Unlike other forms of intellectual property (e.g., patent, copyright) there is no governmental registration system in place and businesses are left on their own to identify and protect their trade secrets. Therefore, trade secret protection is often ignored by businesses as a means to safeguard their critical intellectual property. However, trade secret protection can be invaluable in giving businesses a competitive advantage in the marketplace and can have advantages over other ways to protect proprietary information. For example, unlike patent protection, trade secret protection can potentially have infinite duration and lasts as long as the secrecy of the information exists and derives value from being kept secret.
Below is a nutshell summary of the basics of trade secret protection for consideration by businesses which want to guard their proprietary information from misuse by others.
The protection of trade secret information in the United States is regulated by both state and federal law. It is primarily (albeit not exclusively) regulated by state law. Many states – although not all have adopted some variation of the Uniform Trade Secrets Act (UTSA).
What is a Trade Secret?
Trade secret information can include varied types of information (e.g., customer information vs. scientific formulas) if the information otherwise meets the requirements of being a trade secret. Under UTSA, a trade secret is information (i) of commercial value, (ii) not generally known to others, (iii) and is not readily ascertainable by proper means (iv) because the trade secret holder has made reasonable efforts to maintain the confidentiality of the information.
To be in a position to protect information as a trade secret, it is critical for businesses to make continuing efforts to maintain the information as confidential. If the business has not made those efforts before misappropriation occurs or is threatened, it will be too late. Thus, it is important that the business be vigilant in guarding the trade secret as soon as the information is identified as a trade secret.
Although the particular circumstances (e.g., nature of the trade secret, resources of the trade secret holder) dictate what efforts are reasonable to protect the secrecy of the trade secret, the following are potential efforts:
- Employee education
- Use of security measures (e.g., locked cabinets, passwords)
- Requiring confidentiality agreements be executed by those whom are given access
- Reminders to and acknowledgements by those whom are given access
- Use of “confidential” or “trade secret” stamps, labels, or designations
- Watching for misappropriation and responding to threats of misappropriation
Common pitfalls which may negate that the information is the subject of reasonable efforts to maintain its secrecy (and thus destroy the business’ ability to enforce it as a trade secret) include:
- Revealing the information in connection with marketing or sales efforts (e.g., at a trade show, or on a website)
- Publishing a journal article, or a technical manual that reveals the information
- Disclosing the information in a patent
- Failing to designate the information as a trade secret in a filing with a governmental agency, or failing to contest a third party’s request to a government agency for a copy of a documentreflecting the information.
- Failing to secure a confidentiality agreement before giving someone else access to the trade secret
- Selling a product that discloses the information
What is Misappropriation of a Trade Secret?
UTSA describes actionable misappropriation of a trade secret generally as acquisition, disclosure, or use of the trade secret through improper means (e.g., breach or inducing breach of a confidentiality obligation, theft, bribery, and misrepresentation). Situations when misappropriation often occurs and thus the trade secret holder should be especially watchful for it include:
- Employee termination (voluntary and involuntary), particularly when the employee is going to an competitor
- Joint ventures or alliances where trade secret information is going to be shared, especially when the relationship ends badly
Of course, a business can reduce (although not eliminate) the risk of misappropriation by employingreasonable efforts to maintain the secret, such as requiring anyone to whom access to the trade secret is given to execute a confidentiality agreement before the access is given.
What are the Remedies for a Misappropriation?
The potential remedies for misappropriation (actual and threatened) provide a considerable arsenal of weapons for the trade secret holder looking to maintain its competitive advantage.
If there is a misappropriation (actual or threatened), the trade secret holder may seek injunctive relief. An injunction is a court order against the misappropriator that prohibits or requires some activity (e.g., use of the trade secret, return of trade secret documents). Injunctive relief can be a critical issue in a trade secret case. Often, the trade secret holder believes that it is essential to its business to enjoin the misappropriator – often a competitor -- from going forward with the misappropriator’s use of the trade secret and the misappropriator believes that it is vital to its business to have the ability to use of the information. Consequently, often trade secret litigation will settle with the outcome of the trade secret’s request for an interim injunction pending trial.
Compensatory damages (the trade secret holder’s actual loss from the misappropriation), unjust enrichment (the misappropriator’s gain from the misappropriation), a reasonably royalty (fee) for use of the trade secret, and exemplary (punitive) damages for willful and malicious misappropriation are potential monetary remedies for misappropriation under UTSA. Given the stakes (i.e., treasured proprietary information), monetary awards in misappropriation cases can be in very significant amounts.
Ordinarily, in the United States, each party in litigation bears its own attorneys’ fees. However, trade secret litigation is usually one of the exceptions to that general rule. Under UTSA, the prevailing party may recover attorneys’ fees from the other party. Such awards can be very large and the risk of such an award can drive an early settlement.
Businesses should consider whether they can use trade secret protection as a potential means to safeguard their proprietary information and whether, under the particular circumstances, it makes sense to protect it as a trade secret rather than as another type of intellectual property (e.g., patent). Not only does patent prosecution tend to be expensive, but the business may benefit from the potentially infinite duration of the trade secret protection as compared to the limited monopoly offered by a patent. The business may also want to avail itself of the arsenal of remedies trade secret law offers. But, to prevent others from misappropriating the trade secret, the business must have made continuing efforts to maintain the information as confidential and it is, therefore, imperative that the business be vigilant in guarding the trade secret as soon as the information is identified as a trade secret.