Trade Secrets: What Entrepreneurs Need To Know

trade secrets law and lawyers
Trade Secrets are invaluable to a company. This is a guide to trade secret law for non-lawyers.

Successfully courted by a competitor, a once trusted employee quits. Tim is his name, and on the way out, he leaves with confidential information.

Maybe it’s knowledge of a bespoke formula or innovative accounting process that confers a competitive edge. Or perhaps it’s a confidential list of contacts. Either way, the information with which our fictitious, but ambitious, Tim absconds is not registered with the United States Patent and Trademark Office, and is highly unlikely to qualify for copyright or patent protection, rendering a potential intellectual property claim moot.

In this hypothetical – but all too common – situation, what are the legal options?

If, during his tenure, Tim signed the proper agreements, you may be able to move forward with a successful breach of confidentiality, breach of loyalty, or a breach of non-compete duty claim(s). But even if such an agreement did not exist, you may have a solid trade secret misappropriation claim, if you can establish all of the requisite elements of a trade secret.

101 Definition: What Are Trade Secrets?

First things first: what “things” can be a trade secret?

A whole lot: customer lists, devices, formulas, processes, algorithms, instruments, patterns, business procedures, designs, software code, financials, practices, and informational compilations have all been successfully argued as trade secrets. Expense reporting methods and the data contained within such reports can even be deemed a trade secret – so long as the “thing” meet the trade secret test.

No Single Federal Trade Secret Statute, But Substantial Multi-Jurisdictional Consistency

Currently, there isn’t a single federal trade secret statute, but most states adhere to the Uniform Trade Secrets Act. New York and Massachusetts are the holdouts, but have either common law principles or non-uniform acts to protect corporate secrets and offer comparable remedies for misappropriation. Luckily, are federal statutes that do provide remedies for misappropriation, infringement, or unauthorized access of matters that are covered by trade secret laws (Economic Espionage Act, Computer Fraud and Abuse Act, federal conspiracy statutes, etc.).

Legal Trade Secret Test: What Judges Consider When Determining Whether or Not Something Is A Trade Secret

What makes a trade secret a trade secret? Though exact parameters vary from jurisdiction to jurisdiction, judges typically consider three legal “tests” when reviewing a case.

  • “Generally Common Knowledge”: In order for judges to declare something a trade secret, it can’t be generally known to the public.
  • “Competitive advantage”: This a cornerstone of trade secret law. A thing cannot be deemed an actionable trade secret if it does not confer an independent economic value, material benefit or advantage to a company.
  • “Confidentiality”: To win a trade secret misappropriation lawsuit, the plaintiff must prove that reasonable measures were taken to keep the trade secret, well, secret. You won’t win a claim by attempting to retrofit confidentiality. The test is not absolute secrecy, but rather, reasonable protections under the circumstances to prevent unauthorized disclosure.

Whether all elements are met is a very fact intensive inquiry, which can become rather complicated to prove.

Reverse Engineering & Trade Secret Law: The Ultimate Legal Nuance

Depending on the situation, reverse engineering may be an acceptable business practice; however, stealing is not. Cases become complicated, though, when employees who never signed a proper confidentiality agreement are hired away by competitors. In such instances, if you can’t produce a signed non-compete or another type of confidentiality agreement regarding the secret information, then you may be leaving yourself open to a non-actionable trade secret leak. In such cases, a misappropriation claim would require showing that the trade secret was still the subject of reasonable protections under the circumstances to prevent unauthorized disclosure, and that the former employee broke protocol, stole, or exceeding his/her authority in acquiring the trade secret.

Of course trade secrets are, by virtue of their definition, not disclosed to the public (or anyone that does not have a bonafide need to know, for that matter); thus, they cannot be verifiably be reverse engineering if they are truly secret. This is contrary to patents, which are made public, but cannot be reverse engineering without legal consequences. Consequentially, for trade secrets, no one can ever be certain that they have successfully “cracked” (i.e., reversed engineered) another’s trade secret, because absent misappropriation, there is nothing to cross-reference the cracked version to. The downside risk, however, is obvious: if someone does crack it, you may have no recourse against a trade secret that is successfully reverse engineered.

How Can A Company Protect Its Trade Secrets?

For a court to side with a trade secret misappropriation plaintiff, said plaintiff must prove their “thing”: (1) has independent economic value; (2) is not capable of being readily ascertainable; (3) and is subject to reasonable measures to guard and maintain privacy. This is more easily accomplished by presenting employees and contractors with strategically written agreements and policies that create privacy measures and consequences for breach. Internal policies should reflect restricting access to economically valuable information, logging visitors and access, password protecting files, compartmentalizing key research and development such that no one person or department know all of the “secret sauce”, among other key strategies.

Act Quickly

One of the main reasons lawsuits are dismissed is failure to file on time. For civil suits, the trade secret statute of limitations is usually between 1 and 3 years. If you miss the cut off by one second, that’s that. A court isn’t going to take pity on you – the law is the law. Additionally, single ephemeral company events/items generally don’t become trade secrets without continuous use. Information that becomes public without fault or misappropriation, which you then try to claim as a trade secret, will also preclude trade secret protection. As such, there is no “fly-by-night” trade secret argument; protection must be timely and well planned.

What Legal Actions Can Be Taken If A Trade Secret Is Stolen?

Saul Goodman may have some alternative options in the face of theft, but the only legal way to address trade secret misappropriation is through the court system.

In most situations, the first thing to do in the wake of a misappropriated trade secrets is to file a lawsuit and seek an injunction to preclude any or further exploitation of the misappropriated trade secret. The law suit should be filed “under seal”. Why? To ensure your trade secret isn’t inadvertently leaked via public court documents.

Since the United States lacks a uniform federal trade secret statute, all claims are generally brought pursuant to state law, unless of course, a related federal claim is brought. Even if the claim is brought pursuant to substantive state law, the matter could be litigated in federal court. As such, your trade secret lawyer should have multi-jurisdictional experience.

If properly developed, trade secret regulations can provide the ultimate competitive shield over other types of intellectual property protections.

Contact A Trade Secret Lawyer

Do you have a trade secrets legal issue? Get in touch with Kelly / Warner to learn more about your legal options.