One of the biggest, most frequent mistakes I see as an intellectual property attorney is a startups’s lack of ownership to all of the exclusive rights to the intellectual property created for it.

One of the most damaging omissions is not taking the proper steps to ensure the company owns all of the rights to the IP created by all founders.

You should all sign the IP assignment agreements at the very beginning when everyone is committed to the company’s success.

If your company does not own the rights to the founders’ work, a founder may walk off and take their IP rights with them. This may leave the company in a precarious position if the founder’s IP is central to the company’s key technology.

For the company to own all of the IP rights, all founders must sign an IP assignment agreement that transfers the IP to the company.

And the contract must have a provision that sweeps back and captures work done before incorporation.

Most standard form agreements don’t have this provision. It is special to the needs of startups. If a corporate attorney gives you the IP assignment forms, make sure you ask about this type of retro-provision and get it included in the agreements signed by the founders. Also, beware of do-it-yourself contracts drafted by non-lawyers. They usually don’t have the proper “magic” legal language that transfers the IP to the company despite the attempts to do so.

If you don’t have a written assignment agreement that sweeps back and captures the IP created before and after incorporation, your company won’t own all of the IP rights of the founders.

Lack of proper contracts may have very serious consequences.

If the departing founder created the work on his own before incorporation or when he was not a company employee, he may own all of the IP rights to his work. And when he walks out the company may be left with shallow arguments about fiduciary duties and his obligation to transfer the IP back.

Worse yet, the departing founder may start a new company in competition with the old company and transfer his IP rights to the new company.  Leaving the prior partners with a worthless, empty shell of a company.

Reports say this is exactly what Mark Zukerberg did with Facebook.  The original Facebook company was incorporated in Florida but Mark did not assign the IP rights to the Facebook software to the first company.  And after Mark had a falling out with his partner Eduardo Saverin, Mark hired a real startup lawyer, incorporated Facebook in Delaware (like a savvy startup would do), and assigned the IP rights for the software to the new company.

The resulting lawsuit was eventually settled. But I bet the legal bills were huge.

Similarly, if the work of the founders was a joint work, and the remaining partners assign their rights, the company may have rights to exploit the work. But the rights won’t be exclusive.  The departing founder may exploit the work too, without any obligation to make an accounting or pay the other creators. This scenario makes most investors run scared.

Do your startup a favor. Get all founders to sign a decent contract drafted by a professional that transfers all IP rights to your company. And do it before the founders walk out the door.

Jill Hubbard Bowman is an intellectual property attorney who helps startup companies own their IP.

When developing commercial software products that incorporate any type of open source software (“OSS”), it’s important to understand the basic difference between Restrictive and Permissive OSS licenses.  OSS licenses can have dramatic implications for the value of your final product.

To understand the different types of OSS licenses, it is first important to understand the difference between source code and object code. Source code is the text written in programming language by software programers.  For your computer to understand the instructions,however, the source code must be converted into object code (also called binary code) that the computer can read.   To change or modify the software, software programmers must have access to the source code.

Most computer programs that you buy are distributed in object code.  Commercial software companies usually strictly restrict access to the source code for their key products and protect it with trade secret and copyright law.

In an academic tradition, however, there are many software developers who work collaboratively, freely share source code, and distribute the resulting software under open source licenses without charge.  Hence, this type of software is referred to as open source software.  Open source software is an amazing resource and can greatly reduce product development time.  Open source software, however, is only as “free” as its attached license that legally limits what you can do with it.

Restrictive OSS Licenses

Proponents of restrictive licenses want to keep source code freely available to all. Restrictive licenses, like the GPL or Affero licenses, limit the terms of distribution of software that incorporates pieces of OSS licensed under its terms.  Restrictive licenses require that works based on the OSS relicense the resulting works to others on the same terms of the initial license and require the final source code be openly available for free or a nominal value.

Restrictive relicensing terms can dramatically lower or nullify the value of your final software product.

The rub is that when you incorporate different pieces of OSS into a larger product, the licenses may not be compatible with each other or with the license that you want to use with your final product.  Essentially, restrictive licenses can contaminate your larger product and create an intellectual property mess for those who want to change the licensing terms and  limit access to the product’s full source code.  Basically, if you incorporate OSS with a restrictive license into your product’s software family, the father or grandfather license will dictate what you do with the software children.

Permissive OSS Licenses

In contrast, permissive open source licenses allow you to license second generation software children without requiring access to the final source code.  With permissive licenses like the MIT, BSD and Apache OSS licenses, free is more free.

You can incorporate pieces of OSS into your product and restrict the access to the source code for the final product.  It is much easier to make all licenses compatible and comply with the terms of the original licenses, some of which simply require attribution, a copyright notice, disclaimer of warranties and limits on liability.

In short, it is important to read the licensing terms of any open source software that you want to use in a software product (or website) that you want to sell or sublicense.

The fine print can be very important.

Jill Hubbard Bowman is an intellectual property attorney who helps software developers create valuable products.

If your business is based on software and one day you want to make millions by selling your business or software, it’s important to have clean title or license to the underlying intellectual property rights.

You may be thinking, “No, Duh.  Of course my company has the rights to our software.”

But you may be wrong.

Because of the complicated nature of IP laws, many companies have a muddled IP mess and have destroyed the value of the core software.

Unfortunately for some, they don’t find out about the mess until they are sued or lawyers for a potential acquirer or investor take a close look during due diligence.

Sometimes, the mess can be cleaned up and sometimes it can’t.  Sometimes the value of the software has been destroyed along with the value of the company.

Here are some of the key ways to destroy the value of the software that your company hopes to sell:

1.  Allow Code Belonging to Former Employers To Be Incorporated Into Your Software

It’s no secret—developers often reuse code—and it’s one reason why trade secret litigation is so popular in Silicon Valley.  Some developers keep code belonging to their former employers and use it when building code for a new employer.  It saves time.  It’s just a little short cut.

But many software developers don’t consider the cost of the short cut or the implications to the value of the new code.  Former employers of the developers may claim that they own the new code and allege trade secret misappropriation as well as copyright infringement.

2.  Don’t Require Assignment of IP Rights To Your Company

If everyone who has written code for your company, including founders and independent contractors, hasn’t signed a written agreement that assigns the intellectual property rights to the company, the company doesn’t own all of the IP rights.  It’s a classic mistake.  If you don’t own the IP rights to the software, you can’t sell it.

3.  Allow Some Types of Open Source To Be Incorporated Into Your Code

Some types of open source code have very restricted licenses attached that require you to freely license the resulting work that incorporates the code.   Some licenses don’t allow you to resell or sublicense the modified code for money.

And don’t think you can hide the open source code.  During due diligence, a potential acquirer of your software or company may have your code scanned for tell-tale signs of open source with a restrictive license.  Finding restricted code can stall or kill a deal.  Getting a commercial license can take time, money and hassle.

In short, to protect the value of your code:

• Don’t allow code  that may be owned by someone else, especially the developers’ former employers, to be incorporated into your software without a clear license;
• Require EVERYONE who writes code to assign their IP to the company in a written agreement; and
• Only use open source code that has an unrestricted license (see the MIT licenses for good examples).

Don’t find out that the value of your software has been destroyed when it’s too late to fix it.  An early IP audit can help you identify the problems.

May you all create code worth millions.

Jill Hubbard Bowman is an intellectual property attorney who helps emerging growth companies protect their intellectual property and avoid legal liability.  She can be reached at hubbardbowman [at] me.com.

The following post is by our enthusiastic contributing editor, Heather N. Schafer!!! Heather is an experienced intellectual property attorney who helps inventors protect their inventions and emerging growth companies increase their value through strategic IP protection.

Congratulations!  Your startup has employees!  The Founder’s have shifted tasks – they are no longer burning the midnight oil generating company IP.  Now they are up all night assessing hair loss as they fuss over business plans, funding schemes, and meeting increasing demand!  If the company has done things right – there will be no hair lost over Whether the Startup Owns the IP Rights in Employee-generated IP!

If you are a quick study – you will anticipate that our suggestions involve Contracts!  In this case, your employee Contracts.   First, we will dispel a few misconceptions.

MISCONCEPTIONS ABOUT EMPLOYEE IP

(1)  The Company Owns all Employee-Generated Patentable Inventions

1. Not Necessarily!

(2)  The Company Owns all Employee-Generated Copyrightable Expression

1. Not Necessarily!

(3)  The Company Owns all Employee-Generated Trade Secrets

1. Only if it KNOWS about them
2. Only if they REMAIN SECRET

THE STRAIGHT STORY ABOUT EMPLOYEE IP

(1)  The Company will have CLEAR TITLE to Employee Generated Patentable Inventions only if the Company has a WRITTEN AGREEMENT with the employee.

(2)  WITHOUT a WRITTEN AGREEMENT, the Company has only a “Shop Right.”  A “Shop Right” is a royalty-free license to use the employee’s patentable invention or trade secret!  A Shop Right is not transferrable, meaning that the Company cannot sell or license it – and of greatest importance to a scaling startup dreaming of acquisition by Microsoft or Genentech – the Shop Right ceases the moment the company ceases!!!  Yep!  Cinderella turns back into a pumpkin the minute the prince kisses her!  All the beauty and charm that attracted Microsoft dissipates the minute the parties go from waltzing to marriage.

(3)  The Company owns all Employee-Generated Copyrightable Expression that is created within the scope of employment.  Sounds simple, right?  Not So!  How about the following – oh so common startup occurrences:

1. The cell culture technologist who designed and maintains the company website – hmmm?
2. The assembly line worker who throws together an awesome, witty, cartoon that becomes the basis of the company’s most successful marketing campaign?

Each of these cases, without written agreements, fall right into the Grey Zone of IP Law.  The Grey Zone is no place for a start-up.

Written Contracts put you in the Black and White zone – and this is where the savvy startup Lives.

(4)    In most circumstances, any trade secrets developed by an employee in a position of “trust and confidence” is owned by the Company, independent of a written contract.  HOWEVER, (1) lower level employees (not in a “position of trust”) are too often the developers of your key IP, (2) without a policy in place, the company may never obtain a proper working disclosure of the trade secret, and (3) without educating your employees, they may have no idea how to protect the value of the trade secret!  Take for example the following circumstances:

1. The receptionist who “accidentally” invented the company’s best selling product, by just making a few suggestions while taking notes at a team brain storming meeting.
2. The assembly line worker who proposes a workflow solution that increases efficiency and cost, making the company twice as competitive.

Without employment agreements, expensive ownership disputes over intellectual property will inevitably arise – inventions conceived outside of the workplace relating to the corporation’s core IP, IP generated by employees in non-technical and/or non-creative positions, and etc.  These disputes can spell the END of your lofty endeavor – but they can all be headed off at the pass by a well thought out IP Policy integrated into a well drafted Employment Agreement – signed by EVERY employee from the receptionist to the engineers and scientists.

A good Employment Agreement:

(1)          Provides Consideration – new employment or continued employment and salary/wages

(2)          Identifies classes of IP and confidential information and includes requirement to keep it secret

(3)          Requires the disclosure of developments and inventions to the Company, regardless of whether they are patentable/copyrightable/etc.

(4)          Assigns all developments, creations, and inventions to the Company

(5)          Requires continued assistance with IP protection during and after the period of employment

(6)          Requires return to Company of all employee-generated work product at termination of employment

(7)          Non-compete provisions (within state law limits)

Onward and Upward with Agreements paving your path to success!!!

IP attorney Heather N. Schafer can be reached by email at heathernschafer [at] gmail.com.

Every startup CEO who is growing a scalable company should make sure that her startup owns the IP rights to work created by independent contractors.  Failure to do so could seriously impact the value of the company, jeopardize the possibility of obtaining investment, and lead to legal liability for infringement and horrible embarrassment.

There are a few ownership concepts in intellectual property law that are critical to know.

1)  Under copyright law, when an independent contractor creates an original work of authorship — like a logo or software application — the copyright automatically vests in the author of the work.  There is an exception for works made for hire but it is very narrow and specific.  See my previous post on the subject of the work for hire doctrine.

2) Patent rights are personal.  They vest in the inventor.  Corporations can’t be inventors.

3) Any trade secrets belong to the independent contractor unless specifically transferred.  Potential trade secret protection can be lost if no reasonable measures of protection are taken to keep the information secret, like an NDA.

Consequently, a company must have a signed written agreement with the author/inventor that transfers the IP rights to the company.

An example of a super simple, proper assignment clause:

[NAME OF CONTRACTOR] hereby assigns and agrees to assign to [NAME OF YOUR COMPANY] all right, title and interest in and to the [NAME OF THE WORK] and all intellectual property rights therein.

The red words are critical.  Courts have decreed the proper type of language and your contract should use it.  The description of the work and the associated IP rights may be extensively defined.  Some assignment clauses are fairly long and detailed but the critical words to effectively transfer the rights are in red.

Here are five CEO misbeliefs that I commonly see in my legal practice:

1)  “My company paid for the work and so it owns the IP rights.”

This is the most common false belief that I see in my practice.  The legal truth is counterintuitive.  CEOs need to understand that they must take specific measures to own the IP rights for work that is created by independent contractors.  They must have formal, written contracts if they want the company to own the IP rights.  If the company wants to sell and sublicense the work — like software! — they must either have a full assignment of IP rights or a very broad license.

2) “The contractor says my company will own the IP rights and so my company owns the rights.”

Oral agreements are not sufficient to transfer IP rights.  IP transfers must be in writing signed by the author/inventor.

3) “I have a NDA with the contractor and so my company owns the rights.”

A simple NDA does not transfer IP rights.  You need an agreement with a specific assignment clause that transfers the rights.

4) “My contract says my company owns the rights.”

A clause that says that your company owns the rights but does not assign the rights does not legally transfer the rights.  I see this mistake a lot with contracts drafted by the entrepreneur or pulled off the web.

The following is improper and will not transfer IP rights to your company!

[NAME OF COMPANY] will own all right, title and interest in and to the [NAME OF THE WORK] and all intellectual property rights therein.

5) “It doesn’t matter if my company owns the rights, I have a good relationship with the contractor.”

Frequently in the startup world, relationships fall apart.  I’ve seen partnerships and oral agreements go awry.  I’ve seen independent software developers threaten a startup’s customers with cease and desist notices for infringement because the startups didn’t have IP assignments or licenses for its customers.  If your company is paying for the work, make sure it owns the IP rights by using a formal, written contract with the contractor that specifically assigns the rights.

Other related post:

Does Your Startup Own the IP Rights to Work Created by its Founders?

Jill Hubbard Bowman is an intellectual property lawyer and educator who helps startups protect their intellectual property and avoid legal liability.

The following is a condensed version of one of my most popular early posts.  It summarizes some of the biggest mistakes I’ve seen as a lawyer.  I’ve spent many years fighting in court about intellectual property ownership and cleaning up IP messes in startups.  I really prefer prevention.  In this post, I’ve linked to some of my later posts that explain the topics in more detail and give specific tips about IP protection and avoiding legal liability.

In the many years I’ve been practicing intellectual property (“IP”) law, I’ve seen a wide range of mistakes and bad practices that have cost emerging growth companies millions of dollars.  In many cases, startup founders could have avoided expensive, thorny legal problems with a little information about IP law and some simple precautions.

If you are starting a company, here are five of my favorite reasons to learn about IP law.

Learn more about IP law if you want to:

Keep the intellectual property that you create for your startup free of ownership claims by your former employer

If you are working on your new venture while employed by another company in the same industry, you should watch out. It’s important to learn about IP law if you want to make sure the intellectual property you create for your new startup won’t be the subject of ownership claims by your former employer.  This is a popular type of litigation in Silicon Valley.

Knowing how to keep and carve out the intellectual property rights to what you create for your new company can be critical for your startup’s ultimate success. You need to know what information you can use from your employer without running the risk of trade secret misappropriation claims.  You need to take precautions to narrow the net of what your former employer may claim.

For more information on this topic see the following posts:

• Analyzing the Risk That My Current Employer May Claim Rights to My Startup’s IP
• Bratz Doll Designer’s $100 Million Dollar Mistakes
• Trade Secret Law 101:  Why Entrepreneurs Should Care About Trade Secret Law
• Minimize the Risk of Being Sued By Your Former Employer
• Preventing Your California Employer From Owning Your Inventions

Learn more about IP law if you want to:

Increase the odds that you can use your company and product names without being stopped by another trademark owner

After picking names you love for your business, products, and services, incorporating your company, building a website, and working hard to promote your brand, it is highly disturbing, disappointing, and expensive to have a trademark owner accuse you of trademark infringement and demand that you stop using your business name and take down your website.

And unfortunately, it happens frequently to uninformed entrepreneurs.

Learning about trademark law and doing some basic groundwork before selecting business and product names can save you from big headaches and expenses down the road.  You can greatly increase the odds that you can use your company and product names without being stopped by another trademark owner.  Few people want to start over from scratch.

For more information on this topic see the following posts:

• Why It’s Important To Consider Trademark Law When Picking Business and Product Names for Your Startup
• How to Avoid Trademark Infringement

Learn more about IP law if you want to:

Make sure your startup owns the intellectual property rights created by its founders, independent contractors, and employees

Many, many startups don’t own the intellectual property rights to intellectual property created by its founders, employees, web designers, logo designers, software developers, and other independent contractors.

It doesn’t matter that your startup paid for the creation of the work!

Failure to have signed, written agreements with the proper legal language that transfers intellectual property rights to the startup from everyone who creates IP for it is a classic mistake.  Many of the legal rules about IP ownership are counterintuitive, highly specific, and complicated.  Moreover, many self-drafted contracts and random contracts from the Web don’t have the proper IP assignment language. Mentioning who will own what is not enough.  Bad contracts will give you a false sense of security and really screw your startup over when an investor actually hires lawyers to do due diligence.

It’s important to learn about intellectual property law to understand what you need to do to own IP rights.

For more information on this topic see the following posts:

• The Biggest Startup Blunder:  Failing To Secure Ownership of Your Startup’s IP
• Why Copyright Assignments Can Be Critical For Your Startup
• Who Owns the Rights To Custom Software

Learn more about IP law if you want to:

Minimize the chance of liability for IP infringement

Ignorance is not bliss.  It can get you sued.

And as some unfortunate software developers learned, trade secret misappropriation can even land you in jail.

Read the liability sections of the free ebook, IP Law For Startups FAQ, at iplawforstartups.com to learn more about how to avoid legal liability for trade secret misappropriation, trademark infringement, copyright infringement, and patent infringement.

Learn more about IP law if you want to:

Get legal protection for intellectual property that is created for your startup

Different intellectual property laws have specific requirements for obtaining legal protection.  To get protection, you must follow the rules. You don’t want to blow it and lose protection for your million-dollar invention or product because you didn’t know what you needed to do.  Courts don’t protect the careless.

To learn more about inexpensive trademark, trade secret, and copyright protection, see the following posts:

• Federal Trademark Registration
• Tips for Identifying and Protecting Trade Secrets
• Copyrights and Licenses

Learning about IP law is more interesting than you may think when you have your dream business at stake.  With a little information and some basic steps, you can protect your intellectual property and avoid legal liability.

Jill Hubbard Bowman is an intellectual property attorney in Austin, Texas.  Jill helps startups protect their intellectual property and avoid legal liability.

When you start a new technology company while employed by another, you put your startup’s intellectual property (“IP”) at risk.

One of the biggest threats to your new startup is a claim of trade secret misappropriation by your former employer.  It may allege that you used or disclosed its trade secrets in the creation of your startup’s IP and therefore it owns the resulting work.

One of the best ways to minimize this risk is to quit your old job like a newborn baby—leave naked like the way you entered the world.

You want to strip yourself of anything belonging to your former employer.

Do not take any documents, computers, paper or electronic files, electronic storage devices, prototypes or work that belongs to your former employer, regardless of whether you think it actually qualifies as a trade secret.

Do not take source code or software tools, even if you wrote them.

To stay safe, do not take your phone or your business contacts list.  Customer lists can qualify as a trade secret and companies frequently sue over their use and disclosure.

Keep NOTHING in your possession that refers to your former employer except a copy of any contracts you signed and minimal documents related to any pension, profit sharing or insurance documents.

If you need to take something else, get permission from the company in writing.

And even if they offer to let you take your company computer — don’t.

Remember that in the event of litigation, a trade secret plaintiff will typically seek all documents that mention its name.  You will have to turn over everything in your possession, custody or control.  That includes documents in your house and garage or on remote servers.  Many entrepreneurs are stunned to learn this after litigation has commenced.

Once a lawsuit is imminent or filed, it is too late to clean house.  Destruction of documents can lead to a claim of spoliation of evidence and the plaintiff may win on a technicality.

You may be characterized as a trade secret thief regardless of whether your possession of your former company files was inadvertent.

Further, when you quit, it is a good idea to write a letter to your former employer stating that you understand your legal obligation not to use or disclose company trade secrets.

Think of the letter as the first exhibit in your litigation defense.

Make a show of returning all company property.  State in your letter that you returned all company documents and files in your possession with the exception of your employment contract and 401 K documents.  State the name of the person who took the documents and the date of their return.

By leaving your old job like a newborn baby, you can decrease the risk of trade secret litigation by your former employer.

This is the final post in the Startup Launch Series.  Click on the category to see other related posts.

Shhhhhhhhhhh.  Be careful about sharing trade secrets.

Laws in all states prohibit trade secret “misappropriation,” which means the unauthorized use or disclosure of trade secrets in breach of a duty of confidentiality or by improper means.

Today’s post discusses misappropriation related to a duty of confidentiality.

You may be wondering, “When do I have a duty of confidentiality?”

A duty of confidentiality commonly arises in two situations:

1)   When you’re an employee and your employer gives you access to trade secrets, you automatically have fiduciary duty of confidentiality.

2)   You sign a non-disclosure agreement (“NDA”).

1. Fiduciary Duty. When you are an employee and in a position where your employer discloses trades secrets to you, you have a fiduciary duty not to use or disclose trade secrets to a third party without authorization.  Most employees receive trade secret information.  This duty continues even after termination of your employment.

YOUR FIDUCIARY DUTY OF CONFIDENTIALITY ARISES AUTOMATICALLY REGARDLESS OF WHETHER YOU SIGN A NDA!

Some employees wrongly think that they don’t have a duty unless they sign a contract.  You can be sued for trade secret misappropriation even if you didn’t sign a NDA.

Failure to have employees sign a NDA, however, is evidence that the employer didn’t take reasonable measures to its protect trade secrets.  (See last post for trade secret status requirements.)

2.  NDA. When you sign a NDA, you also have a contractual duty not to use or disclose trade secrets in unauthorized ways. Nondisclosure terms are usually found in employment agreements and independent contractor agreements. The  scope of the contractual duty of confidentiality will vary depending on the terms of the contract but it usually tracks the trade secret statutory requirements.

Most employees, therefore, have two different types of duties related to trade secrets:  a fiduciary duty and a contractual duty.

In some jurisdictions, you can be sued for a breach of both duties.

The most common type of trade secret litigation involves a company suing its former employees.  Trade secret litigation can easily bankrupt a startup.  Big firm attorney fees for an initial defense in trade secret litigation can be over a million dollars.

What is important to understand is that when you leave your job, you have a continuing duty not to use or disclose your former employer’s trade secrets.

What information can you use from your last job?

You can use your general knowledge, skill and experience.  You can use information that is commonly known in the industry.

But you can’t use customer lists, financial data, or the secret software code that you wrote at your last job.

It’s important to identify the types of trade secrets that you know from your former jobs and take care not to use them in your new venture.

My last post gave you some tips for identifying trade secrets, which may include customer lists, personnel information, prices, software code, product specifications, business plans, and many other types of business information that give a company a competitive advantage.

Remember, in your new company, don’t use or disclose your former employer’s secret, protected information that confers a competitive advantage.

Note:  In the context of an attorney-client relationship, attorneys don’t sign NDAS.  Attorneys have a separate professional duty not to use or disclose a client’s confidential information.  The duty related to confidential information arises in the context of an attorney-client relationship.  This relationship arises when a person seeks specific legal advice from an attorney, divulges confidential information, and the attorney provides specific legal advice based on the client’s facts, regardless of whether the person is paying the attorney.  This duty can arise in the context of an initial attorney consultation and the attorney will be under a duty not to disclose or use the confidential information.  The communication between the attorney and client may also be privileged and excluded from discovery.

You may be wondering, “Do I even know any trade secrets?”

If you’ve ever worked for a company, you do.  But if you aren’t a lawyer, how do you tell whether something is a “trade secret” that gets legal protection?

Does it have to be marked as “confidential”?

Does it have to be absolutely secret?

Does it have to be locked in a box with armed guards?

It’s confusing.  The problem is that the legal definition of a “trade secret” isn’t simple or straightforward.  Consequently, most people’s definition of “trade secret” is both too broad and too narrow.

What’s your definition?  Do you think you know what can be legally protected as a trade secret?

Here’s a little test.

1.   Can the information on your cell phone be considered a trade secret?

2.   Can a trade secret include information that is on the Internet?

3.   Can information be considered a “trade secret” if it isn’t marked secret, confidential or proprietary?

4.   Is everything that a company marks “confidential” a trade secret?

5.   Can software source code be a trade secret?

Here’s the simple explanation of how to identify a bona fide trade secret.

This following is a super, simple rule of thumb to remember:

A “trade secret” is secret, protected information that confers a competitive advantage.

When you’re trying to determine whether something is a trade secret, ask yourself three questions:

1.   Is the information relatively secret or not generally known?

2.   Have reasonable measures been taken to protect it from disclosure?

3.   Would a competitor gain an advantage if they knew it?

1.  Trade secrets are types of information.

Information. Companies commonly seek trade secret protection in court for the following:  customer lists, source code, hardware architecture, specifications, designs, business plans, pricing, financial data, technical methods and procedures.

Confusingly, some combinations of information in the public domain may be protected as a “combination trade secret.”  For example, if you use open source software that is available on the Internet but combine and modify it in a secret way that gives you a competitive advantage, the combination may be protected.  Courts still haven’t figured out a good analysis for determining which types of combinations should be protected.  Crafty lawyers have clever ways of identifying trade secrets in court including claims to combinations of public stuff.

Trade secrets are relatively secret.

Secret. Absolute secrecy is not required.  The legal requirement is that the information not be generally known by competitors.  The information must also not be readily ascertainable.  This means it must be secret enough that your competitors can’t easily get the information from just looking at a product, promotional materials or a website.  If it is generally known and used in your industry, it can’t be a trade secret.

2.  Trade secrets are protected.

Protected.  To qualify as a trade secret, the information must also be protected.  A business must take reasonable measures to protect information from unauthorized disclosure and keep it secret.

If the company doesn’t protect it, the courts won’t.

This is where a lot of businesses, especially startups, screw up.  They fail to take reasonable precautions to protect their valuable information and then they’re mad when they can’t get legal protection when their former employees walk away with it.

Evidence of reasonable protection measures include the following:

Marking. A trade secret owner should have a standard marking policy and consistently identify trade secrets and mark them confidential.  But just because information is not marked “confidential,” it doesn’t necessarily mean that courts won’t determine that it is a trade secret if other protections are in place.

NDAS. A trade secret owner should use non-disclosure agreements with its employees, independent contractors, vendors, or other third parties before disclosing confidential information.  This is critical evidence in court.

Verbal Warnings. A trade secret owner should identify and warn people when it considers specific information to be confidential and warn them not to use or disclose the information to other parties.

Education. A business owner should educate its employees, especially technical ones, about trade secrets and teach them how to take proper measures to protect them.  Education is one of the best forms of protection.  Do your employees know what they can discuss about your products at trade shows and at lunch with their buddies?

Physical restrictions.  A trade secret owner should only give highly confidential information to those who have a need to know it.  You should lock down and restrict access to your important, secret source code.  Access to highly confidential information should require a password or specific authorization.

3.  Trade secrets must confer a competitive advantage.

Competitive Advantage.  Finally, to qualify as a trade secret, the information must give the owner a competitive advantage.  Under most state laws (the UTSA), the competitive advantage may be actual or potential.  A “competitive advantage” means that access to the information would save a competitor time or money or give it a competitive edge.  For example, if a competitor saw your trade secrets and what they learned saved them development time and cost, that would be a competitive advantage.

Do you want to change your test answers?

Test Answers:

1.  Can the information on your cell phone be considered a trade secret?

Maybe.  For example, the list of customer contacts in your password protected Blackberry may be considered a trade secret.  Your emails and attached documents that contain protected, valuable, secret information may also be protected in some cases.

2.  Can a trade secret include information that is on the Internet?

Maybe.  Some protected, secret combinations of information in the public domain, even if the individual components are found on the Internet, can be protected as trade secrets.

3.   Can information be considered a “trade secret” even if it isn’t marked secret, confidential or proprietary?

Yes.  If a court is convinced that a company has taken other reasonable protection measures, like NDAs and physical restrictions, a court might find that an unmarked document containing protected, secret information that confers a competitive advantage is a trade secret.

4.  Is everything that a company marks “confidential” a trade secret?

No.  Indeed, willy-nilly, over-aggressive “confidential” markings are evidence that you can’t property identify legal trade secrets and you have no idea what you are doing.

5.  Can software source code be a trade secret?

Yes.  If source code is secret and protected, it can be a trade secret and get legal protection.  Indeed, trade secret law is the best way to protect source code.

Here’s the more precise legal explanation of a “trade secret”:

I’m including this section because I know that some of you love facts like I do and need an abundance of information.  This section is a little boring so if you want to skip it, just remember the rule of thumb about secret, protected information that confers a competitive advantage.  It’s really only the lawyers who need to know the statutory details.  Your determination of trade secret status won’t be a determining factor in a legal battle.

Trade secret law is a type of state law.  This is important because it means that there is no national standard that applies to everyone everywhere.

There are two main types of trade secret law:  the Uniform Trade Secrets Act (“UTSA”) and the Restatement of Torts.

Most states have adopted the UTSA.   A few hold-out states like Texas kept their old law based on the Restatement of Torts.  The exact scope of protection and the nitty, gritty details in litigation are different but the core protection is very similar.

The following are the more exact definitions of a legal “trade secret.” These are the definitions the lawyers use in court and argue about.

Specifically, the UTSA defines a “trade secret” as:

“[I]nformation, including a formula, pattern, compilation, device, method, technique or process, that:  (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The Restatement of Torts defines a “trade secret” as:

“A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or us it.  It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.”

In trade secret litigation, the lawyers spend an inordinate amount of time fighting over whether specific information is or is not a trade secret. Ultimately, only a court can decide if all of the legal requirements have been met in order for information to be given the gold star protection of a “trade secret.”

By using the rule of thumb definition of a trade secret—secret, protected information that confers a competitive advantage—non-lawyers can make an educated decision about whether specific information might be considered a trade secret under the law and act accordingly.

Knowing how to identify trade secrets can be critical for a startup’s success.  It can help prevent misappropriation—using or disclosing trade secrets without permission.  More importantly, it can help a startup take the right measures to protect its trade secrets.

Stay tuned to learn more about trade secret misappropriation and when the duty of non-disclosure arises in next week’s posts.

This is the first in a series of four posts about trade secret law.

If you’re starting a business, whether it involves writing software or designing dolls, it’s important to know about trade secret law.

Why?

Because trade secret litigation could blow your startup to smithereens.  It’s a very popular type of litigation brought against successful startups.

Trade secret law is a land mine in the IP legal landscape that can ruin your company and even land you in jail.  Watch out software guys. (I’ll write more about criminal trade secret statutes and great cases involving jail time for software entrepreneurs in a later series of posts.)

I’ve been an IP lawyer for over ten years and I’ve fought in many trade secret wars across the country.  I’ve represented unfortunate startups sued for trade secret misappropriation by the founders’ former employers.  This type of trade secret case can be tough and intense for all of the people involved.  For startups, a trade secret case can be a matter of life or financial death.  In some cases involving VC funded startups, the old employers wanted the startups’ main assets, including the money from the recent round of financing.  The plaintiffs (the companies bringing the lawsuits) sought damages in the hundreds of millions of dollars and ownership of the startups’ intellectual property.

In some cases, the old employers wanted everything new the startups had built because it was allegedly based on the foundation of their trade secrets.

I’ve also represented larger companies who sued their former employees because they were furious that they paid for the intellectual property to great technology and then their employees left and started their own companies—with the same technology.

In one case involving Russian scientists, the Russians left their US employer on the East Coast because they wanted to live where the weather was better.

Really.

They got sued in sunny California.

Litigation is nasty.  It’s expensive and time consuming.

A lot of engineers and technical folks are shocked at the invasiveness of the “discovery” process in litigation.  All documents—at work or at home—within your possession, custody or control that are potentially relevant to the claims in the lawsuit are fair game.  This means that your home computer as well as your work computer may be searched.  The old backup tapes sitting in the chair of your office may also be searched.

Further, discovery usually involves searching documents and drives that you’ve stored off-site or at your house.  I’ve personally collected documents from the attic of a startup founder’s garage.  In court, I’ve also had a judge ask opposing counsel if they had checked for relevant documents in the boxes in the garage where the engineer played basketball.  No kidding.

Trade secret litigation can be particularly disruptive because the lawyers will go through your documents, especially your casual e-mails, with a fine-tooth comb looking for hints of trade secret misappropriation.  At your deposition, opposing counsel may also ask you detailed questions about your lunch conversations with your former co-workers — conversations that you thought were friendly and casual.  Lawyers can spin your allegedly innocent comments to your former co-workers into “evidence” of trade secret theft.

Litigation can result in losing the rights you thought you had in your key intellectual property and even destroy your company.  Litigation and bankruptcy go nicely together.

So stay tuned if you want to know more about trade secret law and understand what you can take and use from your old jobs in your new company, and what you had better leave behind.

The next post will explain how to identify bona fide trade secrets.