What is a Trade Secret? A trade secret is any information used in business that is both valuable and kept hidden from competitors. Some examples may include vendor information, customer lists, marketing plans, research and development methods and results, financial information, drawings, business practices, passwords, agreements, employee ideas and developments conceived and developed during working hours, employee work product, etc.

State Law. Trade secrets are protected in all the states and 42 states have enacted the Uniform Trade Secrets Act.  Under state law, private individuals may sue to prevent the unauthorized disclosure of trade secrets and for damages when unauthorized disclosure occurs.

Federal Criminal Law. Federal laws that protect trade secrets criminalize two types of unauthorized disclosures:

• Economic Espionage – those that are intended to benefit a foreign government (18 USC 1831), and
• Theft of Trade Secrets – those that are motivated by economic gain (18 USC 1832). 

For Economic Espionage there is a maximum penalty of 15 years in prison and a $500,000 fine for an individual and a $10 million fine for a corporate offender. For Theft of Trade Secrets there is a maximum penalty of 10 years in prison and a $250,000 fine. A corporate offender is subject to a maximum fine of $5 million.

Does it Have to Be Patentable? No. Unlike a patent, novelty is not required, nor is an invention. If it is patentable, however, it is usually a given that it qualifies as a trade secret.

Can a Trade Secret be Something Simple? A trade secret does not have to be complicated. Clearly, one has a trade secret if the information has never been published and is known only to the owner prior to revealing it to another subject to that other person’s agreement on confidentiality.

The Gray Area. Generally, one cannot obtain trade secret protection for information generally known or understood within an industry even if not to the public at large. However, what is generally known is a question of fact and is not usually a cut and dry answer. For example, suppose you reveal what you consider to be a trade secret to a person after that person agrees to keep it confidential. Further suppose your trade secret is an elaboration based on published information that had never before been utilized in the industry. Then, that person says “Eureka” and proceeds to use your trade secret to great economic advantage to him. You tell him “trade secret.” He says “public information.” So who wins? It is not a cut and dry answer.

First of all, Attorney Louis Ventre, Jr. usually recommends that the confidentiality agreement also include a non-circumvention clause. This helps to add a cause of action on breach of contract in addition to a trade secret tort claim. However, let’s assume that the non-circumvention clause is not in place and that only a trade secret issue is involved. Since this is a question of fact, a jury might consider whether the trade secret has been employed in the industry, whether there was motivation in the industry to otherwise employ the trade secret, and how easy it would have been for the industry to duplicate that information without knowledge of the trade secret.

If the trade secret hadn’t been employed before and the industry would have been well motivated to do it had it been well known, then this is a factual circumstance that a jury could well use to conclude that the trade secret was not generally known or understood within an industry. It affects their judgment as to whether or not the trade secret could have been easily acquired or duplicated through proper means. Basic fair play issues often can influence a jury when the answer isn’t cut and dry.

Are Punitive Damages Possible? Yes, punitive, or exemplary, damages may be awardable when there is an intentional misappropriation of a trade secret or when there is a misappropriation resulting from the conscious disregard of the rights of the trade secret owner. Attorney’s fees may also be awardable, often when willfulness and maliciousness are present.

Steps Taken to Preserve Secrecy? In order to protect trade secrets, a company should implement a policy of secrecy and consistently implement good precautionary practices within the office. This policy should address use of email, shredders, restricting access to information, marking materials, and many others. This is one of the factors that a jury will consider when it determines if the trade secret owner thought the trade secret had value and is one factor affecting a jury’s decision on whether or not to grant trade secret protection. However, note that many states have enacted statutes which, with explicit exceptions, make it unlawful for an employer to intercept or record any private communication by telephone, or electronic communication.

What is Reasonable for Employees? An employee should be required to execute a confidentiality agreement, non-disclosure agreement and non-compete agreement as a precaution and deterrent to the temptation to take and share with a new employer, that which is valuable to the company’s competitors.

A high-level employee with access to the company’s secrets should have an employment agreement with a narrowly defined restrictive covenant not to compete with the Company.

Upon leaving a job, an exit interview should be conducted and the employee should be asked to sign an acknowledgment that during employment the employee had access to confidential information, that the employee kept it secret and that the employee won’t take any written materials on such secrets with him.

Yes, But Is a Non-Compete Agreement Enforceable? Maybe, but it is clearly better to have a non-compete provision, than not.  The potential to enforce a non-compete provision is enhanced if it is reasonably limited in time and geographic scope and necessary to protect the employer’s legitimate business interests.  The risk in not having a non-compete provision is that a court will probably not prevent a high-level, key employee with crucial trade secret knowledge from taking a job with a competitor.  With it, many state courts would probably enforce it.  However, even if you have a non-compete provision, some states, like California and Georgia, have strong policies prohibiting or restricting non-compete provisions.

Is a Patent Better? Maybe. Unlike a patent, if a trade secret becomes known by reverse engineering or independent creation, it is lost and little can be done. There is also value in the certainty of a patent’s definitive disclosure, its lifetime regardless of who knows about it, and the clarity in specific claims. It may also promote creation of derivative inventions by employees.  It seems apparent that defined rights can be more easily sold and policed as to use by a competitor.

While trade secrets involving business knowledge are often ill-defined within a company, it is also clear that trade secrets can be well defined, if the effort is made to do so.  So, if reliance on trade secret law is attempted, it requires vigilance and steps to protect the trade secret. A problem lies in being second guessed in terms of theft or employee misuse of trade secrets, as to whether or not a company took adequate steps to protect its trade secret.

Serious concerns involving trade secrets often relate to former employees using inside knowledge to benefit a competitor and the corresponding vagueness in knowing what is a trade secret and what lies in an employees general experience in a field.

How Can the Law Firm Help? Attorney Louis Ventre, Jr. can prepare a bare minimum company policy statement, an employee agreement, and an exit interview acknowledgement for your company for a fixed price of $500. Continuing advice concerning policies, procedures and protection of company property is provided at a rate of $250 per hour.