Trade Secret Protection: Good Risk Management
November 2007
Trade secrets are an integral part of nearly
every business operation. However, even though trade secrets are pervasive in
modern commercial enterprises, many business owners and managers may not fully
appreciate the scope of information that may be protected as a trade secret.
Furthermore, it may not be readily apparent as to what steps, if any, must or
should be taken to protect confidential business information as a trade secret.
by Sanford
E. Warren Jr. and Brandon Lee
Akin Gump Strauss
Hauer & Feld LLP
While the general concept of trade secrets may be well-known to many in business,
the specific legal requirements for obtaining protection and the scope of available
remedies are frequently misunderstood.
The recent disclosure of an alleged plot to sell Coca-Cola trade secrets
to Pepsi reminds many business people of the importance of trade secret protection.
According to an FBI investigation, the plot involved an administrative assistant
at Coca-Cola and two accomplices who offered to sell confidential information
about products under development to the "highest bidder."1 Fortunately for Coca-Cola, one of their competitors, Pepsi, tipped off the FBI
who set up a sting operation to uncover the alleged plot. This case is an excellent
example of the need to seriously consider the precautions that can and should
be taken by every business seeking to protect its trade secrets.
What Constitutes a Trade Secret?
First and foremost, trade secret law is designed to protect confidential
business information. Therefore, it is critical to assess the types of information
that qualify for protection from improper disclosure, known in trade secret
law as misappropriation. At least 45 states have adopted some variation of the
Uniform Trade Secret Act (UTSA),2 which defines
a "trade secret" as any information that derives economic value from not being
generally known and is the subject of reasonable precautions to maintain its
secrecy. Under the UTSA's broad definition, many different types of information
may be protected "including formulas, patterns, compilations, programs, devices,
methods, techniques, or processes."3 While the Coca-Cola
plot focused on confidential marketing information and valuable samples of unreleased
products, protection also extends to less flashy, but equally valuable types
of confidential information such as customer lists, databases of client information,
and compilations of sales data.
The UTSA definition of "trade secret" also requires that some economic benefit
or value be associated with the information not being generally known to the
public. In the Coca-Cola plot, it is clear that information about the upcoming
products had an intrinsic value to Coca-Cola, a value that would be significantly
diminished if the samples were obtained by competitors before the official product
launch. Similarly, compilations of data, such as customer contact information,
sales data, and other critical business information, are extremely valuable
to most businesses and provide a competitive advantage over rivals. Therefore,
it is critical to take reasonable precautions to prevent employees, and other
persons, from improperly disclosing such confidential information to competitors.
How Are Trade Secrets Protected?
After the alleged misappropriation of trade secrets arises, the issue most
frequently contested is the sufficiency of the precautions taken to protect
the information. The value of confidential information is generally assumed
to be proportional to the steps and precautions taken to maintain the confidentiality
of that information. It is only necessary that an employer take "reasonable
precautions," not necessarily every possible precaution.4 Therefore, restricting the disclosure of such confidential information only
to employees that must have access to the information is essential.
Confidential information should be maintained using commercially practical
safeguards. For example, paper documents containing confidential information
should be held and maintained in a locked office or locked file cabinets. Electronic
documents having such information should be password-protected or, if possible,
have access electronically restricted to only particular users. These precautions
are easy to implement and also tend to be the most effective protections against
trade secret misappropriation. However, it would be impossible to run a business
without disclosing some confidential information to at least some of the employees.
Were Non-Disclosure Agreements Procured?
When employees must have access to confidential information, it is important
to ensure they understand their responsibilities and obligations. Therefore,
every state allows some form of a non-disclosure agreement (NDA) between employers
and employees. NDA agreements are generally entered into at the beginning of
the employment relationship, and provide the employee with adequate notice of
his or her responsibilities and obligations with respect to confidential information
of the business. A smaller number of states may also permit non-compete agreements
which preclude an employee from working for a competitor for a limited period
of time.5 Both types of agreements should be carefully
tailored, ensuring that the scope of confidentiality is well-defined and that
the agreement is not overly burdensome on the employee. A well-drafted NDA,
or a non-compete agreement, can be an effective tool in preventing unwanted
disclosure and enforcing trade secrets.
Were "Improper Means" Used?
When misappropriation of trade secrets occurs, remedies are generally available
if all of the legal requirements for trade secret protection are satisfied.
As already discussed, the court will look at whether the information was truly
confidential business information and whether reasonable precautions were taken.
The courts will also look at whether "improper means" were used to obtain the
confidential information. "Improper means" includes both common criminal acts
such as theft, bribery, and fraud or misrepresentation, but also traditionally
non-criminal activities such as breach of a duty to maintain secrecy, or inducing
another to breach such a duty.6
Conclusion
Businesses should be cautious any time they might inadvertently obtain confidential
information, such as when hiring the former employee of a competitor. Therefore,
taking precautions, both offensive and defensive, can protect not only your
own trade secrets, but also against becoming involved with another's allegations
of misappropriation.
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