Use These Key Lessons to Create and Protect Your Trade Secrets

In this segment, we’re going to talk about some of the key takeaways from the trade secret discussion that different kinds of relationships that you’re going to have with individuals and with companies, and some of the legal ways to protect your trade secrets. First of all, trade secret is a very important doctrine in intellectual property law. And that’s because there are going to be elements of a product or the entire product that is not going to be protected by patent. It might not be protected by copyright or trademark. It’s going to be those elements, for example, data. As we know from our copyright discussion, copyright does not protect data or facts, but trade secret will.

And when you think about trade secret as a part of your overall portfolio, especially if you’re involved in manufacturing. Trade secret can apply from the very beginning of the manufacturing process. Who are your sources of supply? What are the prices that you’re paying? What’s the sequence that you’re using in your manufacturing process? If you’re developing software, trade secret can protect algorithms, your technical specifications, the result of testing elements that are not protected by copyright, and are not protected by patent. So especially the last couple of years, since the United States Supreme Court has ruled, that many patents that have issued on software are invalid.

And because there are many countries outside the US that do not confer patent protection on software. Your means for protecting much of your software will be through trade secret and of course, your user interface trademarks, as we discussed earlier.

Therefore, when you think of how to look at the portfolio of company assets, think about those areas where trade secret fills in the gaps left by patent, copyright, and trademark. Again, it can last a very long time. As we know, or as we’ve heard from Coke, the formula is well over a 100 years old.

Independent creation is a complete defense to misappropriation. So in this way trade secret is very much like copyright. So you have to think about then, how will you create a technology development team or a product development team, if you bring in someone who comes from a competitor. And therefore, who has had access to the trade secrets of that competitor. How do you, as a business, bring in a new talented employee, put them on your development team without exposing yourself to a claim for trade secret misappropriation. And indeed, sometimes a company simply has to decide, is this a risk that we can manage?

Or do we bring in this very talented person and put them on a different project for a period of time. So for example, one thing you can do is you sit down with that employee when they come in the door and you remind them. You know they have a duty of confidentially with a respect to information that they already have, that the company has a policy against their use of it or their disclosure of it. You don’t want that confidential information, and that even if they think that they’re really not using something that’s confidential they’re just using their skills and their knowledge.

Give them an opportunity to meet with company counsel so that the attorney can explain to them the difference between a skill set and a knowledge base on a one hand that they get to have as their own assets and a former employer’s secret. So independent creation is a complete defense to trade secret misappropriation.

You’ll also want to think about what happens when you bring in a workforce that’s a part-time employee? Part-time employees, or independent contractors who work for you on a specific project, as we discussed earlier, they may have other employment opportunities and they may be also consulting with other companies. You need to remind them not to taint your processes and your work product with the trade secrets of others. For attorneys, and you can think back to those couple of slides about measures that are reasonable under the circumstances. Trade secret really is about client conduct.

And we need to be careful and not over lawyer and give a client a dozen procedures they have to follow, but instead to think about for each client what are the processes needed for that particular company to succeed. And which ones are absolutely critical, and then we might want to conduct what we call trade secret audits from time to time. Having a check list for clients. Do they have policies that they give to individuals, even at the level where they’re offering a position? Reminding individuals that we have policies against bringing in information, or documents, or materials. So you can develop a checklist, everything from how the client works with employees, how they hire, fire, how they work with strategic partners.

And make sure that the client understand that these are not requirements just because you’re concern about little details but because you’re concerned about the clients assets and the protection of those assets. And again, this may explain the fail safe A.O. Smith case, clients will sometimes rely on their instincts and they’ll think if they are working with people who are honorable or who have a reputation. That they don’t need to worry about protocols. And the truth is, sometimes the clients are right. If you work with ethical people, you don’t typically have to have the same concerns about misappropriation.

But if you work with ethical people, and you take no steps whatsoever, you will not be able to enforce those trade secrets against others. So trade secrets can be lost once, and then lost forever. Again, protocols are what matter. And remind the client that if they would like to develop a product that is going to directly compete with another company, help them put together a clean room. Just like the kind of clean room we discussed when we talked about copyright law.

And sometimes what we can do as attorneys is we can connect the clients with experts in particular fields so that a client is getting, for example, advice from the university professor, or someone who has had extensive experience in a particular field. And will be able to advise the client on how to develop a product, create specifications, develop testing protocols, and ultimately develop a competitive product without ever having access to the information, or personnel of a competitor.

Again, as attorneys, we sometimes look at contracts, and sometimes in the US, we look at non-competition agreements. Non-competition agreements are very problematic in many states, in the United States, and they are very problematic outside these United States. Let’s make a distinction here between a trade secret agreement and a non-competition agreement. A trade secret agreement focuses on indeed protecting the trade secrets of a company. A non-competition agreement states, essentially, even if you are never using the trade secrets at all, you can’t work for a competitor. You can’t work in this field. Now, different lawyers have different opinions about non-competition agreements. Generally, I disfavor them, unless someone is an officer who’s highly compensated and typically has stock or stock options.

If they’re just a mere worker, why should they be prevented from working for a competitor? Because they’ve been developing skills and knowledge in a particular field, and indeed there are many states in the United States, California being a prime example, that makes non-competition clauses illegal. You can’t prevent someone from working for a competitor just because they’re a competitor. You can prevent them if they’re taking trade secrets. Other states however, will enforce non-competition agreements. For those states though, that do allow non-competition contracts they typically require what is called a legitimate business interest. What is a legitimate business interest n preventing this employee from taking a position with an employer? And the answer is almost always trade secret.

So, sometimes the care that a client takes to implement trade secret protocols can actually be used to limit future employment of a key employee with a competitor. Having said that, outside the U.S. many, many countries in particular in Europe will not enforce non-competition agreements from near working folks. They may for a stock owner, a director, or an officer but they typically will not for a worker bee, and that is because of the tremendous impact it has on the ability of someone to be employed when there is no assertion of trade secret misappropriation. I have often had clients say to me I would like a non-disclosure and non-competition contract that I can use around the world.

And I have to remind them there is no such contract. Indeed, there’s no such contract that can be enforced, even in all 50 states in the United States. And finally for clients, the value that is brought to your company through trade secrets is, indeed, know-how. Sometimes that intangible ability that your staff have and that are implemented to manufacture a particular product to a particular specifications. And that know-how does not have to meet the requirement of patents which is novelty. Again, registration is not a requirement so you can be developing trade secrets, virtually, everyday. They can last a short time.

If some university professor publishes a paper and you read it, and you say hm, that’s the algorithm that we use within our company for this particular manufacturing process, it means others are free to use that very same algorithm. On the other hand, it may be a long time before people figure that out. As we discussed, the use of trade secret can affect the mobility of your key employees and their defecting to competitors. So well-known case in the United States where a key employee who was involved in the development of Gatorade left to go to a competitor, but he didn’t just leave to go to a competitor, he lied to a few people within his company before he left.

He said, well, I’ve been thinking of accepting this job offer, but I haven’t actually accepted it yet. When in fact he had accepted that employment, and he continued to attend high level company meetings. And ultimately when he went to the new employer, even though the new employer said, we don’t need these trade secrets, we’re not going to use those trade secrets. We’re an ethical company, we have our own policies, we have our own protocols. What the court said is, but he’s a liar. And we think somebody who lacks the morality to speak honestly to an employer doesn’t really have the morality to keep this information confidential.

So the court entered an order that barred him forever from using the information, and it barred him from taking the position with a new company for a period of time until the information that he knew was obsolete. So when I lecture to my students and in particular to my business students I say, here’s some free legal advice. Don’t lie. And of course, trade secrets, our basis on which you can actually get an injunction against a competitor. You can go to court. If you prove that you have a trade secret, that you’ve used measures reasonable under the circumstances, you can get a court order. That will order your competitor to stop making a particular product, to pull it off the shelf.

You can sometimes get an employee fired. And you can sometimes get the court to require that your competitor pay you, not just damages to you, but a certain percentage of all of the money they have made off the products using that information. And finally, trade secrets can be licensed just like patents can be licensed. You’ll have to, of course, have trade secret protocols built in to that license. But there can be a revenue stream from those trade secrets.