8.4 Trade secrets

Trade secrets are confidential business information that give companies a competitive edge. They can include formulas, methods, or processes that aren't publicly known. Protecting trade secrets is crucial for maintaining a company's advantage in the market.

Companies must take reasonable steps to keep trade secrets confidential. This can involve limiting access, using non-disclosure agreements, and implementing security measures. Unlike patents, trade secrets don't require registration and can be protected indefinitely as long as they remain secret.

Definition of trade secrets

• Trade secrets are a form of intellectual property that consist of confidential business information that provides a company with a competitive advantage
• Trade secrets can include a wide range of information such as formulas, patterns, compilations, programs, devices, methods, techniques, or processes
• The key characteristic of a trade secret is that it is not generally known or readily ascertainable by others who could obtain economic value from its disclosure or use

Key elements of trade secrets

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• The information must have independent economic value, actual or potential, from not being generally known to or readily ascertainable by others
• The owner must take reasonable measures to keep the information secret, such as limiting access, requiring confidentiality agreements, and implementing security procedures
• The secrecy of the information must be maintained, meaning it is not publicly available or easily discoverable through proper means
• The trade secret must provide a competitive advantage to the owner, enabling them to obtain an economic benefit over competitors who do not know or use it

Examples of trade secrets

• Coca-Cola's secret formula for its signature soft drink (recipe)
• Google's search algorithm (software code)
• KFC's blend of herbs and spices used in its fried chicken (ingredients list)
• A manufacturer's customer list and sales data (business information)
• A company's strategic plans, pricing strategies, and marketing tactics (confidential business strategies)

Legal protection for trade secrets

• Trade secrets are protected by a combination of state and federal laws in the United States, as well as international agreements
• The primary federal law is the Defend Trade Secrets Act (DTSA) of 2016, which provides a uniform framework for trade secret protection and allows owners to sue in federal court
• Most states have adopted the Uniform Trade Secrets Act (UTSA), which defines trade secrets and sets forth remedies for misappropriation

International trade secret laws

• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) sets minimum standards for trade secret protection among World Trade Organization (WTO) member countries
• The United States-Mexico-Canada Agreement (USMCA) includes provisions on trade secret protection and enforcement
• The European Union's Trade Secrets Directive harmonizes trade secret laws across member states and provides remedies for unlawful acquisition, use, and disclosure

Differences vs patents and trademarks

• Patents protect inventions and require public disclosure in exchange for a limited monopoly, while trade secrets remain confidential indefinitely as long as secrecy is maintained
• Trademarks protect brands and logos used to identify goods or services, while trade secrets protect confidential business information
• Trade secrets do not require registration or approval by a government agency, unlike patents and trademarks

Non-disclosure agreements (NDAs)

• NDAs are contracts that prohibit the recipient of confidential information from disclosing it to others
• NDAs are a critical tool for protecting trade secrets, especially when sharing information with employees, contractors, suppliers, or potential partners
• Key elements of an NDA include the definition of confidential information, the scope and duration of the obligation to maintain secrecy, and the consequences of breach
• NDAs can be one-way (unilateral) or mutual, depending on whether one or both parties are disclosing confidential information

Misappropriation of trade secrets

• Misappropriation occurs when someone acquires, uses, or discloses a trade secret without the owner's consent and in violation of a duty to maintain secrecy
• Misappropriation can result in significant financial harm to the trade secret owner, including lost profits, loss of competitive advantage, and damage to reputation
• Remedies for misappropriation may include injunctive relief (court order to stop use or disclosure), damages (monetary compensation), and attorney's fees

Improper means of acquiring trade secrets

• Improper means include theft, bribery, misrepresentation, breach of a duty to maintain secrecy, or espionage through electronic or other means
• Examples of improper means are hacking into a company's computer system, bribing an employee to disclose confidential information, or misrepresenting one's identity to gain access to trade secrets
• Reverse engineering or independent discovery are not considered improper means of acquiring a trade secret

Breach of confidentiality

• Breach of confidentiality occurs when someone who has a duty to maintain secrecy (such as an employee or contractor) discloses or uses the trade secret without authorization
• The duty to maintain secrecy can arise from an employment agreement, NDA, or implied by the nature of the relationship
• Examples of breach of confidentiality include an employee sharing customer lists with a competitor or a former employee using confidential business strategies in a new venture

Economic espionage

• Economic espionage is the theft of trade secrets by or for the benefit of a foreign government, instrumentality, or agent
• The Economic Espionage Act of 1996 makes it a federal crime to steal trade secrets with the intent or knowledge that it will benefit a foreign entity
• Examples of economic espionage include a foreign intelligence agency hacking into a defense contractor's network to steal military technology or an employee selling confidential business information to a state-owned enterprise

Best practices for safeguarding trade secrets

• Companies should implement a comprehensive trade secret protection program that includes policies, procedures, and training to prevent misappropriation
• Best practices involve a combination of legal, technical, and operational measures to secure confidential information and mitigate risks

Limiting access and disclosure

• Restrict access to trade secrets on a need-to-know basis, granting access only to employees or contractors who require the information to perform their duties
• Use access controls such as passwords, encryption, and network segmentation to prevent unauthorized access to trade secret information
• Establish clear policies and procedures for handling and disclosing trade secrets, including guidelines for marking documents as confidential and securely storing and transmitting information

Employee training and policies

• Provide regular training to employees on the importance of protecting trade secrets and their obligations under confidentiality agreements and company policies
• Require employees to sign confidentiality agreements and non-compete agreements (where enforceable) as a condition of employment
• Implement an exit interview process for departing employees to remind them of their ongoing obligations to protect trade secrets and to retrieve any confidential materials in their possession

Physical and digital security measures

• Implement physical security measures such as locked doors, security cameras, and visitor logs to control access to facilities where trade secrets are stored or used
• Use technical security measures such as firewalls, intrusion detection systems, and data loss prevention (DLP) tools to monitor and protect digital assets containing trade secrets
• Regularly monitor and audit security systems and procedures to identify and address vulnerabilities and ensure compliance with best practices

Trade secrets in international business

• When expanding into foreign markets, companies face additional risks and challenges in protecting their trade secrets due to differences in legal systems, cultural norms, and business practices
• It is essential for companies to assess the trade secret landscape in each country where they operate and to develop strategies for mitigating risks and enforcing their rights

Risks when expanding abroad

• Weak or inconsistent trade secret laws in some countries may not provide adequate protection or remedies for misappropriation
• Cultural differences in attitudes towards intellectual property and confidentiality can increase the risk of unauthorized disclosure or use of trade secrets
• Political and economic instability in some regions can create uncertainty and increase the likelihood of state-sponsored economic espionage
• Language barriers and differences in business practices can make it more difficult to communicate and enforce confidentiality obligations with local employees and partners

Protecting secrets in foreign jurisdictions

• Conduct due diligence on potential partners, employees, and contractors in foreign countries to assess their reputation and track record for protecting confidential information
• Localize confidentiality agreements, policies, and training materials to ensure they are enforceable and culturally appropriate in each jurisdiction
• Consider using technical measures such as data localization (storing trade secrets on servers in-country) and network segmentation to limit cross-border access and minimize the risk of unauthorized disclosure
• Work with local legal counsel and trade secret experts to navigate the legal and regulatory landscape in each country and to develop effective protection and enforcement strategies

Enforcing rights internationally

• Be prepared to enforce trade secret rights through civil litigation or criminal prosecution in foreign jurisdictions, which may have different procedures, standards of proof, and remedies than in the United States
• Consider alternative dispute resolution methods such as arbitration or mediation, which may be faster, less expensive, and more confidential than court proceedings
• Collaborate with industry associations, chambers of commerce, and government agencies to advocate for stronger trade secret protection and enforcement in foreign markets
• Monitor the political and economic environment in each country and adjust protection and enforcement strategies as needed to respond to changes in the risk landscape

Consulting on trade secret issues

• As a consultant advising companies on trade secret issues, it is important to have a deep understanding of the legal, technical, and operational aspects of trade secret protection and enforcement
• Consultants can provide valuable guidance and support to companies throughout the trade secret lifecycle, from identifying and valuing trade secrets to developing protection strategies and responding to misappropriation

Assessing a company's trade secrets

• Work with the company to identify and inventory its trade secrets, including technical information, business processes, and customer data
• Assess the value of each trade secret based on factors such as its uniqueness, complexity, and potential impact on the company's competitive position
• Evaluate the company's current measures for protecting trade secrets, including policies, procedures, agreements, and security controls
• Identify gaps and vulnerabilities in the company's trade secret protection program and recommend improvements based on best practices and industry standards

Developing protection strategies

• Develop a comprehensive trade secret protection plan that addresses legal, technical, and operational risks and aligns with the company's business objectives and risk tolerance
• Draft or review confidentiality agreements, employee policies, and training materials to ensure they are clear, enforceable, and consistent with applicable laws and regulations
• Recommend technical security measures such as access controls, encryption, and monitoring tools to prevent unauthorized access to or disclosure of trade secrets
• Advise the company on best practices for managing trade secrets throughout the business lifecycle, including during mergers and acquisitions, joint ventures, and collaborations with third parties

Investigating and responding to theft

• Assist the company in conducting internal investigations of suspected trade secret theft, including interviewing employees, reviewing electronic records, and preserving evidence
• Coordinate with legal counsel and law enforcement to pursue civil or criminal remedies against individuals or entities responsible for misappropriation
• Develop and implement a crisis communication plan to manage reputational risks and stakeholder concerns in the event of a trade secret theft or leak
• Advise the company on post-incident remediation measures, such as improving security controls, revising policies and procedures, and providing additional training to employees to prevent future incidents