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Protecting Trade Secrets

By Toolkit Staff | July 03, 2012

One of the reasons people start a business is that they have an idea about how to do something better than their competition. Maybe the idea improves a product or gets it manufactured at a lower cost. Or maybe the idea helps get a product into the hands of more customers or helps service customers better.

If you have such an idea, you probably want to prevent competitors from learning about or using it if you can. Sometimes you can do that by applying for a patent, copyright or trademark. However, each of those protections has limitations.

For example, there are fairly strict rules about what you can get patented. And a copyright is typically available only for the expression of an idea (e.g. the words to "Heartbreak Hotel") rather than the idea itself (a song about a guy who's upset because his girlfriend left him). A trademark has obvious limitations, too: It's hard to argue that a list of customers you've culled from your business contacts over the years is your trademark.

Trade secret laws help bridge the gaps left by patents, copyrights and trademarks. Trade secret protection is largely a matter of state law, so the availability and degree of protection varies. But all states offer some protection.

What qualifies for trade secret protection? Obviously, the best answer to that question depends on the laws and court decisions that have been rendered in your state. However, a group of attorneys from many different states settled on this definition of trade secret, which has been published in a series of law books known as the Restatement of Torts: "[A trade secret is any] formula, pattern, device, or compilation of information which is used in one's business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."

As this definition suggests, a trade secret should relate to business. And the secret should offer an advantage over competitors who don't know about it. Thus, the fact that only watchmakers may have the "secret" for assembling watches does not make the assembly process a trade secret. If every watchmaker knows watch assembly processes, there's probably no protection for them even though the general public doesn't understand them. On the other hand, recipes--such as The Colonel's unique blend of eleven herbs and spices--are often protected.

State laws usually don't prevent one company from using the same trade secret another company uses, as long as the secret was developed independently of, rather than stolen from, the other company. (Be careful here, if the secret also happens to be patented, using it will be unlawful even if it was developed independently.)

How can you protect your trade secrets? This involves at least five steps:

Identify (perhaps even label) what your business considers secret. Try to use some discretion here. While you shouldn't leave out anything important, you may needlessly encumber others--and make it difficult for them to distinguish between what is mundane and what's really critical--if you call everything a secret. (Of course, if you are in a business where nearly everything is an important secret, by all means, be liberal with the term.)

Explore your options. You may have the option of using patent or copyright protection instead of trade secret protection, but some tradeoffs are involved.

A patent is a grant of a right to the inventor by the U.S. government that allows the patent holder to exclude others from making or using the invention for a period of time, usually 17 years. In exchange, the patent holder must disclose information about the patent that permits others to use it freely after the patent expires. In contrast, trade secret protection can last forever as long as no one else independently discovers the secret.

A copyright is the right to reproduce a certain work if the work is in fixed form. A copyright is secured automatically when the work is created and identified by the symbol ©; however, in order to be able to enforce a copyright, the work should be registered with the federal government. A copyright lasts for the life of the creator plus 70 years. Obtaining a copyright does not prevent others from using the work if they independently develop it (which is unlikely, given the nature of most copyrightable works, but may be relevant in the case of things like customer lists or descriptions of business processes).

If you decide that treating your secret as a trade secret is the best way to protect it, secure the secret as much as possible. Put confidential customer information in locked file cabinets. Keep secret recipes in a safe, etc.

Limit access to the secret to as few people as possible, and on a need-to-know basis only. If the secret is written, keep track of the number of copies made and who has them. Insist that all copies be returned when they are no longer needed. If you are dealing with another business to whom you must divulge a secret, get a non-disclosure agreement from them. You should also get non-disclosure agreements from employees who are given access to secrets. Non-compete agreements may offer additional protection in such cases, as I'll explain below.

Consider taking legal action against those who impermissibly divulge your company's secrets. Unfortunately, it's sometimes difficult to know whether a court will extend protection to your secret until after you have presented a case. For this reason--and because such cases are expensive to bring--this step should be your last resort.

Some common concerns: In the course of your business dealings with others, you may need to disclose a secret in order to get the job done. For example, you may need to give your customer list to a company that will be handling follow-up mailings for you. In such cases, it helps to get a non-disclosure agreement.

These agreements contain, at a minimum, the following: (1) An acknowledgment by the party gaining access to the secret that the information is, indeed, a secret; (2) a requirement that the party gaining access to the secret only use it for the purposes for which it is being made available; (3) a requirement that the party gaining access to the secret not disclose it to any other party without express written permission from you; and (4) a requirement that the party return the material to you when finished needing it.

If you are concerned about employees misappropriating trade secrets, you may request non-disclosure agreements from them. Non-compete agreements may also be helpful in these situations. These get a little tricky depending on state laws, so consult the Toolkit's treatment of non-compete agreements and, as always, see an attorney if you feel it's necessary.

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