Trade Secrets

Abstract

Trade secrets may be any of a wide array of ideas and information owned and kept secret by a firm or organization. Trade secret theft or misappropriation is a problem faced by many organizations. It usually involves the unauthorized use of confidential information by current or former employees. The increase in lawsuits over trade secret and post-employment agreements show the importance of trade secret protection in the contemporary business world. Several mechanisms are available to assist firms in protecting their trade secrets.

Overview

The Uniform Trade Secrets Act (UTSA) generally defines a trade secret as "information," which includes items such as a formula, pattern, program, device, method, technique, or process that derives economic value from not being known by other persons who might obtain economic value from its disclosure or use. A trade secret is, then, valuable information or knowledge that an inventor, firm, or organization protects from disclosure and use by taking reasonable measures to keep the information confidential. Devices such as patent law protect the ideas and products of inventors and innovators by granting them a right of exclusivity for a specific period, requiring in exchange that they disclose the plans for their invention and all related information. However, an inventor sometimes prefers to protect this information by cataloguing it as a trade secret, instead of patenting it; this allows an individual or company to keep the information related to the innovation a secret, as long as the information remains confidential.

One of the main ways in which a firm may lose a trade secret is by employee mobility. For example, when an employee leaves the physical premises, especially to move to a job with a competitor. The risk of trade secret misappropriation, with its consequent loss of investment and possible litigation, can be very high.

It is difficult to be very specific as to what qualifies as a trade secret. Legislation tends to offer very broad definitions, and these may also vary by state and jurisdiction. Generally speaking, however, a trade secret is information that a company decides to keep confidential or secret, and part of its value derives precisely from its being secret. In fact, according to the UTSA, which has been adopted fully or partially by forty-eight states, few limits exist to the kinds of information that may count as trade secrets. In some instances, an idea may be considered a trade secret.

Legislation. The UTSA was last amended in 1985, but other legislation has since been passed that protects trade secrets, including the Economic Espionage Act (EEA) of 1996, the first major federal statute to deal with trade secret misappropriation. At the time, reports of trade secret misappropriation by U.S. Firms were increasing, and firms claimed that state laws offered little in the way of protection and remedies against trade secret misappropriation. The EEA was a response to these concerns, making trade secret misappropriation a crime and providing enforcement measures of national and international scope.

In the following years, the business sector continued to believe the available policies and legislation were insufficient to protect against trade secret crime. In July 2015, a bipartisan group of legislators in both Congressional houses proposed the Defend the Trade Secrets Act (DTSA), which was signed into law by President Barack Obama in May of 2016. The DTSA authorized a variety of remedies, which included injunctions, compensations, and property seizure.

On the other hand, the DTSA departed from the broader scope of previous legislation and limited the scope of trade secrets to information from the financial, business, scientific, technical, economic, or engineering fields. Whichever definition may apply, firms now have access to legislation that offers them protection and access to the courts when their confidential information is violated or misappropriated.

It is important to note two important factors. First, the law offers such protection for cases that can demonstrate reasonable measures have been taken to protect the confidentiality of trade secrets. Therefore, in order to try their case in court, firms must demonstrate that they have protected their trade secrets conscientiously and appropriately from disclosure. Second, not all cases of trade secret misappropriation are caused by illicit or malicious intent.

Disclosure. In fact, disclosure of trade secrets may be accidental or intentional, and caused by external as well as internal actors. External actors are those outside the firm and may be nation-states, criminal organizations, competitors, and hackers. Hackers may be criminals or activists; in either case, their intent is usually to acquire stolen information, which may range from names and e-mail addresses or correspondence, to financial information and identity documents. They may also seek to uncover the inner workings of a firm or its network.

A firm's internal actors may also engage in confidential information misappropriation, whether motivated by malicious intent or through negligence. Employees pose an obvious risk to companies that have trade secrets, because workers have access and knowledge of the firm's processes, systems, and know-how. Employees may misappropriate trade secrets with malicious intent, as revenge for some grievance or to court employment with a business's competitor, for example. Employees have sometimes been recruited to steal trade secrets.

Trade secrets may also be disclosed unintentionally when company computers are sold or dumped without confidential information being erased from their hard drives. Or an employee may simply not have understood that the information is a trade secret, prior to disclosing it to colleagues or using it at another job. Duped by hackers, employees unwittingly download trojan horses onto their computers, which unleash spyware through the computer network to steal confidential information.

Courts provide protection and remedies for trade secret violation if a firm has taken reasonable steps to protect said information. In other words, once a company has suffered a trade secret misappropriation, it must argue convincingly that the disclosure occurred despite a series of reasonable measures taken to ensure the confidentiality of the information.

According to the UTSA, a firm must establish that its measures to maintain the secrecy of its trade secrets was "reasonable under the circumstances"—and this depends on what those circumstances are. The DTSA states succinctly that efforts at maintaining secrecy must be reasonable. Both of these statutes seem to allow for a concept of reasonableness that is contextual, that is, based on its specific circumstances, such as type of information misappropriated, its value, and the particular measures or safeguards that were established to prevent its theft.

Further Insights

Compliance. Rick Richmond, Kelly M. Morrison, and Kathleen J. Covarrubias (2017) have established eight steps that firms seeking to protect their trade secrets must consider to ensure that their measures comply with standards of reasonableness and precaution across a variety of considerations. Firms must first identify what its trade secrets are and avoid overreaching; that is, a firm must be careful not to claim too many things as "trade secrets," specifically, information that may already exist outside the firm. Having too many trade secrets hinders the ability of a firm to protect its confidential information efficiently. Moreover, a court may consider that a firm cataloguing too many trade secrets is lacking in seriousness.

Once a firm has identified its trade secrets, it should mark or label all documents and files that contain confidential information. Otherwise, employees may become confused about which documents fall within the purview of trade secrecy. Carefully labeling documents lessens the chance for costly mistakes. Moreover, it is easier to prosecute cases in which it is difficult to claim ignorance of the confidentiality of a document or file.

Firms should require, when appropriate, nondisclosure agreements from employees and third parties. A nondisclosure agreement is a contract that binds an individual to keep the secrecy of confidential information. Courts tend to consider nondisclosure agreements positively when weighing the standard of reasonableness used by a firm to protect its trade secrets.

Limiting access to where the trade secrets are stored is an important step in reducing the risk of trade secret disclosure. This includes restricting the access to a "need to know" basis, that is, to staff who need to know trade secret information to perform their jobs efficiently. This makes it easier to identify leaks and culprits of information disclosure. Another major component is the destruction of documents and devices that contain trade secret information. For example, discarding confidential information in public trash bins would work against establishing reasonable steps to maintaining secrecy. It is best to destroy documents completely.

Firms should install gatekeeping measures such as cybersecurity. These include firewalls that help protect trade secrets from external infiltration. Firms may also implement tracking systems to control information transfers above a certain size or extraordinary numbers of downloads after hours or in a short span of time.

Firms should also be conscientious about training their staff on how to adequately protect, store, manage, and discard confidential information. Further, firms must be consistent about the application of established measures and policies, and take rapid action when breaches occur. Inconsistent application of safety measures and delays after a violation of company procedures might appear as "unreasonable" in a trade secret misappropriations case. Firms can follow simple yet crucial steps, such as establishing firm ownership of documents and devices that contain confidential information, ensuring that employees' access to such cease immediately once an employee resigns or is terminated, and explaining these policies verbally and in writing.

In case it ever becomes necessary to prove that reasonable measures were maintained to ensure information secrecy, firms should document all steps, procedures, and measures taken for this purpose. This includes actions such as keeping copies of nondisclosure agreements, records of staff training and attendance, reprimands for policy violations, cybersecurity processes, and all other related policies and safety measures. It behooves firms to remember that trade secrets may be lost forever if the owners of confidential information fail to take reasonable precautionary measures to protect it. Many court cases serve as cautionary stories.

Issues

Hiring from competitors is common in some competitive fields. This represents a constant risk, especially pertaining to senior positions, because high-level executives are likelier to possess confidential information about their previous employer. It is relatively commonplace for firms to hire laterally, that is, from the competition, for these individuals often have valuable skills and knowledge. It follows, then, that when such an employee moves from one firm to another, he or she carries a wealth of knowledge that can contribute to a competitor's acquiring a competitive edge. This poses risks of trade secret misappropriation which may, in turn, result in expensive losses and litigation.

For example, Move sued its competitor Zillow in the landmark case, Move, Inc. v. Zillow, Inc. (2016). Zillow hired two of Move's executives in a practice commonly known as "executive poaching." Move's defecting executives took with them some electronic devices containing proprietary confidential information belonging to Move. In the end, Zillow settled the case for $130 million, plus millions in legal fees.

Noncompete Agreements. One of the ways in which firms protect themselves from such risks is through noncompete agreements. Noncompete agreements aim at preventing employees from working for a competitor for a specific period after leaving the firm. Although these instruments prove crucial for the protection of confidential information, it is important to bear in mind that states across the nation enforce these agreements to varying degrees. Firms, then, must be well-informed about how the laws are applied in the jurisdiction where the firm is located.

For example, in AssuredPartners, Inc. v. Schmitt (2015), an Illinois appellate court established that a noncompete agreement that prevented a former employee from working in his professional capacity nationwide for twenty-eight months after leaving the company, was unreasonable. The court deemed unreasonable not only the length of time imposed but also the fact that it forced the former employee to work outside the country if he wanted to work in his profession.

In general, most states do not dismiss a noncompete agreement deemed as containing unreasonable terms. Some may, instead, allow a reforming, rewriting, or changing of terms to make it reasonable, or simply strike out those elements it deems unreasonable. Nevertheless, a court may still decide to invalidate an agreement.

In some cases, a firm may be able to win a remedy or injunction if they prove that their former employee would have to use trade secrets owned by his or her former employer in their new job. PepsiCo Inc. v. Redmond (1995) is such a case. The court ruled that the former PepsiCo employee's new job would inevitably require the employee to use trade secrets and affirmed an injunction that barred the employee from working for the competition for a given period of time.

Many states, on the other hand, refuse to apply such injunctions, considering barring people from working at a specific firm or trade an undue burden on an individual. A firm's best bet to protect their trade secrets from internal and external actors remains with the firm's internal strategies: policies, tools, and practices—and consistent vigilance—against unauthorized access.

Terms & Concepts

Cybersecurity: Systems, practices and technologies aimed at protecting computers, networks, and data from unauthorized access and attack.

Defend Trade Secrets Act (DTSA): Legislation signed in 2016 by President Barack H. Obama that offers federal and civil action or lawsuit for trade secret misappropriation. It protects a broad range of proprietary information that falls within the purview of financial, business, scientific, technical, and economic information.

Hackers: Individuals who use networking, computers, programming, and other technological skills to gain unauthorized access to computers or digital data, usually for illicit purposes.

Injunction: A judicial ruling or court order.

Jurisdiction: The scope of power to make judicial and legal decisions.

Noncompete Agreement: An agreement, clause, or covenant in which one party agrees not to pursue or begin a similar job or trade in competition with another party.

Nondisclosure Agreement: An agreement, clause or covenant in which one or more individuals agree not to disclose confidential, protected, or secret information.

Policies: Courses of action, strategies and/or laws adopted by an organization.

Trade Secret Misappropriation: Under the DTSA, the discovery and use of trade secrets by means that are improper or illicit. The definition of trade secret misappropriation may vary across states and jurisdictions.

Uniform Trade Secrets Act (UTSA): An act that allowed trade secret owners to bring lawsuits in state courts. There are many similarities between the UTSA and the DTSA, which was enacted later. The DTSA is considered by many as more favorable because it provides access to federal courts and property seizures for trade secret owners; it also provides some protections for those accused of trade secret theft or misappropriation.

Bibliography

Delerue, H., & Hamid, M. (2015). Who are these people? Personality traits and judgments about trade secret misappropriation in post-employment activities. Business Ethics: A European Review, 24(3), 315–331. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=103029120&site=ehost-live

Effron, R. J. (2016). Trade secrets, extraterritoriality, and jurisdiction. Wake Forest Law Review, 51(4), 765–792. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=120162651&site=ehost-live

Fertig, D. R., & Betts, M. A. (2017). The Defend Trade Secrets Act: Jurisdictional considerations—Part I. Intellectual Property & Technology Law Journal, 29(7), 3–6. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=123885086&site=ehost-live

Fertig, D. R., & Betts, M. A. (2017). The Defend Trade Secrets Act: Jurisdictional considerations—Part II. Intellectual Property & Technology Law Journal, 29(8), 12–20. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124360536&site=ehost-live

McKnew, N. M., & Bridges, E. I. (2017). I've Got a Secret ... and I'm Willing to Use It! Franchisors, Franchisees, and Trade Secrets. Licensing Journal, 37(8), 4–14. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=125340122&site=ehost-live

Mornin, J. D. (2016). What you need to know about the Defend Trade Secrets Act. Intellectual Property & Technology Law Journal, 28(9), 20–23. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=119549074&site=ehost-live

Richmond, R., Morrison, K. M., & Covarrubias, K. J. (2017). Keeping your trade secrets secret. Employee Relations Law Journal, 43(2), 26–35. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124285831&site=ehost-live

Richmond, R., Morrison, K. M., & Lim, E. (2017). What do you do when an employee with access to your company's trade secrets leaves to work for a competitor? Employee Relations Law Journal, 43(2), 36–44. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124285832&site=ehost-live

Richmond, R., Morrison, K. M., & Pilikyan, N. K. (2017). Hiring lateral employees? Consider how to minimize the risk of trade secret litigation. Employee Relations Law Journal, 43(2), 45–49. Retrieved December 10, 2017 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124285833&site=ehost-live

Suggested Reading

Castellaneta, F., Conti, R., & Kacperczyk, A. (2017). Money secrets: How does trade secret legal protection affect firm market value? Evidence from the uniform trade secret act. Strategic Management Journal, 38(4), 834–853. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=121389255&site=ehost-live

Li, Y. A., Lin, Y. G., & Zhang, L. G. (2018). Trade secrets law and corporate disclosure: Causal evidence on the proprietary cost hypothesis. Journal of Accounting Research, 56(1), 265–308. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=127968987&site=ehost-live

Saloman, M. A. (2017). US and global protections for employers to recover stolen intellectual property and trade secrets. Employment Relations Today (Wiley), 44(1), 49–55. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124417006&site=ehost-live

Schuster, J. H. (2017). Trade secret misappropriation. Business Torts Reporter, 29(10), 239–241. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124345426&site=ehost-live