Does your business have trade secrets? Many people may respond “no” to this question. One reason for this answer may be that trade secrets often are viewed as a very special type of information, such as the Coca-Cola formula, possessed by only a few companies.
In reality, nearly all businesses potentially have trade secrets. Trade secrets may, in fact, be the lifeblood of a business, representing the information that your business uses to compete successfully in the marketplace.
Secrets of the Trade?
What are trade secrets? As set forth in 18 U.S. Code § 1839(3), “the term ‘trade secret’ means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if —
(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
In other words, trade secrets may include any of your confidential information that has independent economic value. Your customer relationship management (CRM) data, operational practices and data, financial data, employee information, etc., all may be trade secrets, because that information has independent economic value.
Whether or not your business information that has independent economic value is a trade secret may depend on whether your business takes reasonable measures to protect the information. In most businesses, reasonable measures generally involve executing Non-Disclosure Agreements (NDAs) with individuals and entities with whom they engage in business, in which the parties to the NDA agree to protect the confidential information of the other party. NDAs are one of the many agreements executed by companies on a regular basis as part of the ongoing operations of the business.
Despite the seemingly low-level, day-to-day nature of these agreements and their specific intent to protect confidential information, including trade secrets, NDAs may include terms that may not meet the reasonable measures standard. As such, trade secrets disclosed pursuant to NDAs may lose their trade secret and confidential information status over time.
The most common issues encountered with NDAs and the loss of protection generally involve the term of the NDA. For many valid reasons, NDAs often include a fixed term for the agreement, e.g., two to three years, along with early termination provisions. It is not the fixed term, per se, that results in the loss of trade secret and confidential information status, but the fact that after the termination of the agreement, 1) any further information disclosed is not protected, and 2) the obligation to protect confidential information that has already been disclosed may end with the termination of the agreement or after a period of time following the termination of the agreement.
When an agreement terminates or the obligation to protect ends, it can, and has been, argued that reasonable measures are no longer being taken. As such, your business information may no longer meet the test for a trade secret or even confidential information and may be freely used by entities that have received the information for purposes that may not be in the best interests of your business.
What steps can your business take to help protect its trade secrets and other confidential information?
1. Review the NDAs that you currently have in place to make sure that the obligations to protect confidential information do not end over time, identify any other terms that may negatively impact the trade secret and confidential status of your information, and consider whether additional protections for trade secrets should be included.
2. Update your NDA for future use to remedy any deficiencies identified in step 1.
3. Execute updated NDAs to replace NDAs that you have identified as potentially deficient.
4. Begin docketing/calendaring the termination dates for your NDAs and assign a person to actively manage your NDAs.
5. Evaluate whether your business has trade secrets that have such a significant economic value that “reasonable measures” may require more than NDAs to protect the trade secret status of the information.
6. Document the measures that your business takes to protect its trade secrets and other confidential information.
By taking the above steps, your business can be well on its way to meeting the reasonable measures standard and answering the title question “yes.”
Michael Antone is an attorney with the Business and Transactional practice group at Davis, Agnor, Rapaport & Skalny LLC. He may be reached at 410-995-5800 or [email protected].