Shhhhhhh…Don't Tell Anyone—It's a (Trade) Secret
November 2004
An important part of managing risk is learning
how to recognize a trade secret and ensuring a trade secret maintains its protected
status. Failure to appreciate these concepts can lead to sticky legal situations
that may arise between, for example, your organization and your employees or
between your organization and its competitors.
by Sanford
E. Warren Jr. and E.E. "Jack" Richards II
Winstead Sechrest
& Minick
—Kewanee Oil Co. v Bicron Corp.,
416 U.S. 470 (1974)
—Hunter S. Thompson (b. 1939)
The above quotes help illustrate that business has both good and bad points.
Nowhere is this more evident than in the realm of trade secrets—reservoirs of
information that some work hard to obtain and that others work hard to steal.
What Is a Trade Secret?
A trade secret is a unique beast that is best described by comparing it to
its more familiar cousin, the patent. When an individual elects to patent his
invention, he tells the world, in great detail, how to make and use the widget
within the words of the patent itself. In exchange, the U.S. government gives
the inventor a monopoly to make and use the widget for 20 years. With trade
secrets, however, the owner keeps the secret to himself. Of course, by keeping
the secret to himself, the government does not offer the owner the 20 years
of protection that it affords to patent owners.
Another difference between patents and trade secrets is that the trade secret
owner doesn't have to pay to have a patent application drafted and prosecuted
by an attorney … ahem. So, based on some of these considerations, many choose
to protect their intellectual property via the trade secret route while others
pursue patents, depending on the situation. Turning our attention exclusively
to trade secrets, let's examine some specific questions that will help you determine
whether any particular information constitutes a trade secret.
1. Is Your Information a Secret and Is It Valuable?
Trade secret doctrine is primarily dictated by state law. Still, most any
definition, regardless of state, requires that a trade secret entail anything
that (1) gives a business an advantage over its competitors and (2) that is
not generally known to one's competitors. Parties to litigation usually focus
on interpretation of the second prong (i.e., secrecy). Regarding this secrecy
element, if you allow your information to be published in a trade journal or
handed out to customers without the proper safeguards (e.g., a nondisclosure
agreement), you have sacrificed the "secret" in "trade secret." Consequently,
no trade secret protection will exist for the information.
2. How Did the Bad Guy Get Your Information?
As stated above, a trade secret must be a secret. Still, absolute secrecy
is not a requirement. So the question becomes, "How secret must my trade secret
be?" In many cases, even when information falls short of absolute secrecy, the
information may still be awarded trade secret protection if it was improperly
acquired by another party. See, e.g., Miller Paper Co.
v Roberts Paper Co., 901 SW2d 593 (Tex App—Amarillo 1995, no writ).
In Miller, several employees left Roberts
Paper Co. to form Miller Paper Co. Upon leaving, some of the employees took
a customer list that Roberts had compiled over a 52-year period. Roberts had
kept the list of customers secret for the most part. The list contained special
billing information, contact information, and purchase order likes and dislikes
for certain customers. While some of this information could have been obtained
through independent research, the fact is that it wasn't—the employees simply
took the list from their employer. The court held that doing so constituted
trade secret misappropriation. Thus, information that is not absolutely secret
may still be protected if you can show the information was wrongfully obtained.
As a brief aside, even if the customer list at issue in Miller was held to not be a trade secret because,
for example, it failed to give a business advantage to Roberts or it was generally
known to Roberts Paper's competitors, Roberts may still have been able to assert
a claim for breach of confidential relationship or common-law misappropriation.
3. Did You Take Reasonable Steps To Protect the Information?
Okay, so a trade secret must provide some advantage over competitors, and
it must have some element of secrecy. That required level of secrecy is sometimes
lowered when a bad actor wrongfully appropriates the information. The required
level of secrecy, however, is also determined by how easily the information
could have been safeguarded. For example, in E.I. DuPont
de Nemours & Co. v Christopher, 431 F2d 1012 (5th Cir 1970), DuPont was
constructing a processing plant. To keep certain aspects of the construction
secret, DuPont erected privacy fencing. Undeterred, Christopher used an airplane
to take aerial views of the construction. The court found trade secret misappropriation
and concluded that DuPont should not have been required to erect a roof over
the construction site in an attempt to protect its trade secrets from "industrial
espionage in which an airplane is the cloak and a camera is the dagger." Thus,
the extent of available measures that could have been reasonably taken by the
owner to guard the secrecy of the information may be considered in determining
whether trade secret protection exists.
4. Did You Obtain the Information through "Sweat of the Brow?"
If the above factors have been considered but your situation is still cloudy,
some courts have considered the amount of effort or money expended by the information
owner in gathering the information in the first place. Judges and juries sometimes
have a hard time refusing protection for, as an example, a list of customer
leads or a soft drink formula that was obtained through years of hard work.
Still, this "sweat of the brow" factor is unlikely to help you if you don't
have decent arguments pertaining to the aforementioned points (e.g., secrecy
element).
How Does this Help Me Manage Risk?
So, now that you have some general guidelines on how to identify a trade
secret, how can you use this information to manage risk? Well, avoiding legal
landmines is a good way to manage risk. Having to sue a former employee for
theft of trade secrets can be expensive if you have not protected your organization
adequately. Thus, in light of the above discussion, consider the following steps
for protecting information within your organization. Of course, the same considerations
should be made if you are attempting, for example, to see if there is merit
to a competitor's assertion that your employee has misappropriated a trade secret.
- Do not provide public tours within areas where sensitive information
is available.
- Place "confidential" watermarks on sensitive documents.
- Exchange sensitive information with third parties under the protection
of a nondisclosure agreement.
- Serialize (i.e., label with unique numbers) sensitive documents so they
may be tracked at a later time.
- Provide limited access to sensitive files. This may mean locking file
cabinets or constructing password-protected electronic files.
- Enter into employment agreements that specifically address trade secrets
and confidential information that the organization will convey to the prospective
employee. Ensure, however, that the agreements are not overbearing. For
example, prohibiting use of sensitive customer information should not be
overly restrictive in terms of geographic area and of the duration of time
for which the employee cannot use the information after leaving the organization.
- The employment agreement may also address the offer of employment being
extended on the premise that the prospective employee not bring any other
company's trade secrets into the organization.
Conclusion
The above sets out the basics of trade secrets. Of course, many detailed
nuances were not addressed for the sake of brevity. Please feel free to contact
the authors with questions about the matter. Good luck and here's hoping you
do business with those who practice "fair dealing" and that you manage to avoid
the "long plastic hallways" of business where "thieves and pimps run free."
If you can't avoid such characters, remember that you can use trade secrets
to help protect your organization.
E.E.
("Jack") Richards IIis an associate
with Winstead Sechrest Minick in Austin, Texas, where he specializes in intellectual
property, technology, litigation, dispute resolution, and nanotechnology. He
received his BS degree from Texas A&M and his JD degree, cum laude, from the
University of Houston Law Center. Before entering law school, he worked as an
engineer for a start-up company in the medical device industry, focusing on
electronics and software related to cardiac data (electrophysiology and hemodynamics).
Mr. Richards can be reached at jrichards@winstead.com.
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