics of a business cannot be the basis of a trade secret claim as a party who learns the basics of an industry from an employer would be precluded from entering the business at all in a competitive relationship. Price information disclosed by a business to its customers is usually not a trade secret as those customers are free to disclose that pricing information to anyone, including a competitor. Similarly, a design or process that can easily be ascertained from an examination of the product itself cannot be a trade secret.
The protection given by the law to trade secrets reflects a balancing of conflicting social and economic interests. Where an employer has invested substantial time, money, and effort to obtain a secret advantage, the secret information should be protected from an employee or third party who obtains the secret information through improper means. On the other hand, information that is generally known or easily reproducible by competitors is not given the same protection.
Pricing formulas can be a trade secret if a business can establish that the value in the pricing formula lies in the fact that it is not generally known to others who could benefit by using it, or that the information could not be acquired or derived through general skills and knowledge. However, mere knowledge of the price desired by a business or a formula that permits one to charge a certain amount to allow that business to make a good profit is not a trade secret.
Factors That Determine A Trade Secret.
One factor that the courts look to is how easily the information can be duplicated without involving substantial time, effort or expense. Information that is developed over a long period of time and at great expense is more likely to be afforded trade secret protection than information that is developed inexpensively over a short period of time. For example, courts have found that under certain circumstances customer lists can constitute trade secrets where that information has been developed by the employer over the years at great expense, kept under tight security and cannot be duplicated merely by an examination of the industry or reading the yellow pages or industry publications.
Another factor that the courts look to is whether a business took reasonable steps to maintain the secrecy of the information. Where a business has failed to take reasonable steps to protect the secrecy of the information, a business will not be afforded protection for its trade secret. While not a prerequisite to the protection of a trade secret, one manner in which a business can protect a trade secret is by entering into confidentiality agreements with employees and third parties who have access to the trade secret.
A "textbook" example of steps a court found to be reasonable to maintain the secrecy of a formula were as follows: employees who had access to the formula were required to sign confidentiality agreements which advised the employees that the formula was secret; only those employees who signed the confidentiality agreements had access to the formula; labels on ingredients of the formulas were coded; and the formula ingredients were referred to in company documents by their code names.
Many businesses in the service sector keep extensive files with information on their customers. This information may include customer contact information, service history, customer preferences and materials pricing to customers. Where a customer list is created over several years and cannot be duplicated without referring to multiple sources and calling potential customers to determine if they were in the market to purchase the product, one may be able to establish that the customer list is a trade secret because it is not readily ascertainable and can only be produced with considerable time, effort and expense. However, a business must also show that it took reasonable measures to protect the secrecy of the customer list. Trade secret protection of the same customer list can be lost where copies of the list are not kept under lock and key, not marked confidential, or are given to third parties who are not instructed or required to maintain the secrecy of the list.
One court found a customer list of mobile tool jobbers to be a trade secret. The court found that the list of mobile tool jobbers could only have been developed using considerable time, effort and money as such a list could not have been created from the telephone book, library, special directories, or any other publicly available sources. In addition, the office in which the list was kept was locked, special computer access codes were used, customer information was limited on a need-to-know basis, hard copies of the list were kept in one place, salesmen's call books could not be removed from the office, security cameras were used, employee confidentiality agreements were utilized, and employees were constantly reminded of the confidentiality of the list.
While the steps taken by the businesses above to maintain the secrecy of certain information was found to be reasonable, what is "reasonable" depends on the circumstances of each case, including, in part, on whether the business is large or small. What would be reasonable for a Fortune 500 company might by unreasonable, due to expense and nature of the business, for a small company.
For example, the owner of a custom tailor shop maintained a customer list that had the customer's name, information unique to each customer, and information known only to the salesmen who dealt with the customer. The list was kept in a closed file drawer at the store, employees with access to the list were repeatedly informed that the list was confidential, and only those salesmen that contacted the customer had access to the information. Based on this, a court found that the customer list was a protectable trade secret.
In contrast, a court found a customer list of a multi-million dollar company not to be a trade secret because the company did not establish that it undertook reasonable efforts to protect the secrecy of the information. The company maintained the customer list on a computer that was only accessible by three employees and each of those employees had received a company manual which provided that the company information was confidential. However, there was no evidence of internal security, the employees who had access to the customer list had not entered into confidentiality agreements, the customer list was not stamped "confidential," hard copies of the customer list were not kept under lock and key, and upon departure employees were not reminded of the confidential nature of the customer lists.
Every business wants to protect certain information in order to maintain its competitive advantage. Whether that information is entitled to trade secret protection depends on a variety of factors. While this article cannot tell you if your information will be entitled to trade secret protection by the courts, it is hoped that the article has given you an idea of some steps you or your business can take to increase the chance that information will be afforded trade secret protection. There are multiple avenues that a business can take to protect its business information and consultation with legal counsel is important before there is a problem.