by Mark Grossman

How to Guard Your Trade Secrets (and Why You Must)

Jan 29, 20096 mins
IT LeadershipPrivacyRisk Management

Trade secrets are key to the survival of any business, but if you aren't careful, modern technologies like BlackBerrys and USB drives (or loose lips) can help them walk right out the door--and without a well-written contract, you may have little legal recourse.

In the connected world that is 2009, almost every company has a trade secret that it wants to keep. Between BlackBerrys, home e-mail accounts, and USB ports that can write gigs of data to a flash drive, it’s only getting harder to protect your trade secrets. If you aren’t careful, your trade secrets can walk right out the door—and without a well-written contract, you may have little legal recourse.

If you are a start-up, your hoped-for million dollar valuation is tied to your trade secrets. If you are an established business, you may have and continue to develop trade secrets, which likewise may be quite valuable to you. For any business, maintaining trade secrets requires a combination of common sense and good lawyering.

Exactly What Is a Trade Secret?

There’s no single precise legal definition of a trade secret. Each state has its own unique take on this area of the law. One generally accepted definition comes from the Uniform Trade Secret Act. “Trade secret means information, including a formula, pattern, compilation, program, device, method, technique or process, that:

  1. derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
  2. is the subject of efforts that are reasonable under the circumstance to maintain its secrecy.”

If you think you have a trade secret, a court will look at many factors in determining whether it agrees with you. For example, how widely known is the information outside of your business. How many people know your secret? What security measures have you used to maintain secrecy? How valuable is the information to you and your competitors? How much effort and money have you used to develop the secret? How hard would it be for a competitor to duplicate your information using proper methods?

Sloppy Contracts

Once a trade secret is generally known, you can’t claim it as a trade secret ever again. You just can’t put the cat back in the bag. Having said that, you usually need to tell at least some people your secret so that they can use it for your benefit. When you do reveal your trade secret to someone, it’s essential that you have an appropriate non-disclosure agreement in place before you do so.

Often, a provision requiring that a person not reveal trade secrets is part of a larger agreement. Typically, these agreements include non-competition provisions and provisions about maintaining the confidentiality of proprietary information, which may not be a true trade secret.

Therefore, what you have are three related, but different concepts in these agreements. They are non-disclosure of trade secrets, non-disclosure of proprietary information that doesn’t have trade secret status, and non-competition. It can be dangerous to mix them together. It’s a stew that may not work.

On the one hand, you have trade secrets. The law is clear. If you give someone implicit or explicit permission to reveal your trade secret, you lose your ability to protect your trade secret. The agreement not to reveal your trade secrets must explicitly be an obligation that lasts forever.

On the other hand, you have non-competition. The law is different in this area than with trade secrets. With non-competition, forever is generally improper. The law doesn’t favor long-term obligations not to compete. The public policy underlying this is that you don’t want to allow an agreement to unduly restrict a person’s ability to work.

Further, non-competition agreements have to be limited to a “reasonable” geographic scope and to a limited period.

In the middle of this stew, you have a general obligation to maintain your confidential information, which information doesn’t rise to the level of a true trade secret. Here, the law allows you wide latitude to negotiate an agreement. You can agree to have the agreement expire after some reasonable period without any legal penalty like losing the trade secret status of your information.

The danger lies with sloppy drafting. I’ve seen agreements that take these three concepts and lump them together. You can’t do that.

The obligation to maintain trade secrets must be forever. The obligation not to compete must end. You can do generally whatever you want with proprietary information that isn’t a trade secret. If your agreement gets this wrong, you have a problem.

I’m not suggesting that you shouldn’t have these three types of provisions in one agreement. They naturally fit together. I’m just suggesting that it be drafted carefully with a sensitivity to the differing legal standards that govern each part of the agreement.

If You Don’t Have an Agreement

While there can be no doubt that it’s always a good idea to have a good agreement in place, sometimes trade secrets may be revealed without an agreement in place. That’s bad. That’s always bad, but it’s not necessarily a complete disaster.

In some circumstances, the law will protect a trade secret that’s revealed without the benefit of a written agreement in place.

One situation would be where there was an express promise of confidentiality before disclosure. The problem here is likely to be a proof problem: You don’t want your trade secret to depend on one person’s word against another.

Another situation in which the law might offer protection is if the trade secret was disclosed in a situation where the person knew or had reason to know that confidentiality was expected. Even then, the person learning the information must have agreed to an obligation of confidentiality.

Employees also have an inherent duty to maintain trade secrets, but don’t depend on an implied duty. You should have an agreement in place.

Protective Measures

If you have trade secrets to protect, you should have a plan and procedures for maintaining your secret:

  • Have every employee, consultant, and contractor signing an appropriate non-disclosure agreement.
  • Your internal procedures should require that every confidential document be prominently marked as “confidential.” Be selective though. It’s counterproductive to mark things like today’s lunch order as confidential.
  • Shred documents when you must destroy them. Confidential computer files should likewise be wiped not deleted.
  • Place appropriate proprietary notices on all the material that your company distributes.
  • Restrict access to confidential information to those who truly have a need to know. You should work under the assumption that most people feel the need to share a secret with one person. Keep your secrets under wraps. Lock your confidential information in a secure filing cabinet in a secure room. If your information is digital, encrypt it. Think about where you have your photocopying machines and scanners. Put them as far as possible from your confidential files.

These are just examples of steps you can take to preserve your secrets. Remember that once proprietary information loses its trade secret status, you can never get it back again. Be careful.

Mark Grossman is a tech lawyer, business advisor, and negotiator. He is the founder of the Grossman Law Group with offices in Manhattan and South Florida.