Trade Secrets

Under the Uniform Trade Secrets Act (“UTSA”), a trade secret is defined as information that derives independent economic value because it is not generally known or readily ascertainable, and it is the subject of efforts to maintain secrecy. Unlike copyrights, patents, and trademarks, trade secrets are not registered with a government agency. However, in some cases, they can represent a company’s most valuable intellectual property assets.

The UTSA has been enacted by most states, but in states where it has not been enacted, infringement or “misappropriation” of a trade secret remains a common law tort. Common issues involving trade secrets are:

  • Nondisclosure Agreements
  • Noncompete Agreements
  • Infringement
  • Enforcement

Trade secrets are easily misappropriated. Often, they consist of information that can be memorized or noted down by employees, customers, developers, suppliers, and others. The more people know a trade secret in an economy where employee turnover is high, the harder it is to keep the information secret. If a competitor, journalist, or blogger gets hold of the trade secret, the information may be put to use immediately. Once a trade secret becomes public, its status as a trade secret may be lost.

Examples of Trade Secrets

Information that can be kept as a trade secret includes formulas, patterns, compilations, programs, devices, methods, techniques, or processes. Some examples of trade secrets include customer lists and manufacturing processes. The economic value of the information can be actual or potential. For example, if you have not actually started producing a particular useful device according to a blueprint, you can still protect the blueprint as a trade secret on the basis that it has the potential for economic value.

Sometimes the information that is protected as a trade secret may also be protectable as an invention under a patent. However, in order to obtain a patent, you must make a public disclosure of how an invention can be reproduced. Patent protection is a limited monopoly for a specific time, whereas trade secret protection continues until the trade secret is publicly disclosed. The same invention cannot receive patent and trade secret protection at the same time.

What Do You Need to Prove in a Trade Secret Claim?

In most states, in order to prove a trade secret claim, you will need to prove that:

  • The subject matter at issue is a trade secret;
  • You made reasonable efforts to prevent the trade secret from being disclosed; and
  • Somebody else misappropriated the information.

There are two types of illegal appropriation of a trade secret. It may be acquired improperly, or it may involve a breach of confidence. A competitor can lawfully use independent discovery, acquire a trade secret through an accidental disclosure based on the trade secret owner’s failure to reasonably guard the secret, or use reverse engineering.  

Some companies wonder what the court considers “reasonable” efforts to guard trade secrets. In general, disclosure of trade secrets should be limited to a need-to-know basis. Anyone to whom the trade secret must be disclosed should have to sign a nondisclosure agreement, and when possible, a noncompete agreement. These agreements can include clauses that restrain employees from working on confidential information from their home computers. Any documents or items that contain trade secrets should be conspicuously marked “confidential.” The policy regarding trade secrets should be clearly articulated in the company handbook, and measures should be taken to restrict access to the trade secrets, such as by issuing employee badges or installing locks and passwords.

Since no government entity monitors trade secrets, enforcement of trade secrets is largely a matter of policing by private companies that can afford to do so. However, in the case of intentional theft of trade secrets, the federal Economic Espionage Act of 1996 and some state laws provide criminal penalties. Misappropriation of trade secrets is also a form of unfair competition.