Trade secrets are often touted as the lifeblood of a company. But, what are they? And, what are companies required to do to maintain their status as trade secrets? This blog explores those issues.
As defined, a “trade secret” is “information, including a formula, pattern, compilation, program, device, method, technique, or process that: [¶] (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and [¶] (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code §3426.1(d). Broken down, trade secrets have three elements: (1) the information is a secret; (2) the information has actual or potential economic value because it is a secret; and (3) the holder of the trade secret makes reasonable efforts to keep the information a secret.
The California Supreme Court explained “trade secrets” as follows: “’Trade secrets are a peculiar kind of property. Their only value consists in their being kept private.’ Thus, ‘the right to exclude others is central to the very definition of the property interest. Once the data that constitute a trade secret are disclosed to others, or others are allowed to use those data, the holder of the trade secret has lost his property interest in the data.’” DVD Copy Control Assn., Inc. v. Bunner (2003) 31 Cal.4th 864, 881 (internal citations omitted).
The distinction between a trade secret and other secrets is that trade secrets have economic value by virtue of their secrecy. One of the prime examples is Coca Cola. The recipe for Coca Cola is a secret. And, the fact that it remains a secret (i.e., others are unable to duplicate the drink) makes it of value. Conversely, my recipe for cookies is a secret. However, since my cookies are virtually inedible, they are not a trade secret because the recipe has no economic value.
The secrecy requirement (third prong above) for trade secrets only requires that “reasonable efforts” be made. It does not require absolute secrecy. The “reasonable efforts” requirement is fact specific. “Reasonable efforts” are the efforts that would be made by a reasonable person or business in the same situation and having the same knowledge and resources as the trade secret holder exercising due care to protect important information of the same kind. Specific measures should be taken to protect the specific trade secret information that go above and beyond the general measures taken to protect other business information or assets. This proves that you consider the trade secret information to be more important than other business information.
Depending on the circumstance, the following measures may constitute “reasonable efforts” and, if possible, should be taken:
• Identify the trade secrets specifically in writing. Then, advise employees who use the trade secret of its status as a trade secret and the need to keep it confidential;
• Train employees on how to treat the information as confidential;
• Require employees who have access to the trade secret to sign a confidentiality agreement or nondisclosure to ensure the secrecy. Put in the confidentiality agreement that the requirement of secrecy extends beyond the termination of employment until such time as the trade secret is public (i.e., no longer a trade secret);
• Limit access to a trade secret on a “need to know” basis;
• Use specific measures to control access to the trade secret (i.e., password protected data);
• Physically segregate the trade secret from other business information. The trade secret should be kept in a restricted or secured area. The employer should consider such measures as locked filing cabinets or locked rooms, or badges for employees or those with access to the information;
• Mark documents or computer files with warnings or reminders of confidentiality;
• Establish an official document handling policy for trade secret information;
• Shred printed trade secret documents when they are no longer needed;
• Screen all information that is disclosed to ensure that the trade secret information is not accidentally disclosed;
• Make visitors to any facility containing trade secret information sign it and out, wear badges, and sign confidentiality agreements;
• State in the employment contract that the employee must return all documents upon termination;
• Use confidentiality agreements in contracts with third parties;
• Conduct exit interviews for departing employees. Remind departing employees of their duties to protect trade secret information. Request that the departing employee certify that he is not taking any trade secret information with him;
• If the departing employee refuses to certify that he has not taken trade secrets, this may indicate that he has taken them. In such a case (or if other suspicions arise), notify the departing employee’s new employer of the departing employee’s trade secret obligations. Be careful in accusing the exiting employee of misappropriation to the new employer. Otherwise, this may spring a defamation lawsuit.
There is no “one size fits all” in protecting a company’s trade secrets. A company should use as many different means as is economically possible to protect its trade secrets. The more measures that are used, the more likely a jury (if challenged) will determine that the company used all reasonable measures to protect its trade secrets.