Background & Current Issues. Trade secrets have historically been an outlier in the area of intellectual property (IP) law because they have not been viewed as “real” IP. Today they are being increasingly viewed as valuable IP assets. Indeed Gene Quinn, one of the most influential IP thought leaders in the U.S., has predicted that trade secrets may pass patents in terms of valuation.
Nevertheless, trade secrets have their own unique challenges and characteristics. The following lists some of the issues currently comprising the trade secret ecosystem.
- A weakened patent system resulting from the America Invents Act and subsequent court decisions which have both invalidated patents and impacted the issuance of new patents. Trade secret protection either singularly or in connection with patents may be a viable way to reduce patent invalidation risk and and/or strengthen a patent’s commercial viability over the long term.
- The explosion of AI and Large Language Models (LLMs). Here the issue pertains to controlling what can and cannot be shared. Where the possibility of divulging copyrighted, patented, or trade secrets as the result of generative AI exists, the resulting output could infringe on intellectual property rights, divulge valuable trade secrets, or breach confidentiality obligations (e.g., the need to protect personally identifiable information or to comply with obligations under an NDA).
- Remote work and employee mobility. Today, more and more potentially valuable business information is “leaving” the office traveling through space so to speak to remote servers, computers, and the “cloud.” The locked file cabinet with tightly controlled access of years past is fast becoming a relic, being replaced by systems subject to cybersecurity risks 24/7. Trade secrets are often viewed as a potential liability by companies due to cyber threats and employee “movement”.
- The move to eliminate non-competes. The Federal Trade Commission is attempting to regulate non-competes out of existence, and some states already have or are in the process of doing so.
- A patent document, registered copyright certificate, or registered trademark certificate issued by a government agency provides proof that the associated IP rights actually exist. With trade secrets, however, no government agency is involved in establishing the IP right. Instead, the trade secret owner is tasked with establishing that the confidential information indeed qualifies as a trade secret. Proof that a trade secret actually exists is required by the courts in any trade secret misappropriation lawsuit. Requiring proof of documentation establishing the existence of the trade secret is considered a reasonable measure by the court.
- Trade secrets are protected under state law and federal law. Damages in a misappropriation case often exceed the damages in patent infringement case. Europe has largely adapted the trade secret law of the United States and trade secret law is seeing global standardization.
Trade Secrets and Confidential Information. Referring to item #5 above, many still assume that confidential company information automatically qualifies as a trade secret. Trade secrets of course constitute confidential information, but not all confidential information will qualify as a trade secret. For example, Florida’s Uniform Trade Secrets Law, largely based on the Uniform Trade Secrets Act, defines “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: “Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means, by other person.”
The unauthorized use of a trade secret is known as misappropriation. To prevail in a court of law on a trade secret misappropriation claim, the plaintiff must first establish that the misappropriated information is indeed a trade secret and has been handled as a trade secret by the plaintiffs. Documentary proof is generally the standard required for meeting this requirement. Contracts such as an employment handbook, NDAs, employee onboarding/exit documentation, trade secret assignment documents, an in-house trade secret policy, etc. are types of acceptable documentation.
Several years ago, the commentator was able to get a motion for summary judgment granted on behalf of the defendants because the plaintiff could provide no documentary proof that he indeed had a trade secret. Even large companies one would think should know better have lost their trade secret misappropriation lawsuits because of the lack of documentation or poor documentation. See e.g., California Healthcare Services v. Amgen and Bundy Baking Solutions v. Mallet. Other helpful factors in establishing trade secrets to the satisfaction of a court include having conducted trade secret audits to evaluate the efficacy of a business’s procedures to protect its trade secrets, using robust cybersecurity efforts, etc.
Non-disclosure agreements (NDAs) can be confusing when it comes to trade secret protection because they are generally limited to protection of exchanged confidential information for a period of only 1 to 3 years following the NDAs’ termination. However, if trade secrets are to be divulged, it is important that any disclosed trade secrets be protected by the receiving party indefinitely and the NDA should state as such. Otherwise, trade secret protection could be at risk. Most receiving parties do not want the burden of protecting the disclosing party’s divulged trade secrets indefinitely. Accordingly, the NDA’s disclosing party should think twice before disclosing a trade secret or insist on adequate provisions in the NDA to protect any divulged trade secrets.
Gearing Up for Trade Secret Protection. Any business, no matter how small, may have valuable trade secret assets which can enhance the business’s value. A robust trade secret approach may also be attractive to potential venture capitalists and future buyers of the business. If you aren’t sure is something could be a trade secret, ask yourself the $64,000 question: What would be the consequences for my business if this confidential information became known by others?
How does one get started in identifying and protecting a trade secret? Here are some questions to ask to get the process going.
What is the trade secret (e.g., software code, a special recipe, a customer list that the business has spent money and time on developing, certain steps of a manufacturing process requiring tight control, a raw material having “special” requirements, etc.)?
Who will have access to the trade secret (e.g., employee, independent contractor, business partner)?
What documentation should the business have in place to protect the trade secret asset (e.g., employee handbook, code of conduct, onboarding/exit documentation, IP assignment of any developed trade secrets to the business, NDAs, independent contractor agreements, trade secret policy documents, shareholder/partnership/operating agreements, etc.)?
How do we educate employees and independent contractors that it’s a trade secret which must be carefully and diligently protected (e.g., asset notice and acknowledgement documentation)?
How do we train those who require access to the trade secret to protect the trade secret (e.g., ensure they know it’s a trade secret)?
How do we monitor the interaction between those who have access and the frequency of interaction (e.g., by maintaining a privilege or access log which states the people who have access, how the access is provided, and have them document the dates on which they accessed the trade secret)?
Getting Started with a Legal Advisor. In conclusion, every business, no matter how small, should be looking into trade secrets as a valuable asset, meaning one which can be monetized and form a part of an IP portfolio. Contact Susan at Troy & Schwartz (305-279-4740) to request a complimentary copy of her trade secret implementation checklist and work with her to perform a trade secret audit, create appropriate documents, etc. or to represent you in trade secret misappropriation matters. As an IP attorney who practices patent, trade secret, trademark, and copyright law, she is uniquely qualified to address best practices for procuring, monetizing, and enforcing IP rights.
THANK YOU FOR YOUR INTEREST IN THIS BLOG. AS USUAL, THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.
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