Trade Secrets: What You Need to Know
Coca-Cola’s secret formula. McDonalds’ special sauce. Google’s search algorithm. Bumble’s dating software. This proprietary information is vital to these companies’ survival, and among their most valuable corporate assets. Each is protected as a trade secret. While patent law offers strong protections for proprietary inventions, obtaining a patent requires establishing that the invention is novel, non-obvious, and patent-eligible. It also requires disclosure of the invention itself in the patent application. And while patents last for twenty years, they do not last forever. By contrast, trade secrecy provides another avenue to protecting a company’s IP that allows the inventions to be kept secret and potentially protected forever.
In the last few years, businesses, governments, and law enforcement agencies have increased their focus on trade secrets as an effective way of protecting a company’s “secret sauce.” This trend accelerated with the passage of the federal Defend Trade Secrets Act of 2016 (“DTSA”), and trade secret litigation has moved toward the forefront of intellectual property law. As described in recent press, such as Trade Secrets Litigation: The No-Longer-Forgotten Part of the Tech IP Arsenal (Corporate Counsel, Warren, Z., July 28, 2017), “[t]hese days, many of the big IP litigation battles involving companies like Facebook…, Uber … and Epic … have nothing to do with patents, trademarks or copyrights at all. Instead, it's all about the perhaps forgotten part of IP: trade secrets…With massive jury rewards and the DTSA encouraging federal litigation, trade secrets litigation is seeing a surge in the tech industry.” This reporting is consistent with reported industry data. According to a 2016 Report by Willamette Management Associates, the number of federal trade secret cases increased by 14 percent for each year from 2001 to 2012. According to a 2018 Lex Machina Report, this increased even more dramatically with the passage of the DTSA. 2016 saw 860 U.S. trade secret cases filed, but this rose to 1,134 cases filed in 2017. Through the first half of 2018, 581 trade secret cases had been filed, putting the number of trade secret cases filed in 2018 on pace to slightly exceed 2017.
Understanding this important area of law is critical as the information age evolves and as companies face increasingly sophisticated attacks from those looking to access their IP. This article provides an overview of trade secret law and summarizes the necessary steps that companies should take to protect their trade secrets.
What May Be Protected as a Trade Secret?
There is no uniform definition of “trade secret,” because trade secrecy law developed at both the state and federal level. Historically, protection of trade secrets was a matter of state law, with each state developing its own definitions and rules. This changed in 1979, when the Uniform Law Commission published the Uniform Trade Secrets Act (“UTSA”) to standardize trade secret law across states. Forty-eight states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have so far adopted that law and its later revision. The UTSA worked for many years, but difficulty with interstate and international enforcement eventually led the federal government to act. In 2016, Congress passed the Defend Trade Secrets Act (“DTSA”), which provided its own set of definitions.
While the number of definitions continue to multiply as federal courts have gotten involved, every definition shares a few key elements. A trade secret is something used in a company’s business that (a) is not known or readily accessible by competitors, (b) has commercial value or that provides a competitive advantage in the marketplace, and (c) the owner of the information protects from disclosure through reasonable efforts to maintain its secrecy.
Nearly every company has trade secrets of some sort. Trade secret information can be almost anything that provides an economic or competitive advantage over one’s competitors. With its broad definition of eligible subject matter, trade secret law protects a wide range of valuable information, including information that would not be eligible for protection under existing patent, trademark, or copyright law. This could include formulae and recipes, proprietary databases, business processes and methods, information about costs, pricing, margins, overhead, manufacturing processes, proprietary computer software programs, customer lists, and strategic plans and marketing programs. Often the owners of these trade secrets may not even know that this type of information is protectable by trade secret laws. Such overlooked trade secrets may include customer lists, supply chain information, or even business development and financial plans.
But the information does not get protection unless it stays “secret.” It loses any protection if someone else independently discovers it, if they reverse-engineer it, or if the trade secret owner publicly discloses it. For example, if Coca Cola inadvertently posted its secret recipe on Instagram, anyone could use it with impunity. It is incumbent on every company to assess its trade secrets and ensure that enough safeguards are in place to maintain the confidentiality of that secret information.
Why are Trade Secrets Becoming More Important?
Trade secrets recently have become a more popular form of intellectual property protection for several reasons. These include the ubiquity of trade secrets and their broad range of eligible subject matter, the uncertainty inherent in the patent application process and a reluctance to disclose one’s “secret sauce,” the possibility of perpetual protection under trade secret law, and the availability of stronger trade secret laws such as the federal cause of action under the DTSA.
One of the biggest reasons trade secret law is on the rise is the flexibility and scope of protection it offers. Trade secret law can protect a wide range of subject matter that does not fall under traditional intellectual property schemes. Patent law, for example, protects subject matter limited to a composition, production process, machine, tool, new plant species, or an upgrade to an existing invention. 35 U.S.C. §101. Many of this era’s most important inventions are difficult to patent, including algorithms, correlations, and systems and methods that primarily rely on the same.
Trade secret law can also be less risky in some respects. During the application process for a patent, copyright, or trademark, a company has to disclose the secret itself. That carries a certain inherent risk—if the application is denied, the secret is no longer secret. While the protection afforded by trade secret law may be considered fragile—meaning constant vigilance is required to maintain secrecy and that the protection may be lost if the trade secret is disclosed—a patent, even after issuance, also carries some risk of post-grant invalidation. Sometimes a trade secret owner may ultimately enjoy greater certainty by maintaining an invention as a trade secret, and not disclosing it to the public.
In addition, the patent application process can drag on for several years. In fields with rapidly changing technology and short product development lead times, the immediate availability of trade secret protection may be appealing. On the other hand, in fields with slowly changing technology or where long-term protection is desired, the potentially unlimited duration of protection afforded by trade secret law may be advantageous in comparison to the twenty-year protection provided by patents.
Why Must I Keep The Information “Secret”?
As companies rely more on trade secrets, there has been a corresponding need for greater vigilance against trade secret misappropriation. The workplace trends toward greater employee mobility, increased interconnectivity and networking, globalization, and reliance on data stored in “the cloud” all increase the risk of trade secret misappropriation.
In recognizing the need for stronger, more robust trade secret protection, Congress enacted the DTSA as an amendment to the Economic Espionage Act, a federal criminal statute, to include a private civil cause of action. This new law has attracted much media attention and the potential for large damage awards or settlements.
The DTSA provides businesses with a private right of action when their secrets are stolen. But one of the critical elements in almost every trade secret case is whether the company took “reasonable measures” to protect the information. There is no bright line test for what constitutes “reasonable measures.” Instead, companies must balance factors such as the cost and effort involved in acquiring the information, the value of the information, the level of competition in the marketplace, and the perceived ease of reverse-engineering.
What Should I Do To Protect My Trade Secrets?
Protective measures generally fall into three categories: physical security, digital or network security, and legal measures, such as confidentiality, non-compete, and non-disclosure agreements (NDAs).
Physical security measures may involve storing the secret information in a secure environment and limiting access to only preauthorized individuals. Coca-Cola’s vault is an example of such physical security. Other companies protect their secrets by restricting access to certain parts of the physical plant, using keycards to monitor access to certain rooms, and otherwise limiting access to only those who need it.
Digital security measures may include the use of firewalls, strong passwords, as well as controls on employee access to certain networks or websites. Portable flash drive use within a company may also be encrypted, restricted in use, or banned altogether as they are one of the easiest ways for a disgruntled employee to abscond with information. To limit the dissemination of confidential information, including customer contact information, a company may also wish to issue its employees with dedicated cell phones and portable computers for business use.
Legal measures to protect the secrecy of information include not only the abovementioned confidentiality agreements, non-compete agreements, and NDAs, but also the adoption of sound operating procedures that will protect both the secret information and also the company itself. For example, companies should ensure that all trade secrets are marked as “Confidential.”
Companies also should train all employees routinely on how to handle trade secrets. This should occur during the onboarding process for new employees and also during exit interviews for departing employees. Newly hired employees should be reminded not to bring in or disclose any trade secrets from their former employers. This mandate can, and should, be built into any employment agreement or comprehensive offer letter. Such measures may help protect both the new employee and the new company from liability against potential accusations of trade secret misappropriation.
The level of reasonable measures necessary prove to a court that information is indeed a trade secret will vary, but will likely include at least some measures from each of the three categories discussed above.
As trade secrets take on a more important role in the business world, the legal community, and society at large, companies should inventory their trade secrets, employ all reasonable measures to protect them, and assess the different legal tools to safeguard these valuable assets.
This post was co-authored by Benjamin Daniels, Counsel in Wiggin and Dana’s Litigation Department, and features contributions from Thomas Landman.