Trade Secret Law 101: Tips for Identifying Trade Secrets

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.