If there is no secret, then information disclosed in a patent is generally known to the public and cannot form the basis of a trade secret claim.
If there is no secret, then information disclosed in a patent is generally known to the public and cannot form the basis of a trade secret claim.
The best way to obtain immediate protection for your company’s trade secrets is to identify them by developing a list, inform all employees that these are trade secrets, and then protect the secret information. Without taking these positive steps to identify and protect trade secrets, you risk losing all common law and statutory protections.
Business Information can be protected as trade secrets, e.g.:
■ cost and pricing information
■ manufacturing information
■ internal market analyses or forecasts
■ financial information, non-public
■ customer and/or client lists
■ unannounced business relationships one is negotiating or has entered
■ business opportunities regarding acquiring another company or product
■ marketing and advertising plans
■ personnel information, i.e. of employees
The comments to the UTSA state, “[t]he courts do not require that extreme and unduly expensive procedures be taken to protect trade secrets against flagrant Industrial espionage.”
Reasonable efforts include “advising employees of the existence of a trade secret, limiting access to the information on a need to know basis, requiring employees to sign confidentiality agreements, and keeping secret documents under lock.” Requiring employees, contractors, visitors and other people who may come into contact with trade secret information to sign confidentiality or non-disclosure agreements help to ensure that the information retains its trade secret status, because such agreements impose on their signers a contractual duty not to disclose the information.
Unlike patents, copyrights or trademarks, trade secrets are not publicly recognized or registered with the government. Nor do companies publicly identify their trade secrets through press releases. Hence, managers should look especially carefully to identify all valuable trade secrets when performing an intellectual property audit.
Overlooking trade secrets could be costly, depending on the industry competitors. A trade secrets portfolio may be more valuable than all of the company’s patents, copyrights and trademarks combined.
Trade secrets are easily misappropriated and then easily exploited. But steps can be taken to protect them.
The first step is to understand the Uniform Trade Secrets Act, as a starting point, and then review the basics of California law.
The UTSA adopted by California defines a “trade secret” as follows:
“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
There are four basic requirements:
The owner’s mere desire or intent to keep information a secret is not enough.
Companies should take these additional steps to protect trade secrets:
While the new employer may assert that it did not know that its employee used or improperly disclosed trade secret informationm under the UTSA the standard is not actual knowledge of wrongdoing but rather constructive knowledge. Civil Code section 3426.1(b)(2)(B)(ii)(iii).
If the company’s principals knew or should have known that wrongdoing was occurring, liability may attach to the company.
It is important to contain the use of information because the potential damages encompassed by continuing misappropriation expands with each illicit use of disclosure of the trade secret.
The Uniform Trade Secrets Act ( UTSA) defines “misappropriation” to include two distinct types of misuse:
1) the acquisition by improper means, and
2) the use or disclosure of trade secrets.
California Civil Code section 3426.1.
“Improper means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” California Civil Code section 3426.1(a).
Thus, if a former employee were to physically take or copy a trade secret, that information would be acquired by improper means.
“Misappropriation” also prohibits the use or disclosure of trade secret information. Civil Code section 3426.1(b)(2).
Cases interpreting this provision of the UTSA have held that a former employee’s use or disclosure of confidential customer information to solicit new accounts on behalf of a new employer constitutes the misappropriation of a trade secret.
Companies can protect themselves against theft of trade secrets by suing non-compete provisions in employment contracts. These protect against losing trade secrets and other confidential information when their employees leave as well as inadvertant or inevitable used of proprietary information by former employees in their new employment, even without actually taking physical documents or data when they leave.
In California, trade secrets consist of information that derives independent economic value by virtue of not being generally known to the public and is the subject of reasonable efforts to maintain its secrecy.
A trade secret could consist of a business process or method or a customer list that is the result of research and development.
Trade secret protection is independent of the protections afforded by patent law and copyright laws, which generally require disclosure of the information before it can be protected. Nonetheless, a trade secret is protectable only if and when efforts are made to keep the information confidential.
A non-compete provision will prohibit an employee from working for a competitor for a period of time following termination of his or her employment. These provisions are commonplace in many states outside of California. The justification for the use of such provisions is that employees will inevitably use the trade secrets obtained during their employment irrespective of whether they actually took anything with them.
However, such provisions based upon “inevitable disclosure” are not allowed in California. Instead, California courts generally will not enforce a non-compete provision unless it is entered into in connection with the sale of an employee’s business. Similarly, California courts will not enforce out-of-state non-compete provisions unless they are consistent with this policy. California’s policy is based on Business & Professions Code § 16600, which invalidates a contract by which anyone is restrained from engaging in a lawful business or profession.
Despite this prohibition against the use of covenants not to compete, employees in California do not have an unfettered right to use confidential information taken from a prior employer and use it in their subsequent employment. California law prohibits the use of trade secrets to compete against one’s prior employer. This legal prohibition may be reinforced in employee contracts, such as non-disclosure agreements. Such agreements should occupy a standard role in the new hire process.
California law does allow the use of non-compete provisions in connection with employment contracts entered into with sellers of an interest in a business. In such instances, the sellers of the business may be prohibited from engaging in a competing business within a certain geographic area for a specified period of time. This type of provision may be used when the former business owners are hired by the acquiring company. However, the restrictions in such agreements must be reasonable. For example, an over-inclusive geographic restriction or excessive time duration will not be enforced by a court.
What can be done to protect yourself from competition by prior employees who do not fall within the business owners’ exception? As stated above, all employees should be required to sign a non-disclosure agreement designed to protect trade secrets. The law prohibits the use of trade secrets after an employee leaves the company. However, in order to establish that the information is entitled to trade secret protection, one must show that efforts were made to protect such information. Non-disclosure agreements are useful for this purpose.
Special care should be devoted to access to trade secrets. Many executives within technology companies are often allowed access to customer lists. However, such widespread access is often unnecessary. Restricted access is one of the underpinnings of trade secret protection.
Further, employees should be asked to return all information, including company computers, when they leave the company. Following departure of an employee, the company should conduct a forensic analysis of his/her computers and devices to be sure that nothing was taken. Steps may be taken to immediately retrieve and to enjoin the use of any information that was removed.
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Many technology companies are necessarily concerned about losing trade secrets and other confidential information when their employees leave the company. In addition, there is a risk that technology professionals may inevitably use proprietary information in their new employment without actually taking physical documents or data when they leave. Can technology companies protect themselves against these scenarios through the use of non-compete provisions? The answer to this question is . . . sometimes.
Technology executives sometimes fail to recognize the nature of the information that constitutes protected trade secrets. As a result, such companies are either over inclusive or under inclusive in their efforts to protect business information. In California, a trade secret generally consists of information that derives independent economic value by virtue of not being generally known to the public and is the subject of reasonable efforts to maintain its secrecy. A trade secret could consist of a business process or method or a customer list that is the result of research and development. Trade secret protection is independent of the protections afforded by the patent and copyright laws, which generally require disclosure of the information before it can be protected. Conversely, a trade secret is entitled to protection only when efforts are made to keep the information confidential.
Typically, a non-compete provision will prohibit an employee from working for a competitor for a period of time following termination of his or her employment. These provisions are commonplace in many states outside of California. The justification for the use of such provisions is that employees will inevitably use the trade secrets obtained during their employment irrespective of whether they actually took anything with them.
However, such provisions based upon “inevitable disclosure” are not allowed in California. Instead, California courts generally will not enforce a non-compete provision unless it is entered into in connection with the sale of an employee’s business. Similarly, California courts will not enforce out-of-state non-compete provisions unless they are consistent with this policy. California’s policy is based on Business & Professions Code § 16600, which invalidates a contract by which anyone is restrained from engaging in a lawful business or profession.
Despite this prohibition against the use of covenants not to compete, employees in California do not have an unfettered right to use confidential information taken from a prior employer and use it in their subsequent employment. California law prohibits the use of trade secrets to compete against one’s prior employer. This legal prohibition may be reinforced in employee contracts, such as non-disclosure agreements. Such agreements should occupy a standard role in the new hire process.
California law does allow the use of non-compete provisions in connection with employment contracts entered into with sellers of an interest in a business. In such instances, the sellers of the business may be prohibited from engaging in a competing business within a certain geographic area for a specified period of time. This type of provision may be used when the former business owners are hired by the acquiring company. However, the restrictions in such agreements must be reasonable. For example, an over-inclusive geographic restriction or excessive time duration will not be enforced by a court.
What can be done to protect yourself from competition by prior employees who do not fall within the business owners’ exception? As stated above, all employees should be required to sign a non-disclosure agreement designed to protect trade secrets. The law prohibits the use of trade secrets after an employee leaves the company. However, in order to establish that the information is entitled to trade secret protection, one must show that efforts were made to protect such information. Non-disclosure agreements are useful for this purpose.
Special care should be devoted to access to trade secrets. Many executives within technology companies are often allowed access to customer lists. However, such widespread access is often unnecessary. Restricted access is one of the underpinnings of trade secret protection.
Further, employees should be asked to return all information, including company computers, when they leave the company. Following departure of an employee, the company should conduct a forensic analysis of his/her computers and devices to be sure that nothing was taken. Steps may be taken to immediately retrieve and to enjoin the use of any information that was removed.
California has adopted a version of the Uniform Trade Secrets Act (UTSA). Enacted in 1984, the UTSA is codified under Section 3426 to 3426.11 of the California Civil Code.
If a company takes reasonable measures to protect its information, and if the information is valuable because it is kept secret, California courts will recognize that common, ordinary datum data can be protected as a trade secret.
For example, business plans, customer lists, client lists, spreadsheets, and corporate minutes, and bid specifications can be afforded protection as trade secrets.
