Trade Secrets: A Valuable and Often Overlooked Asset
|Written by Gene Quinn
Patent Attorney & Founder of IPWatchdog
Zies, Widerman & Malek
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Posted: Jan 14, 2011 @ 6:02 pm
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Trade secrets are a very important part of any intellectual property portfolio. It is not at all an overstatement to say that virtually every business has trade secrets worth protection, regardless of whether the business is run as a sole proprietorship, a small business or Fortune 500 company. This is true because any business information that is valuable as a result of being kept secret qualifies for treatment as a trade secret. Nevertheless, it may be better to say that every business has assets that could and should be protected as trade secrets, but the truth is that many companies, even large companies, fail to do so properly. The failure to treat information as a trade secret means you have no asset at all, and no remedy if the information is taken or stolen by others. Thus, appreciating what can be a trade secret and how to take steps to protect a trade secret are vital for inventors and businesses alike.
Trade secret protection can be obtained by any business is for two reasons. First, trade secret protection can exist for virtually any business information. Second, trade secret protection is extremely easy to obtain. In fact, to obtain a trade secret you need not make any application to any State or Federal government agency, you merely need to treat the information as secret. That, of course, requires that the information is and must remain secret.
Let’s explore the first point in more detail. By definition, a trade secret relates to any business information that is valuable because it is a secret. While most consider trade secrets to be synonymous with invention, that is an oversimplification that leads many to overlook the valuable assets they have that could be a trade secret if only kept secret. It is, of course, true that trade secrets exist for most if not all inventions, at least if the inventor is doing the appropriate things on the front end to make sure others do not learn about the invention or attempts to reduce the invention to practice, but trade secret protection can be had for such things as a customer lists and supplier or vendor lists.
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Things such as customer lists and supplier lists are something that you benefit from keeping away from potential competitors. For example, consider that you are operating Home Cleaning Business, Inc.. As a good friend of mine, Professor Llew Gibbons who teaches intellectual property law at the University of Toledo College of Law, tells his students: “There are a finite number of people who are willing to pay other people to clean their homes.” The point is that with a home cleaning business, or any business for that matter, one of the hardest things to develop are customers who are interested in your product or service. Attracting a customer base is why you advertise. If a competitor could obtain your customer list and just solicit those on that list the competitor would have lessened or completely eliminated the need for advertising expenses. They merely start with a targeted list of people who are already predisposed to being interested in the good or service they are offering, robbing you of customers and business.
Of course, me characterizing what the aforementioned competitor is doing as “robbing you of customers and business” is perhaps overblown. It would no doubt feel like they have “robbed” you of customers and business, but legally the question is not one of feelings, but rather whether there is any legally actionable and wrongful conduct. Apart from trade secret protection there really is no effective way to protect things such as a customer list or supplier list, or any number of other pieces of valuable business information. You can and should have employees and those who have access to the information to sign an agreement they they will not take and use the information, but the truth is that if you don’t treat the information as valuable and keep it secret you will be fighting an uphill battle. So while it may feel like that former employee “stole” your customers, the legal question doesn’t ask about feelings or emotion, the legal question will ask this: what did you do to protect the information? If you treated the information as a trade secret you have protection, if you didn’t then you don’t, it is really almost that simple.
With respect to the second point, trade secrets are easy to protect because all the law requires is that you take reasonable precautions to keep the valuable business information a secret. What is reasonable will vary depending on the value of the business information, but keeping things such as customer lists in a filing cabinet in a locked office and stamping the file “Confidential” are relatively low cost efforts and should be employed by everyone seeking to protect information as a trade secret. Any other efforts you take are certainly helpful, but you must do something.Let’s explore the point about you needing to do something. In the past I represented a party in a trade secret misappropriation matter in what would best be characterized as a corporate divorce. Friends went into business and everything was fine right up until nothing was fine. Of course, being friends, little or nothing was written on paper. That is a topic for a different day perhaps, and a tragedy we see all the time. It is always better to establish expectations in writing when things are happy than after they start to fall apart. With nothing written down on paper the rights to the inventions created were, of course, in question. Lawsuits were filed and it was a mess. Those unfamiliar with lawyer-speak, when I say it was a “mess” you should read that as “unnecessarily expensive for the parties because they didn’t follow sound business practices when setting up the business.”
In any event, the party opposite my clients argued that my clients had misappropriated trade secrets that they rightfully owned. During the litigation of the dispute we went through discovery, which is the process of uncovering information from the other side. Time and time again we asked for information relative to how they protected the alleged trade secret. At the end of the day I was convinced they hadn’t protected it and filed motions with the Court arguing that in order for it to be a trade secret they had to engage in reasonable measures to maintain secrecy and they couldn’t point to a single protection measure they had undertaken. There were no passwords, locked office rooms, locked file cabinets or files stamped Confidential. There were no employment agreements or confidentiality agreements. Nothing. At the hearing the other side protested and I turned to them and said “reasonable protections necessarily means at least one protection. Can you articulate a single precaution implemented to protect the secrecy?” There was silence, I made my point. The case settled before the Court ruled on the Motion. Who knows what would have been the outcome so early in the proceedings, but it is an absolute logical truth that “reasonable protection” must require at least some describable precaution implemented. Sadly, in many instances there are no precautions or protections in place, and that screams to me that you are not protecting your trade secret and, in fact, don’t have a trade secret any more.
So what is the down side of trade secret protection? As with many things that are easy to acquire, they are easy to lose. As soon as the trade secret is no longer a secret you have lost all protection! Those familiar with the law know this is an overstatement, but just barely. The ability for a Court to issue orders of protection to keep a lid on a trade secret infraction are minimal at best, and if you have any chance you need to act immediately. You simply cannot un-ring that bell.
Trade secrets are indeed fragile. So this means that while you can and should keep trade secrets, and you should take reasonable efforts to keep the information protected, if other forms of intellectual property are available you should at least consider them. The other form of intellectual property that you should consider, if available given the subject matter of the trade secret, is patent protection. Patents can be expensive, so running to file a patent application may not make the best sense unless the business information is particularly valuable.
Businesses and inventors make decisions every day on whether to pursue a patent or keep a trade secret, and many others fail to make the decision because they have already lost any potential trade secret rights or don’t realize that they might have something that could be patented. As with any business endeavor, the more you know the better the decisions you will make. The old saying about a penny of prevention being worth a pound of cure comes to mind. Engaging professionals on the front end to help you set up your business and alert you to the pitfalls that lie ahead is a cost effective way to stay out of trouble and to maximize business returns.
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About the Author
Gene Quinn is a US Patent Attorney, law professor and the founder of IPWatchdog.com. He is also a principal lecturer in the top patent bar review course in the nation, which helps aspiring patent attorneys and patent agents prepare themselves to pass the patent bar exam. Gene started the widely popular intellectual property website IPWatchdog.com in 1999, and since that time the site has had many millions of unique visitors. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, USA Today, CNN Money, NPR and various other newspapers and magazines worldwide. He represents individuals, small businesses and start-up corporations. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.