Frequently Asked Questions (and Answers) about Trade Secret
Q: What can be kept as a trade secret?
Q: What do courts consider in determining if a trade secret exists?
Q: How is a trade secret related to a patent?
Q: What does ?misappropriating? a trade secret mean?
Q: Can I sell my trade secret?
Q: Can I license my trade secret?
Q: Can more than one person have trade secret rights to the same technology?
Q: How can I protect my trade secrets from disclosure by my employees?
Question: What can be kept as a trade secret?
Answer: A trade secret is information that provides a business with a competitive advantage. The following section provides examples of circumstances where trade secret protection was approved or denied. Courts have provided trade secret protection to formulas, patterns, plans, designs, physical devices, processes, software, and ?know-how.? Examples of these trade secret categories are provided below. Please keep in mind that different courts may reach contrary conclusions concerning trade secret status with respect to what may appear to be identical matters. You may wish to consult a lawyer in your local area to obtain information on your state?s laws.
FORMULA:
A formula (i.e., a recipe that allows one to create a product) can be a trade secret. One of the most familiar examples of a trade secret formula is the Coca-Cola formula. This formula gives the Coca-Cola Company a significant business advantage in the soda market, as there is no other soda that tastes the same. The Coca-Cola Company has put numerous security measures in place to keep its formula a secret. In fact, the Coca Cola Company ensures that no one knows every step of the formula!
Other common formulas found to be trade secrets in the food, drug, and cosmetics industry include formulas for butter flavoring, cheese, breakfast cereal, seasoning for fried chicken, special diet rations for dogs, mixed alcoholic beverages, lipstick, and hair conditioner. On the other hand, formulas for a lemon-flavored soft drink, recipes and cooking procedures for common dishes such as BBQ chicken and bakery goods were all denied trade secret protection.
PATTERNS, PLANS, & DESIGNS
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A pattern, plan or design can be a trade secret. For example, courts have found the following to be trade secrets: circuitry for an advanced minicomputer, color TV circuitry, schematics for an analog circuit, plans and specifications for gears and rollers of a photo-processing machine, plans for drilling equipment, plans and designs for a veneer dryer, molds for the manufacture of street markers, and a design for a grating.
PHYSICAL DEVICE
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A physical device used in manufacturing can be a trade secret. Examples of these devices found to be trade secrets include: a device for manufacturing radio parts, machinery and equipment used to manufacture polyethylene, machinery and equipment used to manufacture saw grade diamonds, a computer tool used to service microprocessor-based elevators, a tool for making a pressure-sensing mechanism, a machine for inking carbon paper and ribbons, and an adhesive-tape machine.
PROCESS
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A process, method or technique used to make the final end product can also be a trade secret. The following is an example of using a process as a trade secret: Suppose you work at a hair salon and when a customer wants you to dye his or her hair, you use a hair dye formula that is pre-bottled. However, you have also developed your own unique process in applying the formula to hair so that the hair color stays longer. Because your process gives you a competitive business advantage, you may obtain trade secret protection of your dye process.
Other examples of processes found to be trade secrets include: a process to manufacture foam crash pads, a process to treat metal, a process to manufacture fiberglass, a method and procedure to manufacture epoxy resin rods, a process to manufacture potassium sulfate, and a process for an environmentally sound method to manufacture coated paper.
Keep in mind that processes and methods incident with a patent may still constitute a trade secret. See below for more information on patents and trade secrets.
?KNOW-HOW?
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"Know-how" can be a trade secret. A method or technique in some cases might fall into the ?process? category, but many methods and techniques can be better described as ?know-how" (i.e., information and experiential expertise related to using formulas or processes.) When asserting methods and techniques in this category, however, one must be very specific in describing the method or technique. Examples of trade secrets in this area include: know-how pertaining to the construction of plant chemicals, methods for testing procedures to assure the quality of raw material, know-how to ascertain whether CAT scanning equipment and components are operating according to specifications and to identify malfunctions, and methods to manufacture typewriters.
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Question: What do courts consider in determining if a trade secret exists?
Answer: Courts usually consider the following three factors in determining whether you have a trade secret:
(1) Is the information deemed to be a "trade secret" valuable to the business?
Only secret information can be protected by trade secret law. Secrecy is typically determined by evaluating whether or not the information is "generally known" or "readily ascertainable." If the information is secret, you must consider whether the secret information is valuable to your business. How would you rank its value? Courts tend to find that the information is a trade secret if the information is so valuable as to significantly impact the operations of a business.
(2) What steps have been taken to keep the information secret?
Trade secret laws require that you have taken some action to keep your information a secret. The security procedure taken to protect the information is often the most important evidence that the information constitutes a trade secret. For example, courts have often found that restricting access (on a "need to know" basis) to any sensitive information is a factor that helps to meet this requirement. Courts have also found that physical security, such as keeping written trade secret information in a locked drawer and granting very limited access to it, can meet this requirement. Generally, holders of trade secrets develop a formal system for safeguarding their trade secret information. Such a system can include, for example, reviewing information to be sure that the secret information is not included in documents sent to customers and competitors. In addition, proprietary notices can be placed on all documents containing information related to trade secrets and strict confidentiality provisions can be written into all consulting, manufacturing, employment, and/or non-disclosure agreements.
(3) To what extent do employees and others involved in the business know about the information? What about people outside the business?
The extent that those in your business and those outside the business have access to the information can affect a court's decision as to whether you have a legal trade secret. Generally, courts have found the information to be public knowledge and not a trade secret if people who do not have a need to know the information have access to it. This is especially true if many people outside the company are familiar with the information.
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Question: How is a trade secret related to a patent?
Answer: Both trade secrets and patents are forms of intellectual property that can be used to protect innovations. Generally, the subject matter that can be protected by trade secrets is broader than that which can be protected by patents. Trade secret protection is available for both technical information and information that does not relate to technical innovations. Non-technical information for which trade secret protection can exist includes: business and marketing plans, and customer lists. Patent protection is generally available for technical innovations, including a new and useful process, machine, manufacture or composition of matter. Software and software-implemented business methods have the potential of being protected by both patents and trade secrets.
One of the differences between patent protection and trade secret protection is that patent protection requires the protected information become available to the public (through publication of the patent application and/or patent), whereas trade secret protection requires the protected information be kept secret. Therefore, if you patent a trade secret, once the application or patent is published, it will no longer be protected by trade secret laws. Accordingly, you have to choose between either patent protection or trade secret protection.
Another significant difference is that patent protection can provide a broader scope and stronger form of protection. For example, unlike trade secrets, patents can be enforced against someone who independently develops or "reverse engineers" an invention. Also, because patents are published and are made public, they also provide "defensive" protection - by being prior art so that someone else can't obtain patent rights in the invention.
A trade secret has it's own advantages. One significant advantage is that the term of protection for a trade secret has the potential to last forever - as long as the invention is kept a secret - whereas patents are only protected for a limited number of years (20 years from filing). Also, trade secrets can be less expensive to protect and to enforce.
In sum, the selection between patent protection and trade secret protection requires careful consideration of several factors. In particular, it is important to consider the nature of the subject matter being protected. Questions relevant to this decision include: Can it be independently developed?; can it be reverse engineered?; can it be maintained as a secret?; how long will the subject matter have market value?; and does the market value support investment in patent protection/enforcement?
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Question: What does ?misappropriating? a trade secret mean?
Answer: One has ??misappropriated? a trade secret if he or she has acquired, disclosed, or used the trade secret information without the permission of the holder, where such activities were done through improper means (e.g., the trade secret information was stolen from the holder) or in breach of an obligation of confidentiality or non-use. If you have received a letter stating that you have ?misappropriated? a trade secret (see SAMPLE LETTERS; also see TRADE SECRET LAWS), you should consult with an attorney.
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Question: Can I sell my trade secret?
Answer: Yes, trade secrets are property rights. As such, you can sell (i.e., assign) your trade secret to someone else. Please note, however, that courts generally prefer agreements to be in writing. You may wish to consult a lawyer in your local area to assist with writing an agreement that states the terms of the purchase.
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Question: Can I license my trade secret?
Answer: Trade secrets are property right. As such, if you have a trade secret, you can license (i.e., lease) your trade secret to others. In legal terms, the money you receive from the license is often referred to as a ?royalty.?
A license permits the holder of the trade secret to impose conditions on how the information is used and under what circumstances. In addition, a license may be subject to cancellation in the event that there are changes in the licensee's management or credit position.
Courts have found that a party who receives trade secret information through a license agreement has received such information lawfully. If the party uses the trade secret beyond what is agreed to in the license, trade secret law may not necessarily apply to the dispute. Instead, contract or tort law may govern the situation.
Should you decide to license your trade secret, you may wish to consult a lawyer in your local area.
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Question: Can more than one person have trade secret rights to the same technology?
Answer: Yes, two (or more) individuals or entities can claim rights to the same trade secret on the same technology if both independently developed that technology and both keep it a secret, as long as the technology is not "generally known."
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Question: How can I protect my trade secrets from disclosure by my employees?
Answer: There are two types of legal contracts that are widely used to help businesses protect trade secrets: (1) non-disclosure agreements; and (2) non-compete agreements. Often, these agreements are included as part of an "employee agreement' that is signed upon commencement of employment.
(1) NON-DISCLOSURE AGREEMENTS (NDAs)
During the course of business, you may have to disclose your business secrets to your employees. What happens when you have a disloyal, untrustworthy, or dishonest employee and that employee knows your secrets? Is there anything you can do to stop the employee from telling others?
A non-disclosure agreement (NDA) is a confidentiality agreement that can be used to protect trade secrets. Often, during the regular course of business, your secret information may be disclosed to employees or business partners. An NDA requires that the information be kept a secret. The provisions of the agreement require the person to keep the information confidential. If someone has signed an NDA and uses your trade secret without your authorization, you can sue for damages and stop the violator.
(2) NON-COMPETE AGREEMENTS
During the regular course of business, you may have to disclose your business secrets to your employees. But what happens when these employees leave your company? By requiring your employees to sign a non-compete agreement, employees must agree not to work for a direct competitor for a certain amount of time after leaving your company. The theory behind this type of agreement is that after a certain amount of time, your trade secret will no longer be valuable because of technological changes as your business advances, and, accordingly, the technology will no longer need to be protected as a trade secret.
It is important to be aware that courts use a "rule of reason" in deciding whether a noncompete agreement is legal. In other words, the terms of a non-compete agreement must be reasonable as to the duration, territory, and scope of the activity. A restraint is generally enforceable if it is fairly designed to protect the employer?s trade secrets. For example, a one-year restriction is generally acceptable.
There are restrictions imposed on enforcing non-compete agreements against employees and some jurisdictions have even barred them. For example, California has state laws that heavily restrict, and in some cases, completely bar, non-compete agreements. California does not apply a rule of reason in evaluating an agreement that prevents an individual from pursuing any lawful occupation, but instead, requires that the trade secret holder prove that the non-compete agreement is absolutely necessary to protect its trade secrets.
You may wish to consult a lawyer in your local area if you have questions about either of these agreements or your state?s laws.
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Maintained by Santa Clara University School of Law High Tech Law Institute
