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In July, we reviewed the Defend Trade Secrets Act (DTSA) that passed in Congress by a sweeping majority, and was signed into law by President Obama on May 11—a rare piece of legislation that was largely agreed upon on both sides of the aisle!
In this post, “Trade Secrets: Part Two,” I want to emphasize the importance of understanding what a trade secret is, regardless of whether it is under the DTSA or state law. Surprisingly, many businesses I work with rely heavily on trade secrets for their economic livelihood, and they don’t know it. Not knowing and not tending to that little gold mine of yours can mean a significant financial hit to your business in many ways, not the least of which is losing your competitive advantage.
So, what are the components of a trade secret, and how do you protect it? Think of it in threes: the three key elements of a trade secret and three steps to protect it.
What is a trade secret?
At its most basic, a trade secret is secret information belonging to your business. It can involve a process or formula you use, a particular design or pattern, or any other type of information that gives your business an economic advantage over your competitors. The three key elements are:
- The information is not generally known to the public;
- The information obtains its economic benefit because it is not generally known, and
- The information is subject to reasonable measures to protect its secrecy
A trade secret is kept under lock and key not just because it is unique to your business, but because its secrecy gives your business a competitive edge. You know the obvious examples—the Coca-Cola® formula that is kept in a vault in the basement, the KFC® batter recipe that is made in two separate facilities so not one person knows the entire recipe, and that delicious trade secret we’re all after: Mrs. Fields® chocolate chip cookies.
But trade secrets can be more than just secret recipes. They vary from industry to industry, and can take on any number of forms—from the design of a product to the particular order of a process. Trade secrets are valuable because of the fact that they are kept from the public, and away from the industry competitors. If the public gets a hold of them, they can duplicate your recipe, product, process, etc. so that you no longer stand out from the pack.
Some secrets form the whole basis of a business’s value. Take, for example, the recipe for KFC’s batter, and the situation that has recently been lighting up social media, namely the possibility that Colonel Sanders’ nephew inadvertently disclosed the secret batter recipe that makes that KFC chicken so finger lickin’ good … Think about the impact inadvertent disclosure of this valuable and protected trade secret can have on their bottom line. You definitely don’t want to be in that situation!
That’s why it’s critical that you first recognize your trade secret assets, then take every reasonable measure to protect them.
So, what reasonable measures should you take to maintain secrecy?
Reasonable measures to maintain secrecy is an intricate and complex area of the law, and I definitely recommend working with well-qualified legal counsel on this issue. Sometimes, trade secret legal proceedings are won or lost entirely on this issue. In fact, I spent three years on a case focused solely on the issue of whether the client took reasonable measures to maintain secrecy of its trade secret information.
A determination of “reasonable measures” requires looking into many aspects of business operations—how the trade secret is kept, who has access to it, and what information employees have been given. Take time to evaluate whether the measures your business takes to maintain secrecy match the relative value of the trade secret. Although it is complex, here are three key steps:
1. Divide and conquer.
Only disclose portions of trade secret information to employees that are absolutely necessary for their particular job. This means restricted access. If it’s a recipe or formula for a product, make sure no one person knows it in its entirety—don’t disclose trade secrets in a way in which more people could access more information than they need to do their job, including electronic password protection. Restrict access to secure manufacturing locations; use guards, ID badges or other appropriate physical security measures to keep track of who enters and leaves your facilities.
2. Loose lips sink ships.
Make sure that employees with access to any trade secret information are well-vetted, including background and reference checks, before you hire them. Also make sure that they are employed under strict terms of confidentiality that are legally enforceable. Explain to your employees the importance of protecting trade secrets—that these secrets give the business its economic advantage and that legal penalties will ensue for wrongful disclosure.
3. #CoverYourAssets in every way possible.
Implement company, staff and third-party policies to protect your valuable trade secrets. Educate your employees. Make sure they understand the policies, how they apply and that every employee plays a large role in maintaining secrecy—that it is a critical function of their job. Also, ensure that they know the consequences for violating the secrecy policy. This is NOT an area to grant leniency and be an understanding employee.
Be vigilant when it comes to protecting your business’s trade secrets. Maintain your competitive edge by identifying your business’s most valued assets and by taking steps to protect them. Knowing your trade secrets and how to guard them properly can save you time and money, and give you the advantage in the event that someone decides to profit by pilfering your very effective business methods or formulas. As the saying goes, “an ounce of prevention is worth a pound of cure.” And, if you are unsure if your business has trade secrets, schedule a complimentary 20-minute power-house consultation, and let’s make sure you know what your trade secrets are and how to #CoverYourAssets …
