05 / 28 / 2014

What are Trade Secrets, and how are they protected?

When most people think of trade secrets, they envision the Coca-Cola secret recipe. Or they think of the KFC's eleven secret herbs and spices. Rarely do business owners take the time to consider what trade secrets their own company may possess. While Coke and KFC's recipes may be famous examples of trade secrets, most companies, in one form or the other, have their own trade secrets that should be valued and protected.

So what IS a trade secret? What constitutes a trade secret varies based on what industry a company is in. For example, Google's famous algorithm that directs internet travelers to relevant search engine results is an extremely valuable trade secret. A trade secret can include any formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.

Under the recently passed Texas Uniform Trade Secrets Act ("TUTSA"), to qualify as a trade secret the secret must create independent economic value from not being known or easily ascertainable by others. Stated differently, just having a secret will not create a trade secret. Just as Coca-cola could sell its secret recipe to an interested buyer, the secret must have some real value or potential value. Examples of trade secrets can include everything from client lists, recipes, business plans, future projections, and training, all the way to "negative know-how," which is knowledge that doing things a certain way does NOT work.

Because of differences in industries certain secrets are harder to protect than others. A client list in a highly specialized field is much more protectable as a trade secret than a client list where the customers can easily be identified. The question is how easily can a secret be recreated by a competitor? Similarly, if a secret is something that would be valuable if a competitor learned it, a business owner should attempt to protect it.

Before TUTSA was passed the factors that courts traditionally considered to determine if something is a trade secret were:

  1. The extent to which the information is known outside of the business;
  1. The extent to which  the information is known by employees and others involved in the business;
  1. The extent of the measures taken to guard the secrecy of the information;
  1. The value of the information to the business and to competitors;
  1. The amount of effort or money expended in developing the information, and,
  1. The ease or difficulty with which the information could be properly acquired or duplicated by others.

After the passage of TUTSA, these traditional factors that courts considered were, in theory, overruled by law. However, with a lack of new cases interpreting the TUTSA law, these factors will most likely still serve as a guide that Courts will consider moving forward. These factors also give a business owner a good way to evaluate how they are protecting their own trade secrets or confidential information.

Even if a business owns a valuable secret, reasonable efforts must be taken to keeps its secrecy. This step may sound simple but most trade secrets are lost by companies because they do not take precautions to keep the valuable secret that gives their business an edge in their industry from walking out the door.

So how do you protect valuable trade secrets?

The first step that all business owners should take is to determine what information is confidential and valuable to the business and treat it as such. The information should be guarded and limited to only those people who need to know it. This does not require a vault or other extravagant means to accomplish. For example, if the trade secret is digital, make sure that it is password protected. Just as a business owner should not leave cash in an unlocked register, trade secrets that provide value to your company should not be left unprotected.

One of the simplest steps that a business owner can take to protect their trade secrets is to have employees sign confidentiality agreements. Simple steps like having all employees sign confidentiality agreements, having visitors who are given access to a business’s trade secret sign non-disclosure agreements, and restricting access to confidential information serves two purposes: first, it helps to establish a business’s argument that they have valuable trade secrets, and second, it provides a separate cause of action against a person who violates an agreement, even if a court determines the information was not a trade secret but merely confidential or proprietary.

All business owners in Texas should value their company’s trade secrets and take the time to identify and protect them. Identifying the intellectual property that makes a company more valuable and competitive prevents what is the most common reason for losing trade secret protection: inadvertent disclosure.  If business owners take the time to think of their trade secrets and confidential information as assets of the company with real value, they will better recognize when something threatens that asset.

The Vethan Law Firm, P.C. is a full service business and trial law firm representing clients in corporate, commercial, trademark, and copyright matters, as well as complex contract and commercial disputes. If you or your business is in need of immediate aggressive representation in a business, commercial or intellectual property law matter, take a moment to meet with us to discuss how we may be of service to you.

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