Trade Secret Fundamentals

The right to exclude others is one of the essential property interests. This right is of utmost importance in the case of trade secrets because once the secret is disclosed to the public, it loses all commercial value.

A trade secret is a form of intellectual property, like a copyright, trademark, or patent. It can be loosely defined as confidential information that has independent economic value. Trade secrets often relate to technical processes or formulas, but other types of information can also qualify as a trade secrets, including market information, business opportunities, business practices and procedures, customer lists, corporate minutes and agendas, product formulae (e.g., a method of making a fertilizer composition, the Coca-Cola recipe, etc.), and several other forms of information. Businesses that understand trade secret law can protect, control, and leverage their innovations and know-how effectively. For example, it is important for businesses to understand how to protect and control their trademarks in dealing with employees and independent contractors.

Identifying a Trade Secret

In order to protect one’s trade secrets, one must first understand how to identify a trade secret. Courts look to several factors to determine the validity of a trade secret:

A good rule of thumb suggested by California case law is to ask two questions:

  • Is it likely that someone skilled in the relevant field would know the information?
  • Does the confidentiality of the information contribute to its independent economic value?

The above questions and factors provide a general guideline to determine if the information is a trade secret, but it should be understood that each situation is different and requires rigorous analysis. It should also be understood that a trade secret does not cover ideas or facts, but rather confidential information, know-how or knowledge (e.g., internal market analysis, cost and pricing information, or an engineering notebook), an internal process, method, or design. In any case, the trade secret is not the idea or fact itself, but the information tending to communicate such idea or fact. Trade secret law protects only the right to control the use and disclosure of confidential information.

Value of Trade Secret

As implied above, the information a business desires to protect must have independent economic value in remaining a secret from competitors and the public. In other words, it must provide some type of advantage to the business in remaining secret. The value can be derived by evaluating the resources invested in producing the information. The actual or potential value does not need to be great but it must be “more than trivial.”

Reasonable Efforts to Protect Trade Secret

In order to lawfully preserve a trade secret, the owner must undertake reasonable efforts to maintain its secrecy. It is therefore prudent for anyone involved in research of any kind (e.g., market research, product research, scientific research, etc.) and/or development of new products and services to be conscious of the need to maintain secrecy and do so in a deliberate and documented manner. There is no definitive process to satisfy the reasonable efforts requirement. Courts will look at the party’s efforts to maintain secrecy on a case-by-case basis, scrutinizing the specific circumstances surrounding the asserted trade secret to determine if reasonable efforts were taken. Commentators have stated that the intention to keep something secret is not enough; a business must perform a provable act to protect their information. The most common method to protect a trade secret is to mark the information as “confidential” or “trade secret.” A business should also not disclose the trade secret to anyone not under an obligation of confidentiality. The fewer employees, contractors, or others know about the trade secret and the more safeguards in place to protect the information, the more likely a court will find a business has undertaken reasonable efforts to protect the trade secret.

Improper Means

A misappropriation claim does not arise unless the information is acquired through improper means. Improper means has a straightforward and clear definition. Cal. Civ. Code § 3426.1 defines improper means as:

Reverse engineering and independent derivation are expressly identified as being lawful, and are excluded from the definition of improper means. This concept is important to understand because misappropriation cannot occur without improper means.

Misappropriation of a Trade Secret

Misappropriation occurs when another (1) acquires the trade secret by improper means (e.g., theft, espionage, bribery, etc.), or (2) discloses or uses a trade secret while having reason to know that the information was provided to them under a duty to maintain its secrecy. To prove misappropriation, a person can provide direct or circumstantial evidence of the actual or threatened misappropriation of the trade secret. Under the California Uniform Trade Secrets Act (CUTSA), the misappropriation claim must state:

Additionally, California courts require that a trade secret must be identified with “reasonable particularity.”

Very often, trade secret misappropriation occurs in the context of an employee that has left the employ of the trade secret owner. Trade secret law contemplates the relationships between a business and its employees or another competing business and seeks to balance employee mobility, fair competition, and trade secret protection. California takes great care to ensure an employee has the ability to change jobs and use the skills and knowledge obtained through the prior employment, even when exposed to trade secrets. The employee’s use of the knowledge and skills acquired while working for a prior employer is not misappropriation of trade secrets. However, the law does bar the employee from using or disclosing the actual trade secrets at the new occupation. An example would be the use of confidential customer information (e.g., a customer list) to solicit new clients for a new employer. The former employer does not need to demonstrate that a former employee physically took trade secret material with them. The misappropriation can be based on the employee’s memory of the trade secrets they learned while an employee.

Trade Secret Management

Trade secret identification and management is critical for many businesses. Disclosure of trade secrets internally should be kept to a strict need-to-know basis. Typically, employees do not understand what constitutes a trade secret. Thus, it is critical that trade secrets, when disclosed to employees are properly identified as trade secrets. Proper notice to employees of trade secret material provides clear delineation and facilitates the assertion of misappropriation claims, if they arise.

Additionally, there are several precautions that businesses can take to control trade secret disclosures, including: non-disclosure agreements and employment agreements that provide confidentiality, intellectual property assignment, non-solicitation, injunctive relief, and liquidated damages provisions; protect electronic files with passwords and lock cabinets that hold hard copies of trade secret documentation; internal policies controlling the use of electronic devices, internet use, and internal email; and have counsel apprised of your trade secret materials and risks prepare an action plan in the case of employee misappropriation.

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