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Trade Secrets: Protecting Your Bottom Line

By Patrick R. Jones, Esq., Partner, Gesmer Updegrove LLP

Coca-Cola was in the news recently when the FBI arrested three people, including an employee of Coca-Cola, for attempting to steal Coca-Cola's trade secrets and sell them to Pepsi.  While the 120-year-old formula for Coca-Cola was not at risk (that is locked safely in the bowels of a bank in Atlanta), the case highlights the risk companies face in protecting their trade secrets.  If a company loses its competitive edge due to the disclosure of its trade secrets, the ramifications for the company and its bottom line can be disastrous. 

Of course, not all information used in a business or enterprise qualifies as a trade secret. There are generally three important conditions for information to qualify as a trade secret: (1) it must be valuable, (2) it must be secret, and (3) it must give an economic advantage over competitors.

Some of the well-established factors used by courts in determining whether specific information is entitled to trade secret protection are:

  • Extent to which the information is known outside the company;
  • Extent to which it is known by employees and others involved with the company;
  • Extent of measures taken by the company to guard the secrecy of the information;
  • Value of the information to the company and its competitors;
  • Amount of effort or money expended by the company in developing the information; and
  • Ease or difficulty with which the information could be properly acquired and duplicated by others.

In many cases, the employer will not know its trade secrets are at risk. A departing employee gives the required notice, has executed a non-disclosure agreement, and in the exit interview readily acknowledges he or she cannot disclose or use any of the company's trade secrets.  Warning signs may go up when one company hires several of another's key employees, or when the employee's new position is so similar to his or her former position that it is inevitable the employee will use the current employer's trade secret information on the new job. 

Unfortunately, by the time the company is considering how to prevent the misuse and/or disclosure of its trade secrets through the use of any injunctive relief, the cat is nearly out of the bag. The success or failure of the litigation/negotiation will be determined by how well that company has defined its trade secrets and taken steps to protect them.

Perform a Trade Secret Audit
One of the first tasks to undertake when designing a set of procedures to protect a company's trade secrets is to determine as precisely as possible what information constitutes a trade secret. This is sometimes referred to as a trade secret audit or inventory. It requires a careful analysis and close questioning of every segment of the business. Many times it is best to place an outside consultant in charge of conducting the audit simply to complete the task within a reasonable time. A consultant also should be able to recommend strategies to improve the protection of the company's trade secrets and proprietary information.

Get Restrictions in Writing
Employees, consultants, vendors, or anyone who will be privy to or be required to develop any information that may be valuable to the company should always be required to sign a non-disclosure agreement. This should enumerate as precisely as possible all categories of information the company considers valuable and secret.

One fact to keep in mind is that a trade secret may consist of public information if the unified design, process, formula, operation, compilation, or other combination is not obvious and gives the company a competitive advantage. Likewise, the information that is developed privately and kept secret may be inadvertently disclosed in sales presentations or even by working on a laptop in a public place.  Therefore, the non-disclosure agreement should expressly set forth protocols for the use of trade secrets and require specific written approval by one individual or a small group of individuals knowledgeable in the field for each disclosure an employee plans to make. In businesses where professional presentations and publications are common or even required, the company should establish a publication committee or committees.

A non-competition agreement also should be used, if appropriate, in circumstances where the employee's knowledge of the company's plans, processes, or business processes would be particularly damaging if utilized by a competitor. All information contained in any computer or electronic format should contain a warning advising any intended or inadvertent user that the program about to be viewed is secret and contains proprietary information belonging to the company, and that the misuse or wrongful disclosure of the information will subject the discloser and the recipient to legal penalties.

Keep a Record
Records relating to the time devoted to developing a trade secret should be developed as an adjunct to the trade secret audit.  Maintaining a record of the time and investment involved in developing trade secrets is not as difficult as it may seem. The work involved in developing a customer may be contained in an employee's performance review, activity reports, or memos to marketing and manufacturing departments regarding the particular customer's needs. Likewise, there is usually some type of memo or justification explaining why information or developments of products for customers or suppliers may be of importance to the company's business or particular effort, or what potential a particular development represents. Of course, if a trade secret results in cost savings, increased productivity, or other tangible benefit to the business, that should be clear in any number of routine reports.

Educate Your Workforce
A company should educate its work force beginning with an orientation program regarding the importance and value the company places on its trade secrets and proprietary information. The trainer should explain to the employee what the company considers its trade secrets, even if the employee develops the information. The importance of maintaining the secrecy of the company's trade secrets should be explained in terms of the business's continuing success as well as the employee's job security and personal success. In addition to any training programs, the same information should be included in an employee handbook and updated periodically. Supervisors should be sensitized to the importance of emphasizing secrecy in appropriate circumstances on a project-by-project basis. These efforts go a long way toward preventing an inadvertent disclosure or simple misunderstanding.

Limit Access
It is important that information the company considers a trade secret or proprietary not be available to employees who have no need to use that information in their daily business activities. Any information maintained on the computer database should have password protection and designated persons should periodically review who has access to that information, including who maintains the secret information on a laptop or "checks out" the information overnight to work at home. The record of departing employees' access should always be checked to determine if there has been any unusual activity or copies unaccounted for. Any time highly confidential information is photocopied, it should ideally be recorded and numbered so the company can always account for the number of copies of its secrets that have been distributed.

Reinforce Restrictions with Departing Employees
Exit interview procedures and forms should be developed for a variety of positions in the company. Employees who have had access to more-sensitive information should be interviewed more carefully and reminded specifically of their obligation to the company regarding the non-disclosure and use of any proprietary information and trade secrets, as well as any restrictions on competition. The interviewer must question employees very carefully regarding their specific responsibilities in the new position to ascertain if it is inevitable that the company's trade secrets will be disclosed, therefore warranting quick action.

Move Quickly to Protect Your Trade Secrets
Should a problem occur, the company should have established personnel and procedures to investigate any improper disclosure and/or misuse of the company's proprietary information and trade secrets.  If the problem seems serious, the company should involve its outside counsel at the earliest stages to demonstrate the seriousness with which the company considers the breach and in the event litigation becomes necessary. A policy should be established outlining the conditions under which the company will seek relief from the courts so that following an investigation, a decision should focus on how the policy should be applied to the facts known at that time, not what the policy is.

The quickening pace of today's business environment, the sheer volume of confidential know-how that is available to employees, and the ease with which it can be transferred requires considering the tasks, questions, and problems outlined here well in advance of the development of a serious problem so that the company may address any breach quickly and effectively.

Patrick R. Jones is a partner with the Boston law firm Gesmer Updegrove LLP, a general counsel law firm for emerging businesses and their investors.  For more information, the author can be contacted at patrick.jones@gesmer.com or (617) 350-6800.

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