Trade Secrets and How to Protect Them

Trade Secrets and How to Protect Them

Trade Secrets and How to Protect Them

A trade secret is a type of intellectual property distinguished from three others, namely copyrights, trademarks, and patents.

Advantages of a Trade Secret

  1. No time limit like patents and copyrights
  2. No requirement for public disclosure
  3. No requirement to file with the government

Trade secrets bring value to the company because they are not known to others, particularly competitors, in your market place. To maintain trade secrets, you must make reasonable efforts to protect them. You should have a program for maintaining secrecy, including:

  1. A provision in your employee handbook requiring employees to refrain from disclosing trade secrets
  2. Physical access controls
  3. Passwords
  4. Sign-in sheets
  5. Confidentiality rubber stamps
  6. Non-disclosure agreements with staff and employees as well as potential joint business ventures

Trade secrets can include:

  • Technical or nontechnical data
  • Formulas
  • Compilations
  • Programs
  • Devices
  • Drawings
  • Processes
  • Financial data
  • Price lists
  • Business and marketing plans
  • Software codes
  • Manufacturing techniques and other methods
  • Customer or prospective customer lists
  • The last one is a huge issue, especially when employees leave with a list of customers with the intention to set up a competing practice.
  • Customer lists can’t be considered trade secrets if they are simply copied from the yellow pages. They must be developed. They often evolve over time and include critical info, e.g., the contact person, the nature of the company, etc.
  • Disparate elements — you can have various formulas, none of which is a trade secret in itself, but when brought together, they can be part of a formula that does constitute a trade secret.
  • The economic value of a trade secret can be actual or potential. The Google algorithm is an example of what was at one time a potential trade secret. The algorithm was developed by students while in college. Although they had developed a method to search the internet, they had no idea at that time how to turn it into a business. Had someone had stolen their algorithm, it would have been protected as a potentially valuable trade secret.

Governing Law:

Historically, trade secrets were the subject of common law, which looks at:

  1. Extent known outside the company or by employees. The more widely known, the less likely it is to be a trade secret.
  2. Measures taken to guard secrecy
  3. Value to company and competitors
  4. Time, effort, money, and difficulty to develop. However, courts today are giving less weight to these if the idea is a good one and conveyed in secrecy.

Uniform Trade Secrets Act — Adopted by 47 states. Misappropriation occurs when a trade secret is acquired by improper means or comes into your possession and you knew it was a secret, e.g., information provided by a new employee.

Federal Economic Espionage Act — U.S can prosecute as a criminal act. The concern is the outflow of business information.

Some famous trade secrets:

Formula for Coca Cola

Recipe for Kentucky Fried Chicken

Formula for Smith’s Cough Drops

Formula for WD-40

Google algorithm

Remedies:

Injunction — For example, when an employee leaves the company with valuable trade secrets and joins a competitor, the company may be able to obtain an injunction to prevent him or her from disclosing them.

Compensatory damages — These are actual damages to the complaining party. Liquidated damages may be provided for in the non-disclosure agreement.

Punitive damages — If there is willful misappropriation, there may be a doubling or tripling of the amount of actual damages.

 

We hope you found this article about “Trade Secrets and How to Protect Them” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

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Alan Olsen, CPA

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

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