Trade Secrets: Uncommon Aspect of Intellectual Property

Yemisi Falaye's article on Trade Secrets gives an interesting overview of its essential elements, while also making comparisons between Trade Secrets and Patents

"COMPANIES OFTEN TRY TO DISCOVER ONE ANOTHER’S TRADE SECRETS THROUGH LAWFUL METHODS SUCH AS REVERSE ENGINEERING ON THE ONE HAND, AND LESS LAWFUL METHODS OF INDUSTRIAL ESPIONAGE ON THE OTHER HAND. ACTS OF INDUSTRIAL ESPIONAGE ARE GENERALLY ILLEGAL. THE IMPORTANCE OF THAT ILLEGALITY TO TRADE SECRET LAW IS AS FOLLOWS: IF A TRADE SECRET IS ACQUIRED BY IMPROPER MEANS, THE SAME IS GENERALLY DEEMED TO HAVE BEEN MISAPPROPRIATED"

Trade secrets are a very important part of any intellectual property portfolio. Virtually every business has trade secrets worthy of protection, regardless of its size. However, many companies, even large companies, fail to do so properly. There are two reasons why it can be said that trade secrets can be obtained by any business. Firstly, trade secret protection can exist for virtually any business information, and secondly, it is extremely easy to obtain. This is because all the law requires is that you take reasonable precautions to keep the information secret. What will be regarded as reasonable will depend on the value of the business information.

Universally, the accepted fact is that to be protected as a trade secret, the subject-matter must be kept secret, although this will depend on how the term is construed. The factors which determine whether something is a trade secret include, the extent to which the information is known outside the business, the extent it is known by the employees, the value in having the information as against competitors and the time and expense it would take others to duplicate the information.

Definition

A Trade Secret is a formula, practice, process, design, instrument, pattern or compilation of information used by a business to obtain an advantage over competitors or customers. It is an item of information that has commercial value, which the firm possessing such information wants to conceal from its competitors, to prevent them from duplicating it.

A company can protect its confidential information through non-disclosure contracts with its employees, within the constraints of employment law. The law of protection of confidential information effectively allows a perpetual monopoly in secret information - it does not expire as a patent would. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.

A company typically invests time and energy into generating information, regarding refinements of process and operation. If competitors had access to the same knowledge, the first company’s ability to maintain its market dominance would be impaired. Where trade secrets are recognised, the creator of knowledge regarded as a ‘trade secret’ is entitled to regard such ‘special knowledge’ as intellectual property.

Protecting Trade Secrets

Trade secrets are not disclosed. Instead, owners of trade secrets seek to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means. In exchange for the opportunity to be employed by the holder of secrets, a worker will sign an agreement not to reveal his prospective employer’s proprietary information. Often, he will also sign over rights to the ownership of his own intellectual production during his employment. Violation of this agreement generally carries stiff financial penalties, agreed in writing by the worker and designed to operate as a disincentive to going back on his word.

A point to note is that trade secret protection can, in principle, extend indefinitely and in this may offer an advantage over patent protection, which lasts only for a specifically limited period (twenty years). A classic trade secret example is the U.S Coca-Cola, which has no patent for its formula and has been very effective in protecting it for many years more than a patent would have. As a matter of fact, Coca-Cola refused to reveal its trade secrets under at least two U.S judges’ orders. Another famous example is Colonel Sander’s recipe for Kentucky Fried Chicken. The recipe, till date, is not publicly known.

However, the down side of such protection is that it is comparatively easy to lose and comes with no minimum guaranteed period of years. As soon as the trade secret is no longer a secret you have lost all protection! Trade secrets are indeed fragile. This means that while you can and should keep secrets and take reasonable efforts to keep the information protected, if other forms of intellectual property are available, they should be considered.

There are at least three types of contracts that are typically used to help businesses protect trade secrets, as follows:

1) Confidential/Non Disclosure Agreements:

A confidential or nondisclosure agreement (NDA) is a contract that can be used to protect trade secrets. An NDA requires that trade secret information disclosed to an employee during business be kept secret, for example, by requiring the employee to keep the information confidential. If a person has signed an NDA and uses the trade secret without authorisation, the employer may sue for damages and stop the unauthorised use.

2) Covenants Not To Compete:

It is also referred to as Non- Compete Agreement (‘NCA’). Such covenants, protect trade secrets when an employee leaves the business. By requiring an employee to sign an NCA, the employee must agree not to work for a direct competitor for a certain period after leaving the first company. The theory behind this type of agreement is that the value of that trade secret will depreciate with time, therefore limiting the competitor’s access to the trade secret while the value is highest to the business.

3) Invention Assignment Contract (‘IAC’):

Although, it is often deemed that trade secrets developed within the scope of employment belong to the employer, having the relation memorialised by an IAC clarifies trade secret rights, and makes both the employee and employer aware what information belongs to the employer.

Remedies Against Theft of Trade Secrets

A variety of civil remedies are available for protecting against the theft of trade secrets. Most jurisdictions provide for some form of preliminary and perpetual injunction to further disclosure and use of the trade secret information.

Most jurisdictions also provide for recovery of actual damages incurred by the trade secret owner, because of the misappropriation. These damages could include the loss of profits to the trade secret owner, the gain enjoyed by the trade secret thief, or a reasonable royalty.

Using explicit contractual measures to protect one’s trade secrets, is undoubtedly not a bad idea. The above agreements are good evidence that security measures have been taken to protect trade secrets, and make the employee aware that confidentiality is expected, and that there will be consequences if the trade secrets are improperly disclosed.

However, one should be aware that such agreements have limits, as described above, and the best way to protect trade secrets from leaving a business may be to ensure that only limited persons have access to critical trade secret information; and bolster loyalty with these employees by keeping them happy, preventing employee turn over and subsequently limiting the transfer of trade secrets to competitors.

In line with the above, it is worthy to note that trade secrets per se cannot be legally protected, as they are secrets; what will be enforceable are the consequential effects of breach of trust or legal contracts. Legal protection of trade secrets can be derived from many diverse sources of law such as laws of contract and tort, criminal law and the laws governing employee/employer relations, equitable doctrine of breach of confidentiality and fiduciary obligations. The amorphous nature of trade secrets law often presents a challenge in its enforcement.

Discovering Trade Secrets: Industrial Espionage

Companies often try to discover one another’s trade secrets through lawful methods such as reverse engineering on the one hand, and less lawful methods of industrial espionage on the other hand. Acts of industrial espionage are generally illegal. The importance of that illegality to trade secret law is as follows: if a trade secret is acquired by improper means, the same is generally deemed to have been misappropriated. Thus, if a trade secret is acquired via industrial espionage, its acquirer will probably be subject to legal liability for it improperly. Nevertheless, a trade secret holder is obliged to protect against such espionage to some degree to safeguard the secret. As noted above, under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.

Keeping Trade Secrets Under Wraps

Trade secrets is just as dynamic as one’s business and should therefore be effectively protected. Reasonable measures should be taken to protect the secrecy of one’s trade secret. Below are tips (courtesy of James Ewing, Michel Morency and Sharon Elliot, of the law offices of Foley & Lardner LLP) on how this can be achieved:

• Control who has access to such information and how the information is stored, labeled and maintained. The level of burden on an organisation to safeguard the secrecy of its trade secrets, depends both on the nature of information as well as the size and sophistication of the business.

• Develop confidentiality policies and educate staff on the importance of trade secrets, their management and professional consequences if they do not keep them confidential.

• Implement creative barriers to protect trade secrets, for example, split a job into parts, so that no single employee or division or supplier knows all the parts of a trade secret.

• Teach employees to watch out for signs of corporate espionage and provide a mechanism to report irregularities.

• Secure the physical premises as well as computers of your business, and restrict both employees and visitors to areas where trade secrets are kept.

• Legally monitor business-related channels of communication.

• Conduct checks to ensure compliance with corporate policies relating to confidential information.

• Most importantly, conduct exit interviews with departing employees, secure the return of all information and electronic equipment, and remind them of their obligation to maintain the confidentiality of your trade secrets.

• Finally, control and protection of the trade secrets which make the business unique among other competitors, is an essential investment in business growth and sustainability in the marketplace.