trade secrets

Identifying and Protecting Trade Secrets for Young Companies

Latest posts by Curtis Capeling and G. Scott Thomas (see all)

The “secret sauce” that makes a startup unique and profitable can be among its most important competitive advantages through each stage of its existence. Understanding what your business’ trade secrets are and how to protect them can be particularly vital in the dog-eat-dog world of entrepreneurship. This following aims to offer clarity and actionable strategies to better ensure that your valuable secrets stay safe.

What is a trade secret?

Generally, it’s any kind of information that you take reasonable steps to keep secret, and that gives you a commercial advantage.

For example, the formula for Coca-Cola is a trade secret. Software algorithms and business methods can be trade secrets. Even negative information, such as methods or alternatives that you explored and found useless, can be a trade secret.

Why should I care?

Trade secrets are valuable intellectual property. For example, Alphabet Inc. is suing Uber for around $2.6 billion for allegedly stealing trade secrets about self-driving cars.

If you plan to attract investors or eventually sell your business, material trade secrets can increase your valuation. Conversely, failure to preserve trade secrets that are a basis for your revenues can impair your valuation.

Related: Trademark Infringement and How to Avoid It

Why not get a patent instead?

Many valuable trade secrets are not patentable due to their nature. Sometimes trade secrets relate to inventions that could be patented, but obtaining a patent can be expensive, and sometimes there are ways around a patent.

Advantages of trade secrets include:

  • They last as long you keep them secret (in general, patents last for 20 years).
  • No formalities or registration are required to create a trade secret.

Disadvantages of trade secrets, especially if a patent is an alternative, include:

  • If someone discovers a trade secret like yours on their own (or discovers your trade secret through proper means), you can’t stop him or her from using it. Also, once a secret is made public, anyone may freely use it. On the other hand, a patent gives you the right to exclude others from commercializing your invention.
  • The proof required to enforce a trade secret can be more difficult to obtain or provide than a patent. Also, trade secret protection generally varies more from country to country than the protection granted by a patent.

If you have to decide between a trade secret and a patent, make sure you talk to knowledgeable counsel.

How can I protect my trade secret?

Use common sense. First, carefully identify your trade secrets. Include any secret information you use to run your business that gives you a meaningful advantage over your competition.

Then, set up policies to protect your trade secrets. Balance the value of a secret against the cost of measures needed to protect it. Think about steps a competitor might take to learn a secret, and thwart them. Employee leaks are the biggest risk to your trade secrets.

Protections can include:

  • Require all of your personnel and business partners (including potential investors and M&A participants) to sign a confidentiality agreement that protects your trade secrets. If you can’t, then don’t disclose any trade secrets. When your personnel sign confidentiality agreements, get an attorney to help you. The Defend Trade Secrets Act requires a notice to potential whistleblowers. If you don’t provide the notice, you likely cannot recover punitive damages or attorneys’ fees that may otherwise be available.
  • Collect all confidential materials from terminated or departing personnel, and remind them of their confidentiality obligations.
  • Protect your network from unauthorized access, and restrict access to trade secrets. Encrypt and password-protect trade secrets.
  • Establish physical security. Lock up your secrets and allow only “need to know” access.
  • Label documents and materials that contain or reflect trade secrets as “confidential.” Prohibit circulation of these materials and require they be checked in and out.
  • If you conduct business internationally, remember that not all countries protect trade secrets or protect them well. Check with knowledgeable counsel before disclosing sensitive information to anyone outside of the United States.

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Someone stole my trade secret. Now what?

State and federal law in the U.S. protect trade secrets. Almost all states have adopted a form of the Uniform Trade Secrets Act, and the federal Defend Trade Secrets Act of 2016 strengthens U.S. trade secret protection.

If your secret is publicly disclosed, it may lose all value as a trade secret. So, if someone steals your trade secret, immediately ask your lawyer about going to court for a restraining order or injunctive relief to prevent further use or dissemination of your trade secret. Under the federal Defend Trade Secrets Act of 2016, in egregious cases a court may order the seizure of property necessary to prevent the propagation or dissemination of your trade secret, without advance notice to the person who stole your trade secret.

Remedies a court may award you if someone steals your trade secret include:

  • A court order prohibiting use or disclosure of your trade secret
  • Damages for your actual loss and for unjust enrichment or a reasonable royalty
  • Exemplary damages for willful or malicious misappropriation
  • Attorneys’ fees for willful and malicious misappropriation

Intentional theft of trade secrets is a crime under federal and some state law. Under the federal Economic Espionage Act of 1996, the U.S. Attorney General may prosecute a person who steals a trade secret. Trade secret misappropriation is also a crime in several states. For example, the unauthorized acquisition, disclosure or use of trade secrets can be a crime in California.

On the international front, most (but not all) countries are members of the World Trade Organization (WTO) and party to the Agreement on Trade Related Aspects of Intellectual Property Rights. Each WTO member country is required to provide legal protection to trade secrets.

If someone steals your trade secret and uses it outside the U.S., the International Trade Commission may block imports of products made using your trade secret if it finds “[u]nfair methods of competition and unfair acts in the importation of [those] articles.” A federal court decided that a product manufactured outside the U.S. using a trade secret stolen from a U.S. business may be barred from import into the U.S, even though the trade secret was stolen outside of the U.S.

Trade secrets give you a competitive advantage and increase the value of your business. Take reasonable steps to protect them, and you will reap the rewards.

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