United States: What Are Trade Secrets And How Can Businesses Protect Them?

Intellectual property laws can be confusing and overwhelming. To help you navigate this complex web, we offer an IP primer series to share the foundations of intellectual property laws, including patents, trademarks, copyrights, and trade secrets.

Trade secrets are protected by the Defend Trade Secrets Act (DTSA), a federal trade secret law that protects against the misappropriation of trade secrets, and applicable state trade secrets laws. Unlike patents, trademarks, and copyrights, trade secrets are not registered or registrable. The key to protecting trade secrets is maintaining secrecy.

What is a trade secret?

Generally, a trade secret is any information that is:

• Sufficiently secret to derive independent economic value – actual or potential – from not being generally known to, or readily ascertainable through proper means by, other persons who can obtain economic value from its disclosure or use; AND
• Subject to reasonable efforts by the owner to maintain its secrecy or confidentiality.

Trade secrets can include any technical or non-technical data used in one's business that gives one an opportunity to obtain an advantage over competitors who do not know or use it.

The key is whether the information provides a competitive advantage.

Trade secrets can protect information as varied as:

• Technical or non-technical data such as a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, list of actual or potential customers or suppliers, etc. (e.g., the Coca-Cola formula, the KFC secret recipe, the Google search algorithm, the Dr. Pepper formula, hydraulic fracturing ("fracking") compounds).
• Pricing strategies and information, trading algorithms (e.g., for high-speed trading).
• Negotiation tactics, development plans, plans for developing luxury brands, marketing, and demographic studies (e.g., the Starwood Hotels business/expansion plans).

How are trade secrets protected?

As mentioned above, trade secrets are not registered or registrable. The key is maintaining secrecy. Various tools can be used to help maintain secrecy, such as:

• Providing oral or written notification that the information is proprietary.
• Executing confidentiality/non-disclosure agreements.
• Preparing and following oversight policies and procedures, such as information/document storage and disposal procedures (e.g., shredding) and information transmission procedures.
• Using facility security, such as fences, locked areas, alarms, security, and ID badges.
• Limiting access to the information to a need-to-know basis.
• Using access logs.
• Incorporating confidential or proprietary legend stamps/labels on protected materials.
• Requiring documents marked confidential or proprietary be returned.
• Providing employee education, guidelines, and training regarding trade secrets.
• Conducting employee exit interviews with a reminder or signed understanding regarding trade secrets.
• Using password protections and/or limiting access to electronic trade secret information.

How are trade secrets misappropriated?

Trade secrets may be misappropriated either by (1) acquisition or (2) disclosure or use. Misappropriation by acquisition is when a person who has reason to know that the information is a trade secret acquires the information by improper means.

Misappropriation can also happen when a trade secret is disclosed or used without express or implied consent by someone who used improper means to acquire the knowledge of the trade secret or, at the time of disclosure or use, knew or had reason to know that knowledge of the trade secret was:

• derived from or through a person who utilized improper means to acquire it;
• acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use;
• derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
• before a material change of position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

What remedies are available for the misappropriation of trade secrets?

If a trade secret is derived through improper means – such as theft, bribery, misrepresentation, breach of relationship or duty (or inducing a breach), or espionage – the holder of the trade secret likely has remedies available.

Under the DTSA, a lawsuit can be brought in federal court. Remedies can include actual economic loss by the trade secret owner, unjust enrichment of the misappropriating party, or a reasonable royalty. Under some circumstances, a civil seizure order may be issued, an injunction may be issued, and the trade secret owner may be entitled to punitive damages and attorney's fees.

Importantly, if a trade secret is revealed through proper means, the holder of the trade secret is unlikely to have remedies available. Proper means can include (but are not limited to) reverse engineering, independent invention or development, use of published materials, databases, and public website information.

What protection does the DTSA provide for disclosure of trade secrets?

The DTSA includes a safe harbor provision for whistleblowers. Whistleblowers are granted both civil and criminal immunity for disclosing a trade secret in confidence to a government official, or an attorney, when that disclosure is made solely for the purpose of reporting or investigating a suspected violation of law.

A statement regarding immunity for the use of trade secret information in an anti-retaliation lawsuit must be included in any contract or agreement, including employment and consulting contracts, that governs the use of trade secrets and other confidential information. The failure to comply with the notice requirement will result in the employer losing the ability to recover enhanced damages and attorneys' fees against the employee.

How are trade secrets protections different from patent protections?

Keeping information as a trade secret, rather than a patent, may be useful for information that cannot easily be reverse engineered or independently developed, such as chemical compounds, recipes/formulas, and algorithms.

How can businesses protect their trade secrets?

In addition to the steps mentioned above, businesses should consider the following best practices to protect their trade secrets:

• Recognize information that provides a competitive advantage, such as formulas, algorithms, customer lists, etc.
• Catalog the information, including incorporating tiers of secrecy for those who have access to the information and update the tiers regularly.
• Protect information that provides a competitive advantage by implementing reasonable measures to restrict access to the information.
• Monitor and control the flow of inbound and outbound information. With inbound information, watch for a new employee saying, "At my old company, we did it this way..." because the information that follows may be a trade secret. To control outbound information, conduct exit interviews when employees leave the company and obtain employees' written acknowledgement of trade secret information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.