“I don’t need non-compete and non-disclosure agreements, I trust my employees, they’re like family.” I have heard that many times from small business owners and, if they’re lucky, then their business may continue well into the future. But, I advise them to save the luck for other entrepreneurial ventures, even family members need to have a legal and binding commitment to preserve the company’s trade secrets.
Consider one of the most recognized “secret recipes” in America, Colonel Harland Sanders’ 11 herbs and spices used in pressure-frying chicken. The Colonel and his nephew, Lee Cummings, traveled together in the 1950’s to open over 800 Kentucky Fried Chicken franchises. Lee literally was “family” and had no non-compete and non-disclosure commitments to the company. The Colonel decided to sell the U.S. holdings of Kentucky Fried Chicken in 1962 to private investors for $2 million (just over $15 million today), but Lee, of course, knew the “famous recipe.” Lee partnered with a friend in Ohio to begin selling his homestyle foods, featuring “Lee’s Famous Recipe” hand-breaded and spiced pressure-fried chicken. By 1970, Lee’s Famous Recipe was international with over 100 units in the chain. By 1981, there were over 200 Lee’s Famous Recipe restaurants when Cummings sold the chain to Shoney’s Restaurants. Over 100 Lee’s Famous Recipe are still in operation and the current owner, Famous Recipe Group, LLC. is rumored to have further franchising plans for the brand.
The bottom line is, if you have anything that you do differently from your competition, that you believe gives you an edge, then you have a “trade secret” that needs protection. While the definition can be a bit slippery, simply stated, a trade secret is any confidential information or device you would not want one of your employees to deliver to a competitor. The Uniform Trade Secret Act expansively defines a “trade secret” as:
Any “information, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique, or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers,” that provides even potential “independent economic value” is considered a “trade secret,” as long as the owner takes “reasonable efforts under the circumstances to maintain its secrecy.”
You should check your state as most adopt some form of the Uniform Trade Secrets Act. And in 2016, Congress finally enacted federal protection with the Defend Trade Secrets Act, 18 U.S.C. § 1836. This not only allows access to federal courts to protect your trade secrets, but also has a specific ex parte seizure component, in “extraordinary circumstances,” where traditional relief under Fed. R. Civ. P. 65 would not be sufficient. The specific trade secrets can be ordered immediately “seized” by federal officials, without notice to the offender, and turned over to the court. The statute also gives legal immunity to corporate whistleblowers who must disclose trade secrets, in confidence, to government officials or an attorney. But, it comes with a catch. If you want the opportunity to get exemplary damages or attorney fees in such a federal action, then you must inform your employees, as part of their non-compete agreement, of the federal whistleblower protection.
United States law gives you other options to protect your competitive edge. A patent, for example, gives you an absolute monopoly, but requires public disclosure and only lasts for 20 years. On the other hand, a trade secret is legally protectable for as long as it continues to provide a competitive edge and appropriate steps are taken to protect against disclosure to third parties. But unlike a patent, a competitor is free to develop and use a similar device or information you consider as a trade secret so long as done through independent research, reverse engineering or other means without unlawful access to your trade secret.
Consult with an experienced attorney who is familiar with trade secrets and patents to help you develop a customized plan to identify and protect your confidential business information. Even if you already have employees execute non-disclosure and non-competition agreements, it is a good idea to routinely conduct a trade secret audit to make sure you are employing proper measures to guard the information and can specifically tie the non-competition to “legitimate business interests.” Any leak in the system can result in a complete loss of protection. And, update your non-disclosure and non-compete agreements to reflect the federal whistleblower protections in order to take advantage of the new federal law. Don’t become the next “Famous Recipe” folklore.
If you have properly safe-guarded your trade secrets, but have a rogue employee seeking to parlay them to a competitor, then click here for Guidance on proper protection.