Trade Secret Law - A General Overview

Trade secrets are essentially any information that has independent value as a result of it being kept confidential by its creator. For example, a trade secret is defined under California law as (1) information (such as a formula, method, technique, or process) that has value by virtue of being not well known, and (2) is the subject of reasonable efforts to maintain secrecy. Trade secrets can apply to a wide variety of confidential, proprietary information, including client and supplier information, financial information, manufacturing knowhow, chemical formulations, internal business methods, future business plans, product development information, proprietary software code, and many more forms of valuable confidential information. As implied by its name, trade secret information must remain confidential in order to maintain its protected status. Publication of trade secret information destroys its status as a trade secret and eliminates its protection under the law.

It is therefore prudent for anyone involved in research and/or development of new inventions, business plans, and other innovations to be conscious of the need to maintain secrecy. Tools like non-disclosure agreements, encrypted files, secrecy protocols, administrative access rules, and related tools should be used when possible to prevent unwanted disclosure of trade secret information.

As long as the innovation, invention, or other valuable, confidential information is kept secret, trade secret protection is available, which could potentially last much longer than patent protection by comparison. A good example is the formula for the popular soft drink Coca Cola®, which was developed nearly a century ago and is still secret. If a patent had been obtained on this formula, it would have expired long ago and anyone would now be able to make the soft drink.

Whenever a new invention is developed, especially a new formula or technique, one of the first questions that must be addressed is how best to protect it. For new inventions, one way to obtain protection is with a patent; another possibility is by treating the invention as a trade secret.

Although a patent provides many significant protections, there are sometimes reasons why patent protection is not available or is not the best course. For example, the new formula or technique may have already been commercialized for more than one year, which could potentially act as a time bar to patent protection. Also, it must be remembered that a patent has a limited term (a maximum of 20 years from the filing date), that cannot be renewed or extended. This is a substantial period of protection, but the commercial viability of the invention could be longer. In addition, a patent is a public document that may be viewed by anyone. Because of this, it is possible for a competitor to review and learn from the patent, especially a patent on a formula or technique, and then practice the invention after the patent expires. In these and other situations, trade secret protection may be considered as an alternative form of protection where feasible. For example, manufacturing processes for producing a product sold to the public may be maintained as a secret if the proper precautions are taken. On the other hand, if a trade secret publicly disclosed or if a secret manufacturing process or engineering information is discovered through reverse engineering, the trade secret rights may be lost.

There are also methods, products, and other technologies that can't be protected by trade secret, and thus patents are the only option for protection. For example, nearly all products that are sold to the public cannot be effectively protected by trade secret. Most products sold to the public can be reverse engineering or simply examined to determine how it works. In such situations and many others, a patent can provide unqualified protection of the technology claimed in the patent, assuming the patent is valid. It should also be noted that trade secret protection does not protect a technology against independent discovery by other persons. Trade secret law does not prevent independent development of the same invention or technology where there is no use of misappropriated trade secret.

Under the Uniform Trade Secrets Act (UTSA), adopted by most states including California, a trade secret encompasses a wide range of information. This includes formulas, patterns, compilations, programs, devices, methods, techniques, technical know how, or processes that derive independent economic value from not being generally known to, and not being readily ascertainable by, others who can benefit economically from their disclosure or use. California’s version of the UTSA has been codified in its Civil Code, particularly in Sections 3426-3426.11. The independent economic value must stem from the secrecy of the information, and reasonable efforts must be undertaken to maintain that secrecy.

Trade secrets are not limited to high-tech or manufacturing industries; they span across various sectors. Common examples include:

  1.  Customer Lists: Particularly valuable in industries where customer loyalty and specific needs are critical. The list must contain detailed and non-public information to qualify.

  2.  Business Plans: Strategic plans outlining future business ventures or operational tactics.

  3.  Product Development Information: Confidential details about new products or services in the pipeline.

  4.  Proprietary Software: Source and object code of proprietary software programs.

  5.  Recipes: Formulas for food and beverages, like the Coca Cola® formula, which benefit from indefinite trade secret protection as opposed to the finite term of a patent.

To maintain the protected status of trade secrets, the trade secret owner must employ various measures to ensure confidentiality. These include:

     Non-Disclosure Agreements (NDAs): Legal contracts that prohibit parties from disclosing confidential information.

     Encryption and Technical Safeguards: Use of firewalls, encrypted files, and password protection to prevent unauthorized access and protect against economic espionage.

     Physical Security: Restricting access to facilities, employing security systems, and using log-in sheets and access cards.

     Administrative Controls: Policies and training programs to educate employees on the importance of trade secret protection and their role in maintaining confidentiality.

Trade secrets are protected mainly by state trade secret law, but federal law, specifically the Defend Trade Secrets Act of 2016 (DTSA), also plays a significant role. The DTSA allows trade secret owners to file a trade secret claim for misappropriation in federal court, providing a uniform standard across states. However, state laws like California’s Uniform Trade Secrets Act still govern many aspects of trade secret protection, and understanding the interplay between state and federal laws is crucial for comprehensive protection.

The digital age presents unique challenges for trade secret protection. The ease of disseminating information online increases the risk of unintended disclosure. Information posted on the Internet, even briefly, can lose its trade secret status. Companies must be vigilant in monitoring and protecting their digital assets to prevent unauthorized access and dissemination.

Trade secrets can include a broad spectrum of information, such as engineering details, business processes, financial information, and customer data. To qualify as a trade secret, the information must not be generally known, have economic value, and must provide a competitive edge due to its secrecy.

Confidential information encompasses all trade secrets but can also include other sensitive business information that may not meet the legal threshold of a trade secret. Proprietary information includes trade secrets and confidential information and may also cover publicly known information that a company considers valuable.

To protect trade secrets effectively, companies should take reasonable measures to document them thoroughly, marking them as confidential and controlling access. Proper documentation can help prove the existence and value of trade secrets in legal disputes. Notices of confidentiality should be prominently displayed on documents and electronic files containing trade secrets.

Nonwritten disclosures of trade secrets, such as during meetings or through verbal communication, should be handled with care. Confidential disclosure agreements are essential to protect such information. Regular assessments and due diligence are necessary to identify and maintain the secrecy of trade secrets.

Employees play a crucial role in maintaining trade secret confidentiality. Employment agreements should clearly outline the employment relationship and the employees' obligations regarding trade secrets. Regular training and reminders about these obligations can help ensure compliance.

Procedures for new and departing employees should include steps to secure trade secrets. New employees should be educated about the company's trade secret policies, while exit interviews with departing employees should reinforce their continuing obligations to protect confidential information.

Independent contractors and other third parties with access to trade secrets should also be bound by confidentiality agreements. These agreements should be detailed, explicit, and clear about the confidential information that is disclosed. Such agreements should also be reviewed and updated regularly to ensure they provide adequate protection keep the information secret.

Companies should implement comprehensive security measures to protect trade secrets. This includes both physical security, such as restricted access to facilities, and technical security, like encryption and password protection for electronic files. Employees should be regularly reminded of their confidentiality obligations, and security measures should be enforced consistently.

Presentations and demonstrations of products or processes should be carefully controlled to avoid disclosing trade secrets. Employees should be required to seek authorization before sharing any potentially sensitive information in a presentation, and legal counsel should be consulted to ensure proper measures are in place.

Trade secrets are a vital form of intellectual property protection for businesses across various industries. The attorneys at Sierra IP Law, PC have extensive experience in assisting clients with trade secret protection, including the implementation of confidentiality agreements, development of secrecy protocols, and other practical steps to maintain the confidentiality and competitive advantage of trade secrets. This comprehensive approach ensures that businesses can protect their trade secrets effectively, minimizing the risk of misappropriation of trade secrets and maintaining their competitive edge in the market.