The Trade Secret Value Proposition: The Secrecy Requirement
|Written by Gene Quinn
Patent Attorney & Founder of IPWatchdog
Widerman & Malek
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Posted: Apr 19, 2014 @ 2:29 pm
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It is not much of 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. Perhaps it is 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 reason that it can be said that 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; as long at the information remains secret it remains protected.
Let’s take a step back. What is a trade secret? A trade secret is defined as any business information that is not generally known and which has value, with the value being derived from the fact that the information is not generally known. The key to trade secret protection, therefore, is keeping that valuable business information from becoming generally known; or in other words keeping the information secret. Matters of public knowledge or general knowledge within an industry simply cannot be protected, nor can they be misappropriated. Similarly, once previously unknown information becomes known secrecy is lost and the trade secret ceases to exist.
As you can see, while trade secrets are an important part of any intellectual property portfolio, they are quite fragile and require specific attention and care in order to preserve secrecy. Secrecy is, therefore, at the very heart of a trade secret, and is what creates the value proposition. Said another way, trade secrets protect information that is valuable because it is secret. The secrecy provides a competitive advantage and must be maintained at all costs.
Courts have identified a number of factors relevant to determining whether business information satisfies the secrecy requirement. These factors include:
- The extent to which the information is known outside the business.
- The extent to which the information is known by employees and others involved in the business.
- The extent of the measures undertaken by an employer to protect the secrecy of the information.
- The value of the information to the employer.
- The amount of effort or money expended by the employer in developing the information.
- The ease or difficulty with which the information could be properly acquired or duplicated by others.
These factors are helpful in making a secrecy determination, and are indeed necessary because insofar as trade secret law is concerned the term “secret” does not have the same meaning as one would attribute to the same term in everyday conversation. This is true primarily because the information does not have to remain absolutely secret in order to be deserving of protection. The definition requires that the information not be generally known.
You can provide trade secreted information to others without destroying the trade secret so long as those who you disclose to are bound by some legal compulsion not to reveal that which is disclosed. This legal compulsion is most frequently some kind of non-disclosure agreement, or some kind of fiduciary duty, such as that owed by a lawyer to prospective, current and former clients.
In fact, attorneys, specifically patent attorneys and patent agents, present a unique secrecy case study. Not surprisingly, secrecy is essential with respect to innovations, particularly now that the United States is a first to file system. All patent attorneys and patent agents, and those who work for us under our direction, are required by the United States Patent and Trademark Office to maintain the confidences and secrets of their clients. This legal requirement is set forth in 37 C.F.R. § 11.106. Furthermore, 37 C.F.R. § 11.118 specifically relates to prospective clients (i.e., one who makes contact to ask questions or seek advice and has not yet, or may never, enter into a representation relationship). 11.118 specifically states: “Even when no client-practitioner relationship ensues, a practitioner who has had discussions with the prospective client shall not use or reveal information learned in the consultation…” Therefore, once you initiate contact with a patent attorney or patent agent to seek professional assistance an automatic confidentiality relationship arises and will continue even if no representation relationship is ever entered into between prospective client and attorney or agent. This is a unique situation in the law, however. Never assume the existence of a confidentiality relationship unless you are dealing with a patent attorney or patent agent.
While normally no single factor is dispositive in determining whether information has been kept secret enough to qualify as a trade secret, the focus is on determining whether reasonable efforts to preserve secrecy were employed is of paramount importance. What is reasonable will, of course, vary depending upon the resources of the company or individual claiming the trade secret and the value of the secret being protected. Notwithstanding, the failure to employ any protection protocols would suggest that the information is not a trade secret. In other words, while what is reasonable will vary, failure to do anything to protect the valuable information will not be reasonable. Said another way, reasonable efforts to preserve secrecy necessarily means that there must be at least some effort to preserve secrecy.
When determining reasonableness of efforts to maintain secrecy, courts realize that what is reasonable given the surrounding circumstances will be different if a local home cleaning business is seeking to protect a customer list, versus the Coca-Cola Company protecting its secret formula. In the former, a locked file cabinet with a folder marked confidential may well be enough, depending upon other facts. In the latter, a locked file cabinet with a folder marked confidential would certainly not be enough to protect what some consider a multi-billion dollar formula.
Although the law does not require individuals to protect against others committing crimes, a good general rule to operate under when seeking to understand the trade secret secrecy requirement is this: The more likely it is that someone may want steal your trade secret the more precautions you should undertake to preserve secrecy. It is reasonable and prudent to do whatever you can to protect your secret information. Thus, if you can anticipate problems then you should take appropriate proactive measures. Always remember, once secrecy is lost the trade secret is gone forever. Only in the most rare and extreme case will a court ever find that secrecy has been lost and the trade secret remains viable. Never assume you can fit into that rare and extreme fact pattern. Take precautions to preserve secrecy and assume the loss of secrecy means the loss of the trade secret.
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.