Identifying and Protecting Trade Secrets

If you ask the owners of most companies whether they have any intellectual property assets, assuming they know what you are talking about, they are likely to say no.  The problem is that the answer should universally be a resounding YES!  Every company has intellectual property assets.  The name of your company is an asset that can be protected through state and federal trademark registration, and can generate good will, which is potentially the largest asset of any kind that many businesses will have.  Explained in this way many will at least acknowledge that intellectual property assets exist, but the one type of intellectual property that most businesses completely ignore is the trade secret.

It is hard to imagine that any business could ever operate without having protectable trade secrets.  The trouble is that most do not know what can be protected as a trade secret, nor do they know how to protect trade secrets.

A trade secret is defined as any business information that is valuable and that derives its value from remaining a secret.  So what information could be protected via trade secret?  Any information that you would not want a competitor to get their hands on could be a trade secret.

We are not talking about top secret, high-tech blueprints for the next gizmo that will revolutionize the world, although that would certainly qualify as a trade secret.  Something as simple as a customer list, supplier list or information regarding profit margins are all things that could be protected.  After all, who would want their customer lists to fall into the hands of the competition?  What if the competition knew where you purchased your products and exactly what your profit margin was? They could undercut you and price war and fight to retain customers would be on.

Still further, what about your employees?  Employees have access to all kinds of information critical to your business operations.  Of course, there is never a problem until something goes wrong.  But how would you cope if one of your key employees decided one day that they were going to walk out the front door and set up a competing company? Would they be legally able to use all of the information they have obtained while working for you?  Would they be able to contact customers to solicit business?  Would they be able to attempt to hire away your top employees to work for them, leaving you with a shell of a business?

Protecting trade secrets is critically important if for no other reason than making sure that the time, money and energy you spend building your business is not wasted.  If your employees could simply leave without having any contractual obligations that would prevent them from taking information, stealing employees away and/or soliciting your existing customers then they would be able to set up a business and compete with you for a fraction of what it cost you to do the same.  After all, you were the one who spent the time and money for marketing to attract customers in the first place, and you were the one who spent the time and money necessary to train your employees.  Without the cost of acquiring new customers and the costs associated with training employees that new business set up by your former employee would compete with you and have only a fraction of the start-up and overhead costs you faced.  That can make it difficult for any business to keep the doors open.

As you are scrambling to think of all the things that you have that you wish others didn’t know about, keep in mind that once you identify those things the law is going to require you to maintain that valuable business information with reasonable precautions to keep the information a secret.  The key here is “reasonable precautions.”  What is considered legally reasonable will vary depending upon the value of the secret.  So if you have an extraordinarily valuable secret recipe, perhaps the formula for Coca Cola, you would want to employ Mission Impossible type secrecy precautions.

Do you remember in the original Tom Cruise Mission Impossible movie where he was trying to break into CIA headquarters?  There were laser alarms, weight sensitive alarms, heat sensitive alarms and he had to break in through ventilation ducts.  If you have seen the movie you know what I am talking about.  If not, suffice it to say that with extremely valuable information you need to take extreme measures to maintain the secrets.

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With most trade secrets you are not going to need Mission Impossible type security.  Keeping customer lists in a file marked “confidential” may be enough, although you can do better.  The trouble with trade secrets is that once the secret is lost so is the asset.  What this means is you never want to do “just enough” to protect the trade secret, you want to do enough to make sure it stays secret. So rather than just stamping a file “confidential,” keep sensitive information in a file marked “confidential” in a file cabinet that is locked, which is in a locked office to which only those who “need to know” have access.  You should probably also stamp the document “confidential” as well in case it ever were to get separated from the file folder.

The more you do to protect your secret information the more the law will be on your side in the event that someone steals the information.  So do what you can.  Passwords, locks, limit access, lock files and treat it like it is valuable. Just don’t leave the information lying around.  You wouldn’t do that to your wallet or jewelry, would you?  So why would you just leave valuable trade secrets lying around for anyone to take?

It is also important for business owners to have written agreements with their employees that address trade secrets and confidential information.  Employees need to be apprised of the requirements to keep confidential information secret.  Employers can also enter into an agreement with employees that limits the employee’s right to take confidential information when they leave, either voluntarily or as the result of being terminated.  Similarly, employees can be restricted with respect to hiring away employees and soliciting customers.  Having properly drafted employment agreements that contain confidentiality and various non-compete clauses is essential for many businesses.

The moral of the story is this: be prudent. Take steps to both identify the valuable business information you possess, and then take reasonable precautions to keep that information secret.  Once the secret is out you lose any and all rights, so treat that information accordingly.  Trade secrets are fragile and irreplaceable.