If you whispered something in someone’s ear, but did so loudly enough that others nearby could hear it, would it still be a secret?

The answer may seem obvious, but the U.S. Court of Appeals for the First Circuit in Boston recently emphasized exactly that point in an important decision on the law of trade secrets. The case carries important lessons for companies trying to maintain the secrecy of their valuable intellectual property.

Lessons Learned the Hard Way

In Incase, Inc. v. Timex Corp., the court held that a corporation cannot reasonably expect to protect a trade secret unless it takes regular steps to maintain the secrecy of such information.

The plaintiff in Incase designed and developed unique packaging for watches manufactured and sold by Timex. Following a series of business discussions, Incase commenced the design and manufacture of the packaging pursuant to the terms of multiple purchase orders issued by Timex. Although Incase appears to have taken the position in negotiations with Timex that its design was proprietary, it also appears they made no effort to secure an agreement to that effect in writing.

The business discussions between Incase and Timex involved two separate packaging designs. Incase produced more than 2 million units of the first design, pursuant to the Timex purchase orders. Incase also began the development of a second line of packaging units. The parties exchanged specifications, designs, and numerous prototypes for the second design, but Timex never placed any orders or entered into a contract with Incase for those units. An officer of Incase was in a large retail store when he noticed certain Timex watches displayed in packaging that was virtually identical to the Incase design. The packaging had been produced by a Philippine manufacturing group that Timex engaged for the second set of units.

Incase sued Timex under Massachusetts law for misappropriation of trade secrets, unjust enrichment, and unfair trade practices, among other claims. Following a trial in the U.S. District Court for the District of Massachusetts, the jury returned a verdict for Incase. However, on a motion filed thereafter, the court set aside the jury verdict on the trade secrets claim, and entered judgment as a matter of law for Timex.

The Uniform Trade Secrets Act, which is in effect in more than 35 states, has not been adopted in Massachusetts. However, case law in Massachusetts has established common law standards that are very comparable. In order to prevail on a claim of misappropriation of trade secrets in Massachusetts, a plaintiff must show that: (1) the information is a trade secret; (2) the plaintiff took reasonable steps to secure the secrecy of the information; and (3) the defendant used improper means, in breach of a confidential relationship, to acquire and use the trade secret. The second prong of this test, requiring a plaintiff to take reasonable steps to preserve the secrecy of the alleged trade secrets, also appears in the Uniform Trade Secrets Act and is a required threshold step for the protection of any alleged trade secret.

In Incase, the court found that Incase had not taken any of the reasonable steps that one would expect. The design of the packaging units, and various drawings and prototypes, were apparently exchanged in the complete absence of any written non-disclosure agreements, even if the parties verbally expressed such an intent to one another in their business negotiations. Documents and samples were not marked “confidential.” Moreover, Incase had no internal procedures designed to protect the integrity and secrecy of the underlying information. At least one key Incase employee testified that it was not clear to him whether his employer considered the information secret.

What this means, practically speaking, is that a company can legitimately consider certain information to be proprietary and confidential in nature, but can be left without legal protection unless it adopts, implements and maintains internal procedures to maintain the secrecy of that information. It was clear in Incase that Timex took the Incase design and gave it to the Philippine company as part of its purchase of millions of the second set of packaging units. Incase did not expect that Timex would treat its proprietary design in that manner. Timex was able to do so with ultimate impunity because Incase had failed to adopt and maintain reasonable security measures in its business practices.

As the court noted, Incase took no “affirmative steps to preserve the secrecy of the information against [Timex],” even though Incase had otherwise considered the information private. Hence, “protecting a trade secret ‘calls for constant warnings to all persons to whom the trade secret has become known and obtaining from each an agreement, preferably in writing, acknowledging its secrecy and promising to respect it.’”

Steps for Protecting Trade Secrets

The lesson for companies hoping to protect their unpatented intellectual property is clear. Before any such company can reasonably expect to protect its trade secrets, and to enforce those protections in litigation if necessary, it must implement and maintain internal security measures that are followed on a regular basis. Evidence of such procedures cannot be developed after the fact strictly for litigation purposes. Rather, they must become part of the fabric of the company’s business practices. Employees must be educated about those procedures and must follow them on a regular basis.

The following procedures are among those that are essential to trade secret protection:

  • A regimen of non-disclosure agreements with key employees and with any outside visitors, vendors, or other business partners.
  • A clearly articulated system of security measures protecting trade secret information, including computer passwords, controls on building ingress and egress, locked file cabinets, documents and files marked “confidential,” and written policies and procedures describing all of the above.
  • A regular system of employee education, not only upon initial hiring, but also throughout the course of employment, emphasizing the confidentiality of the company’s information and articulating the steps that must be taken to protect any such information.
  • Whenever a company enters into a business endeavor with a vendor of services, a customer, or other business partner, that agreement should include confidentiality and non-disclosure terms setting the forth the parties’ clear expectations with regard to each other’s respective intellectual property. To the extent that any such agreements create procedures whereby information is designated or deemed confidential, those procedures must be strictly followed.

All of the foregoing are relatively simple to adopt and can be maintained on a regular basis.

The lesson of Incase is clear. Companies wishing to maintain the secrecy of certain unique and confidential manufacturing processes, designs, innovations or ideas, must adopt and maintain such procedures and must follow them on a regular basis. It is only through such a regimen of corporate policies and procedures that companies can reasonably expect to maintain the secrecy of ideas developed through their hard work and effort.