Businesses of all sizes and all stages of maturity have information they need to protect. From marketing strategies to customer lists, and from proprietary recipes to software codes, all types of businesses rely on proprietary information – and the confidentiality of their proprietary information – to establish their market position and gain a competitive edge.
While all confidential information can be protected, and while there are various legal tools and remedies available for preventing misappropriation and unauthorized disclosure of a company’s confidential information, securing “trade secret” protection offers additional benefits. What constitutes a trade secret? How are trade secrets protected in the United States and abroad? Here is a brief introduction to what company owners, their subject matter experts, and their information technology (IT) managers need to know.
What is a Trade Secret?
While federal law provides the primary protections for trademarks, copyrights, and patents in the United States, both state and federal law provide important protections for trade secret owners. Forty-seven states have enacted some form of the Uniform Trade Secrets Act (UTSA), and two states (Massachusetts and New York) have introduced legislation to adopt UTSA in 2017. The Uniform Trade Secrets Act is a model law developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL), which seeks to harmonize state laws on issues affecting businesses and consumers nationwide. At the federal level, the recently-enacted Defend Trade Secrets Act establishes a nationwide legal standard for trade secret misappropriation, and allows trade secret owners to sue for misappropriation in federal court where previously only state-law remedies were available.
The NCCUSL defines a “trade secret” as follows:
“A trade secret is, basically, information of commercial value. The form of that information can be exceedingly variable. Key to the need for protection is the fact that the information is not generally known to others and is not readily ascertainable by proper means. A trade secret, generally, would be exclusive knowledge, of economic value, which has been generated by the labors of a specific person or persons who have an interest in protecting its value.”
A similar approach is taken on the international level. While each country has its own legal regime for protecting trade secrets, there is significant value (for both businesses and governments) in adhering to a uniform approach. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) – which is followed by more than 160 countries nationwide – establishes general standards for trade secret protection, and identifies these three requirements for confidential information to qualify as a “trade secret.”
- “The information must be secret (i.e., it is not generally known among, or readily accessible to, circles that normally deal with the kind of information in question).”
- “It must have commercial value because it is a secret.”
- “It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements).”
Misappropriation and Access Through Improper Means
The Uniform Trade Secrets Act and international laws prevent the misappropriation of trade secrets as well as other acts that involve accessing protected trade secrets through improper means. For businesses, understanding what is – and isn’t – prohibited is among the first steps toward implementing a strategy for trade secret protection. Under the UTSA, “improper means” include theft, bribery, misrepresentation, breach or inducement of breach, and espionage. The UTSA defines “misappropriation” as:
“(i) [A]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(ii) [D]isclosure or use of a trade secret of another without express or implied consent by a person who:
(A) used improper means to acquire knowledge of the trade secret; or
(B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was
(I) derived from or through a person who had utilized improper means to acquire it;
(II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(C) before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.”
In contrast, the following are specifically recognized as “proper means,” through which trade secrets can be obtained without a duty of secrecy and without giving rise to liability under the UTSA:
- Discovery by independent invention
- Discovery by reverse engineering
- Discovery under a license from the owner of the trade secret
- Observation in public or in published literature
Methods for Protecting Trade Secrets
The methods for protecting trade secrets are largely the same as those for protecting other forms of confidential information. In broad terms, a company’s protection efforts should focus on avoiding discovery or disclosure of their trade secrets through “proper means.” They should also include strong disincentives for misappropriation, and they should include comprehensive monitoring efforts so that they can take legal action at the first sign of unauthorized use or disclosure.
Generally speaking, a company’s protection efforts should be commensurate with their resources and the value of the information sought to be protected. Depending on their particular circumstances, trade secret protection efforts may include:
1. Contractual Protections
If independent contractors, vendors, suppliers, or customers will have access to trade secret information, it is imperative that their access is conditioned upon stringent confidentiality protections. This can be accomplished through customized non-disclosure agreements (or non-disclosure provisions in broader contracts), which should include:
(i) an acknowledgement that the information provided constitutes a trade secret;
(ii) an agreement not to share trade secret information with any unauthorized individuals;
(iii) a prohibition on reverse engineering (if applicable);
(iv) self-executing protections in the event of a breach; and
(v) any other necessary protections.
2. Employment Policies
Employees who have regular access to trade secrets, including subject matter experts and IT managers, should be subject to stringent policies regarding disclosure and information security. Company-wide, employees should have clear obligations with regard to protecting proprietary information. Your company’s employees should have a clear understanding of the types of information that need to be carefully-guarded. This applies even if they do not have access to your company’s actual trade secret information. They should be instructed on conduct that needs to be avoided – such as discussing confidential business information in public or on social media.
3. Physical Access Controls
Companies should adopt adequate physical access controls in order to reduce the risk of trade secrets being exposed to employees, contractors, and others who do not need access for legitimate business purposes. These could include measures such as use of key cards or keypads to restrict building access or access to certain areas within the building, and marking (and securing) documents that contain protected information.
4. Data Security and Logical Access Controls
Most likely, your company’s trade secrets exist in some electronic form. Whether your company utilizes local data storage or you rely on a third-party cloud provider, you should be as certain as possible that:
(i) your company’s data is secure; and
(ii) only individuals with a “need to know” have the ability to access your company’s electronically-stored trade secret information.
Contact Jiah Kim & Associates
If you would like to learn more about what your company can be doing to better protect its trade secrets and other confidential information, we encourage you to schedule an initial consultation. To speak with an attorney at Jiah Kim & Associates, please call (646) 389-5065 or schedule an appointment online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.