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Technology Transfer

Trade Secrets for Entrepreneurs and Innovators

What Are Trade Secrets?

Not all the information your business possesses is a trade secret. Some information, however, has value to your business in that it is not generally known by your competitors. These are trade secrets: they have value in not being generally known, and that value would be reduced if the information became known to your competitors. Trade secrets can include a broad variety of information, including things like customer lists, contract values and terms, test data, pricing considerations, business contacts (e.g., manufacturer and distributor information), computer software design (particularly for PAAS and SAAS services where the software is never possessed by the users), business plans, marketing strategies, financial status of your business, methods of operation, methods of manufacture, chemical formulae, recipes, software source code and object code, etc. Trade secret data may also include elements from the public domain but in a combination that provides value by not being generally known. To qualify as a trade secret, information must:

Have Commercial Value in Its Secrecy

Your trade secret information's value would be greatly reduced if freely obtained by your competitors. For example, if your competitor knew who manufactures your products and at what cost, or knew who all of your clients were, they would be able to compete with you more effectively. Similarly, if your competitor knew cash was particularly tight for your business, they might try to operate at a loss themselves for a time to drive you out of business. That's why it is so important to keep your trade secret information known only to your business, and only to those within your business who need to know.

Be Known to Only a Limited Group of People

Generally, your trade secret information should only be known by those who actually need to know it. The more people who know your trade secret information, the more likely it is that the information will get out there someday. The old hyperbolic adage hints at the truth: "Two people can keep a secret if one of them is dead." Carefully consider each type of information your company possesses and who really needs to know it, then make sure only those people have access to it. There may even be certain information that company executives don't need to know!
Today's employees won't always be tomorrow's employees. You can't restrain employees against going to work somewhere else, and noncompete agreements can only do so much. Reduce the loss of control over your trade secret information and data by restricting access to data to only those persons who really need to know it to do their jobs.

Be Subject to Reasonable Steps to Keep It Secret

Your business must use reasonable measures to protect the secrecy of its information, or its trade secret status can be lost. Such measures can and should include:

  • Adequate digital security, including actions such as:
    • Limiting or preventing external access except on a need-to-know basis;
    • Controlling internal access to those with a need to know;
    • Preventing unnecessary digital copying of data - this may include restricting use of portable memory devices and/or personal computers;
    • Restricting sending of data outside of your organization by email or otherwise;
    • Marking confidential data with appropriate confidentiality markings;
  • Care when sharing your trade secret information with others, including:
    • Consistently using confidentiality/nondisclosure agreements when your trade secret information is shared with others;
    • Ensuring that others with whom you share trade secret information use/will use adequate measures to protect your information;
    • Carefully limiting what information is shared with others to only that which is necessary;
    • Ensuring that your information is destroyed/not retained by others once their use has ceased;
  • Care when sharing your trade secret information with employees:
    • Careful employee agreements that require your employees to maintain confidentiality;
    • Careful use of non-compete agreements/clauses where possible (non-compete agreements are disfavored/disallowed in some jurisdictions);
    • Limit the information shared with employees to the information they actually need to know to perform their jobs;
    • Recognize that even if employees have signed agreements limiting use of your information, you can't make them completely forget what they know when they leave your employ;
  • Adequate physical security, including locks and other access control, shredding, preventing unnecessary copying, etc.;
    • Physical security extends to security within your location(s);
    • Physical security ensures that employees do not have access to information outside their realms;
    • Include procedures to ensure confidential information is not left accessible;
    • Careful vetting of cleaning services/etc.

What If Something Happens?

Trade secret value is lost when your information is no longer secret - when your information becomes known either generally or to specific individuals without an obligation to keep it secret in your behalf. There are generally three ways in which trade secret information can lose its value, and your options are generally limited when that happens.

Loss Due to No Fault

Sometimes, secret information becomes generally known without any fault attributable to your company or others to whom you have disclosed. For example, if you have a secret process for manufacturing a particular product, and someone else independently comes up with and discloses the same process, your secret process is no longer a secret. In such cases, your trade secret is now available for others to freely use, and no recourse is available to you. Lesson: recognize the limitations of reliance on trade secrets; evaluate the nature of your trade secrets and the likelihood of concurrent discovery elsewhere.

Loss Due to Accidental Disclosure

Sometimes things happen: you're talking and accidentally let slip something you shouldn't; an error occurs in your systems and your trade secret information becomes available on your website (even a secret portion of your website); information that should be shredded is instead disposed of without shredding and is then found by others. Generally, it doesn't matter what happens, once your trade secret is out there, it's out there, and there's little to nothing you can do about it. Lesson: take to heart the importance of taking steps to keep your important information secret.

Loss Due to Bad Actors

This is the type of action most people think about when they think of trade secret: someone (a competitor, an employee, etc.) knowingly steals your trade secret and makes use of it. This is called trade secret misappropriation. In general, misappropriation is actionable - you can sue the bad actor for their actions and potentially recover damages. Beware, however, that your recovery can be far less than your loss. If a part-time employee steals your multi-million dollar secret and publishes it on the Internet, the chances the employee will be able to pay millions of dollars is slim. Litigation for misappropriation is generally only helpful when tied to a bad actor with deep pockets. Lesson: It's best to prevent misappropriation rather than litigate it after.