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Trade Secrets

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Under some circumstances, an idea is personal property, and the owner is entitled to protect it from exploitation by others. The idea must be novel and different. Secret recipes that corporations have developed for their products are ideas that are the personal property of the company, for example. Basically, a trade secret is proprietary information, including a formula, pattern, compilation, program, device, method, technique or process that is confidential. It is not common knowledge, but it is not protected by a patent. Trade secrets might be formulas, programs, customer lists or unique designs, among other unique assets.

The most common violation of a trade secret occurs when an employee goes to another company. An employee who leaves the company and uses the secret recipe to establish his or her own business has taken property from his or her former employer. Although the corporation never patented or copyrighted the secret recipe, it still has a property right in the idea. To protect a trade secret, the business must make reasonable effort to maintain secrecy.

Once the idea is no longer secret, its owner's property rights in it evaporate. If you have an idea that is valuable, the people to whom you disclose it must sign a confidentiality agreement, or you will lose ownership.

Sidebar: The employer owns the ideas of its employees related to their job unless there is an agreement to the contrary. An idea for a new kind of toy, for instance, does not belong to the person who invented it if he or she was working for Mattel at the time. Universities, however, often allow their employees, typically tenured professors, to keep the rights to their ideas as part of the employment contract. The university gains prestige from the professor's discovery.

What is "proprietary information"?

"Proprietary information" is information gathered, developed, created or used by a business that is economically valuable to the business because it is not generally known or cannot be discovered without independent effort.

How confidential does the information have to be to be considered a trade secret?

In general, all that is required is that reasonable efforts be made to maintain the secrecy of the information. In other words, the information is usually disclosed only on a "need to know" basis.

What can be considered a trade secret?

That depends on the nature of the business. Generally, the following materials may be information considered by a business owner to be trade secrets:

  • manufacturing devices, methods, techniques or processes
  • customer lists and information
  • supplier lists and information
  • sales information such as sales training materials, brochures, discounts and sales promotion programs
  • marketing information
  • financial and accounting information
  • computer programs-in particular, programs tailored to a particular business or operation
  • logistics systems such as inventory or warehouse procedures
  • inventions
  • other information not readily available or known to others outside of the business

So as long as I keep information about my business confidential, will it be considered a trade secret?

Not necessarily. Some information, even if kept confidential, is not considered by the courts to be trade secrets. Also, once material is publicly disclosed, it loses any protection it ever had as a trade secret.

Can I have a trade secret that is not patentable?

Yes. A trade secret may not necessarily be patented or meet the requirements for patenting.

Rather than rely on trade secret protection, should I obtain a patent or copyright?

Patent or copyright protection is something you may want to consider; however, there are certain drawbacks to both of these. To obtain patent or copyright protection, you have to publicly disclose the information.

For patents, there is the particular concern that the invention or discovery may not be patentable. There is also the possibly that someone will claim that they own a patent on the claimed patentable subject and that you are infringing their patent.

As to copyrights, a copyright only protects the unauthorized copying or duplication of the information; it does not protect the idea or concepts contained in the copyrighted material.

Example: If you copyright a sales training manual, you can prevent a competitor from making copies of the manual and using it word for word. However, you may not be able to prevent the competitor from using the sales techniques revealed in the manual.

What happens if an ex-employee goes to a competitor and reveals my company's trade secret?

Your recourse is to go to court. Your state may have laws to protect you, and the employee may have violated the Uniform Trade Secrets Act.

If you win, the court may issue an injunction to make the other company stop using your trade secret, and you may get money for damages. In some cases, your ex-employee will be committing a crime.

Is there a way to protect my trade secrets ahead of time?

A noncompete agreement with an employee is one of the best ways. The laws regulating these types of contracts vary with each state.

Another approach is a nondisclosure agreement. This could be used when you need to allow an outside entity to look at private company information-if they are a vendor or perhaps if they are a potential acquirer.

What if someone comes after me for violating a trade secret when it is something I figured out on my own?

You should be on solid ground. Under trade secret law, if you discover someone else's trade secret on your own, you are protected. This applies to cases where a company's "secret formula" is analyzed and recreated.