Expert Commentary

Shhhhhhh…Don't Tell Anyone—It's a (Trade) Secret

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.


Intellectual Property
November 2004

The necessity of good faith and honest, fair dealing is the very life and spirit of the commercial world.

Kewanee Oil Co. v Bicron Corp., 416 U.S. 470 (1974)

[B]usiness is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs. There's also a negative side.

Hunter S. Thompson (b. 1939)

These 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, 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 these three 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 four questions discussed, 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

This discussion has set 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 II is an associate with Trop, Pruner & Hu, P.C. 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). To learn more, visit Trop, Pruner & Hu, P.C..

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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