Most businesses develop trade secrets at some time during their existence. A trade secret generally includes any information used in the course of trade or business which lends a competitive advantage and is not generally known within the trade or industry. A trade secret may be embodied, for example, within a formula for a chemical compound, a process for manufacturing or treating materials, research and development information, customer lists, methods of bookkeeping, business plans or designs, computer programs, special pricing and cost materials, and materials outlining special customer needs.
Insofar as a state's trade secret law does not conflict with federal law, trade secret protection will be governed by the law of each individual state. This is in contrast to patent, copyright and trademark law which are largely governed by federal statutes. The application of state law to trade secrets will, naturally, result in some variation in protection and requirements for trade secrets between states.
There are generally three criteria which must be met in order to claim something as a trade secret:
1. It must not be common public knowledge;
2. It must have demonstrable value; and
3. It must be protected and maintained as confidential by the owner.
Unlike patents, there is no strict standard of "invention" involved in determining what can be made the subject of trade secret protection. However, trade secret information must have some demonstrable value in order to be protected. For example, if the information does not provide some competitive advantage, it probably does not qualify as being a trade secret.
In order to claim trade secret protection, the information or subject of the trade secret must obviously be kept secret or confidential. Clearly, disclosure of a trade secret to a non-employee of the company could endanger the ability to claim such information as a trade secret unless it is also carefully regulated and controlled, preferably by a written agreement or nondisclosure contract. As discussed in detail below, measures should be taken by an employer to control the scope and nature of the distribution of trade secret materials to its employees and the circumstances under which, and the extent to which, employees may obtain access to such information.
Once a patent has been issued, the subject matter disclosed therein becomes public knowledge and thus part of the public domain. Hence, patented subject matter cannot be made the subject of trade secret protection. However, the mere filing of a patent application does not cause trade secret rights to be forfeited. Since patent applications are maintained in strict confidence by the United States Patent and Trademark Office until the patent application is published or the patent issues, any subject matter contained within a pending patent application which otherwise meets the criteria for a trade secret may be claimed as a trade secret up until such time as a patent is issued.
Further, the courts have held that even if certain subject matter is patentable (e.g., a novel chemical process), the owner of the technology can elect to claim such subject matter as a trade secret rather than seek patent protection.
Like patents, trade secrets can provide some measure of protection for ideas. However, trade secrets are not afforded the exclusivity provided by patent protection, since third parties are at liberty to independently develop the subject matter of a trade secret or to take a product and perform reverse engineering until the trade secret is discovered. On the other hand, whereas a utility patent expires after twenty years from filing, the duration of a trade secret may be indefinite and depends only upon one's ability to maintain its secrecy. Thus, if it is possible to maintain patentable subject matter secret for an extended period of time (an example might be the famed COCA-COLA formula), it may be more desirable to protect the idea as a trade secret rather than apply for patent protection.
Trade secrets are also somewhat similar to copyrights in that unauthorized copying of tangible subject matter embodying a trade secret is impermissible. However, copyright law does not provide any measure of protection for the ideas themselves, but rather only to the form of expression of those ideas. Advantageously, the licensing of trade secrets is typically granted greater contractual latitude under the antitrust laws than is true of patents. Additionally, when trade secrets are included with trademarks in a franchising agreement, greater latitude is provided for requiring that the franchisee purchase its goods and materials from the franchisor.
By properly claiming and protecting a trade secret, the trade secret owner maintains the right to use the subject matter of the trade secret in secrecy, as well as the right to use and disclose the trade secret to others by way of a contractual or confidential relationship. Trade secret rights are generally considered property rights and can be assigned or licensed or otherwise disposed of or transferred by contract.
How does one go about maintaining and protecting confidential subject matter as a trade secret? A few basic techniques are outlined below:
- Adopt employee hiring and termination policies designed to protect confidential information. Carefully consider the potential liabilities before hiring a prospective employee who is contractually bound or otherwise restricted by former employers as to confidential subject matter. Also, review with all parting employees the scope of the restrictions on their future use of the employer's confidential and proprietary information.
- A nondisclosure provision should be included in the employee's contract of employment which spells out subject matter areas which are held by the employer to be confidential. Additionally, a contractual provision providing for reasonable restrictions on the competitive activity of a former employee upon his or her termination is advisable. Such a restriction will typically be enforced by the courts if it is reasonable as to duration, geographical extent, and scope.
- Provide employee access to confidential information only on a "need to know" basis. Areas where confidential information is kept should be segregated from free access areas, with limited access provided only to those with a need to know the confidential information. Additional measures can be employed in limiting access to such confidential areas, such as the use of electronic security, pass keys or simply color-coded identification badges.
- Employees should be constantly alerted that certain information is confidential. This may be done by the use of signs and strategically placed cautionary notices.
- Confidential documents should be carefully marked as confidential and the routing of such documents should be carefully controlled so as to prevent security leaks. For example, a legend such as "CONFIDENTIAL INFORMATION" or "TRADE SECRET INFORMATION" could be placed on all confidential documents. Also, restrictions as to the reproduction of confidential documents is a wise idea. Employees should be instructed both verbally and through written policy manuals concerning the company procedures for handling confidential documents.
- In dealing with third party non-employees, an employer should exercise caution against disclosing trade secret information, and should only do so pursuant to a confidential disclosure agreement or non-disclosure agreement.
In determining whether trade secret protection is a viable alternative or the most desirable alternative in any particular instance, a careful evaluation of the technology should be conducted, taking into account the ability to maintain important aspects of the technology secret for an extended period of time, the potential for patent protection, and other considerations. Once a determination has been made that certain information will be maintained as a trade secret, vigilance on the part of the owner in maintaining its secrecy is the key to its protection. Contracts should be entered into before the information is disclosed to third parties and internal company practices should be followed to assure that employees are bound by an obligation of secrecy.