Trade Secrets: What Entrepreneurs Need To Know
Hypothetical Scenario: 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. 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, 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). And even if such an agreement didn’t 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” meets the trade secret test.
No Single Federal Trade Secret Statute
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, there are federal statutes that do provide remedies for misappropriation, infringement, or unauthorized access of matters not 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 If Something Is A Trade Secret
What makes a trade secret a trade secret? Exact parameters vary from jurisdiction to jurisdiction; but, typically, judges consider three legal tests.
- Generally Common Knowledge: 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 doesn’t 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 to prevent unauthorized disclosure.
Whether all elements are met is a very fact intensive inquiry, which can be complicated to prove.
Reverse Engineering & Trade Secret Law: The Ultimate Legal Nuance
Depending on the situation, reverse engineering may be an acceptable business practice; 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, then you may be leaving yourself open to a non-actionable trade secret leak.
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). This is contrary to patents, which are made public, but cannot be reverse engineered without legal consequences. Conversely, one can never be certain that they have successfully “cracked” (i.e., reversed engineered) a trade secret. Why? Because, absent misappropriation, there is nothing with which to cross-reference the cracked version. The downside risk is obvious: if someone cracks a trade secret, you may have no legal recourse.
How Can A Company Protect Its Trade Secrets?
For a court to side with a trade secret misappropriation plaintiff, said plaintiff must prove that their “thing”: (1) has independent economic value; (2) is not capable of being readily ascertainable; (3) and is subject to reasonable privacy measures. This is more easily accomplished by presenting employees and contractors with strategically written agreements and policies.
Additionally, internal policies should restrict access to economically valuable information, logging visitors and access, password protecting files, compartmentalizing key research and development such that no one person or department knows all of the “secret sauce.”
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.
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 courts.
In most situations, the first thing to do in the wake of a misappropriated trade secrets is to seek an injunction to preclude any further exploitation.
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.