11 / 01 / 2016

What Is the Difference between Confidential Information and Trade Secrets?

confidential information and trade secrets.jpgThe terms trade secrets and confidential information are highly intertwined, to the point where they are often used interchangeably. However, the terms do not mean the same thing and, for the effective protection of your company's intellectual assets, you need to know the difference so you can form the best strategies to keep these assets from becoming known to your competitors.

Defining Trade Secrets and Confidential Information

Trade Secrets

In brief, trade secrets are a subset of confidential information.

Trade secrets have the protection of the Uniform Trade Secrets Act of 1985 (UTSA), which is recognized by 47 states, Washington D.C., Puerto Rico, and the U.S. Virgin Islands. The UTSA defines a trade secret as:

Information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers that is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use AND is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

 There are two items of note in this definition.

  • First of all, two conditions must be met for a piece of information to be considered a trade secret. The first is stated in the second clause, which says you must make reasonable efforts to maintain the confidentiality of your trade secret; it is not enough to label information as a trade secret, you must also make an effort to keep it so.
  • The second is that a trade secret is information from which your business can derive economic advantage. That advantage is what differentiates the subset called “trade secrets” from the overall concept of confidential information and provides the basis for protection under the UTSA.
Confidential Information

Not all confidential information can be defined as a trade secret nor is it all covered by the UTSA. It is not defined by any statute. This does not mean you cannot protect it.

Common forms of protection for non-trade secret, confidential information include:

  • Employment agreements
  • Non-disclosure agreements (NDAs)
  • Letters of intent
  • Purchase or sale agreements

Contracts and agreements lay out the scope of what is deemed protected information as well as the consequence should that information be misused. Confidential information can be anything that is not generally known to the public and encompasses more than just trade secrets.

Implementing Protections

Before you decide the best way to protect your confidential information, you should conduct an internal audit to identify specifically what your company’s trade secrets and confidential information actually are.

Your next step is to implement an array of protective measures, which can include:

  • Employee agreements
  • Agreements with third parties with access to the information
  • Internal and external security measures
  • Internal policies and procedures
  • Compliance monitoring
  • A definition of the action required in case of a breach

On the last point, you must take prompt action that addresses the misappropriation or misuse of the information. If you fail to respond quickly, the courts could see it as a voluntary waiver of the agreement.

How to Protect Confidential Information and Trade Secrets

The following presumes you have put into place a non-disclosure agreement or a confidentiality agreement that is in effect when the information is revealed to another source outside your business.

Step 1

Your first step is to find out if you are in a state that recognizes the “inevitable disclosure” doctrine, which makes the presumption that individuals will “inevitably use” or disclose confidential information or trade secrets to a new employer if they are employed in the same or similar capacity as they did in your company.

In other words, the doctrine means that people may not be able to completely avoid sharing or using your confidential information if they get the same job at another company.

If your state does not recognize this doctrine, you have a bit more power to protect your information. To start, evaluate and identify the specific information you believe has been disclosed or used for the benefit of the individual's new employer.

Step 2

Once you have that locked down, you can file a lawsuit against the employee for breach of a confidentiality agreement or NDA. There is one stipulation, and that is if the agreement included a requirement for binding arbitration. Depending on the requirements for arbitration, your ability to bring suit may be hindered.

Step 3

In addition to suing the employee in question, you may be able to file suit against the company to whom the information was illegally divulged if you have a basis for believing the new employer had knowledge of the contractual agreement and encouraged the employee to break it. Again, a requirement for binding arbitration can complicate filing a lawsuit against the new employer because that company was not a signatory to the agreement you had with your former employee.

Step 4

Another action you can take is to file suit against the employee or other individual and the outside company for violation of the Uniform Trade Secrets Act. You would argue that your company had trade secrets and the employee wrongfully disclosed them to the new employer or another company or that the trade secrets were used for the economic benefit of another company.

Relief for Trade Secret Claims

In states and territories where the UTSA is recognized, you may be able to recover monetary damages for an actual loss sustained as a result of the breach, but this only applies to trade secrets. You may also be eligible for an award for the “unjust enrichment” of the other business or recover exemplary damages if you can show the breach was “willful and malicious.” You may even be able to get your attorney’s fees paid.

There is no such relief for other confidential information under this act, and if the courts determine your claim of trade secret violations under the UTSA was made in bad faith, you will lose the chance of relief and may be held responsible for the defendant’s legal fees.

All trade secrets are confidential information, but not all confidential information is a trade secret. Trade secrets bestow economic benefit to the company that owns them and, in most of the United States, are protected by the Uniform Trade Secrets Act.

Other types of confidential information must be protected by well-thought out contractual agreements, company policies and procedures, and/or other security measures that are monitored for compliance.

Your goal is to appropriately protect all confidential information by recognizing which information constitutes a trade secret and is protected as such by law and which information requires other legal protections.

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