Trade secrets may be the least understood form of intellectual property. As a result, they tend to get the least attention, even in businesses that may otherwise aggressively protect their patentable inventions, trademarks, and copyrights. Often, trade secrets are not even recognized as such, so that their worth and significance may be overlooked entirely. Yet trade secrets, properly maintained, can be valuable properties and important business assets. For everyone involved in a business of any kind, there are distinct advantages to identifying and properly maintaining trade secrets, and Bohan Mathers has the experience and ability to help you identify and protect your trade secrets maintain their value.
In the United States, Trade Secrets differ from other intellectual property in that the law governing the protection of them is primarily a matter for the individual states. Patents and copyrights are strictly federal matters, and notwithstanding state trademark laws and registries, trademarks used in interstate commerce are protected and regulated by federal law, but until this year there was no federal protection against theft, misappropriation, and misuse of trade secrets. The Defend Trade Secrets Act of 2016 (U.S.C. Title 18, Chapter 90, Protection of Trade Secrets) does not automatically supercede the trade secrets laws of the various states, however. The federal law applies spefically to misappropriation of trade secrets to foreign goverments and agencies and also to trade secrets related to goods and/or services traded in interstate or foreign commerce.
Primary state governance combined with the possibility of federal governance of an area of law can carry the threat of confusion and conflict from locale to locale. But although there are differences among the various states and federal law regarding trade secret protection, this protection is largely based on the Uniform Trade Secrets Act (UTSA) promulgated by the National Conference Of Commissioners On Uniform State Laws. The UTSA is currently enacted in one form or another by 47 states and the Disctric of Columbia and served as the model for the federal statute.
So what is a trade secret?
In spite of the differences in law among the states and federal law, a trade secret is generally agreed to be any concrete information or knowledge that is used in a business, that is not generally known or readily ascertainable by proper means outside of the business, that has direct economic value or provides commercial or competitive advantage to the business, and that is the subject of reasonable efforts to maintain its secrecy.
Consistent with all other intellectual property, trade secrets are not mere ideas, but rather are things that exist. A key concept is that a trade secret is something that is used in a business and results in an economic or competitive advantage over other businesses. To be used, and so to produce a result, the information or knowledge must be in the concrete form of “a formula, pattern, compilation, program, device, method, technique, or process.” (Quoted from the Uniform Trade Secrets Act currently adopted by 47 U.S. states and the District of Columbia.) Ideas may exist only in the mind, or in vague or general descriptions; information or knowledge that is concrete, useful, and effective, and requires research, development, testing, and practice.
It is important to note that information alone, such as the location of a productive fishing ground, can constitute a trade secret if it is used to advantage in a business. Also, negative information — that is, information about what doesn’t work — is still information, and when some commercial value or competitive advantage is realized from its use in a business — for example, to avoid the wasteful expense of unproductive or inferior activities — such information can be held as a trade secret.
“Not Generally Known”
Misunderstanding of the requirement that a trade secret is something “not generally known” to others is probably at the root of most cases of businesses failing to properly identify and protect their trade secrets. It seems logical to conclude that, for example, since everyone knows how to make a baseball cap — attach a visor of well-known shape to a crown of well-known shape and dimensions — then nothing could be secret about it, but that would be a wrong conclusion.
An analogy often made by courts in analyzing whether something is a trade secret is that of a recipe, and that analogy reveals much about what a trade secret may be. For example, almost everyone knows, or could easily find out, how to make lasagna, some better than others. However, when you serve yours in your restaurant, or package it for sale in food stores, and something you do in the making of it results in your earning more profit per serving, or in more customers demanding yours than that of your competitors, then some or all of your recipe is your trade secret. The particular concrete knowledge and information that make up a trade secret is separate from the general knowledge about products and methods in the area of business to which it is applied.
The same principle applies in a wide variety of areas for a wide variety of properties that can be considered to be trade secrets. A good example of a recipe-like trade secret that may include ingredients, proportions, tools, and methods of preparation is the “secret formula” for the brass from which world-famous Zildjian cymbals are spun. This trade secret, handed down from generation to generation since the 17th century, is legendary in the music industry.
The recipe makes a useful analogy because not only is the entire recipe itself a process, but it also consists of many kinds of “knowledge” — from ingredients and sources of the best ingredients to proportions to methods of mixture and preparation to particular kinds and uses of utensils — any or all of which, if “not generally known” can be trade secrets. However, the recipe analogy does not completely define all trade secrets. As noted above, raw information, such as customer lists and supplier information, and even negative information can make up a trade secret, if the knowledge is “not generally known or readily ascertainable” and is employed in the conduct of business to effect an economic gain for the business.
“Not … Readily Ascertainable”
The idea of what is or is not readily ascertainable is another concept that is often misunderstood, causing businesses to ignore or undervalue their valuable proprietary information. Information that may be available to anyone from a public library or on the Internet, for example, may still be “not readily ascertainable” with respect to its value to, and its special use by or in, a particular business to a particular advantage. For example, when research, trial and error, testing, and evaluation are involved in reaching the final advantageous application of the resulting knowledge to a business, then it may be that knowledge was not readily ascertainable without the time and investment it took to acquire it. Likewise, valuable knowledge that comes from combining information from a number of independent sources that may not ordinarily be thought of together, resulting in new knowledge, may be not otherwise ascertainable. Moreover, just because certain knowledge is known to someone else and is public knowledge doesn’t mean that anyone knows that your use of that publicly available knowledge is what gives you a particular commercial advantage. Readily available is not the same as readily ascertainable.
Furthermore, if your secret knowledge is not evident or apparent to someone looking at your product, using your service, or observing the public face of your business, then that secret is also not readily ascertainable. For example, you may have discovered that a perfectly ordinary lubricant — but one not thought of in an industrial setting, such as Vaseline — is the best and most economical thing to use during assembly to ease two parts together before securing them, but the evidence of its use is washed away in cleaning the assembly at its final stage of manufacture. Then your use of Vaseline for the purpose of making your assembly operation more efficient and less costly is a trade secret not readily ascertainable without invading your business in some way.
As noted elsewhere in these pages, independent discovery of what you may be holding as a trade secret is always possible, and it is not a violation of your trade secret rights. When someone else puts in the same kind of effort, or has the same kind of luck, as you did to come to the same conclusion, that knowledge is their trade secret too, independent of your identical trade secret. So if that person then wants to reveal this knowledge to the world, you have no claim against such an action. (And, incidentally, such a revelation does nothing to disclose that your use of the same knowledge is something providing economic value to you, and it may not at all diminish or destroy the value of that knowledge to your business.) From this point of view “not readily ascertainable” means not readily ascertainable from or about you.
“By Proper Means”
The Uniform Trade Secrets Act and the state statutes based on it do not define “proper means” directly. Instead, they enumerate improper means, implying that every other way that someone may come upon the knowledge comprising a trade secret of yours is “proper.” The avenues of improperly acquiring someone else’s trade secrets are, by these definitions, “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, [and] espionage.” Clearly, independent discovery is proper, but so-called reverse engineering can fall into a grey area that could be considered espionage depending on how the deduction, induction, or reduction of information was carried out.
For the most part, however, theft, bribery, misrepresentation, and espionage are all readily understandable. All require a willful, usually surreptitious act of acquisition. However, the most ordinary improper means of gaining or disclosing the trade secrets of others is by a breach or “inducement” to breach of duty. It is not so often recognized by employees, nor emphasized enough by employers, that an employee who holds a position of trust has, by virtue of the job he or she is paid to do, an obligation — a fiduciary duty — to protect the employer’s property, including the proprietary information and knowledge that comprise its trade secrets. An employee cannot use trade secrets as currency to secure a job with another company, nor can another company or individual use the offer of employment or any other inducement to obtain the trade secrets of a competitor from the competitor’s employees. Moreover, on leaving a company, whether to go to work for another or to start his or her own business, an employee cannot take and use the trade secrets of the former employer in the new position. That may seem difficult — how does one not think of a blue elephant once confronted with one, or not act in one’s trade of profession according to what one has come to know? — but it is a legal obligation, difficult or not.
However you came by your hard-won knowledge of the best way to do — or not do — what you do in your business, that knowledge is only a trade secret if it has measurable commercial value. To be a trade secret, your special knowledge must have value in the marketplace in which your business exists, although the value may take a variety of forms. The value may lie in the trade secret giving your goods or services a quality or qualities that make the product more desirable to more people, or that make your product especially desirable to a particular segment of the market for it, or that make it attractive for a particular purpose. Or the value of the trade secret may derive from its allowing you to lower your production or delivery cost, thereby increasing your margins, or in letting you offer more attractive prices. Or the value of your trade secret may be that it allows you to put your product before more ready buyers than others may be able to reach. Anything you use in your business that favorably affects your business relative to your market or to other businesses in your market can be a trade secret, if it is not generally known and you take reasonable precautions to keep it secret.
The legend goes that the alchemist retires alone to his high tower guarded by dwoemers and magical beasts to prepare his secret potion. In fact, it is not unusual for a chef to close off his kitchen to all but his most trusted helpers for the preparation of his world-famous dish, and, likewise, it is not unusual in a business for certain tasks to be done by the boss, alone, or by only a few trusted workers, in a locked or inconspicuous place. However, such dramatic measures are not always necessary or possible.
“Reasonable” precautions are, first, those that are possible under the circumstances. So, rather than absolutely restricting the knowledge to a select few, reasonable precautions may include simply doing everything possible to not point out your trade secret to every employee and keeping the knowledge inaccessible to visitors, clients, and customers. For example, suppose your trade secret involves the use of a particular machine, but there is no practical way to use the machine to any advantage in the production line when it’s hidden in a locked room or a separate building. Then reasonable precautions in that instance may involve removing all of the identifying markings and nomenclature from that machine.
In other circumstances, and especially for information that cannot be easily hidden from most employees, it is a common practice to bind all employees and agents of a business by non-disclosure and non-compete agreements, and this practice can be considered a reasonable precaution, if it is appropriate to the circumstance. Also, for any information that is written, printed, or otherwise recorded in a fixed medium, keeping that material under lock and key (or, perhaps, in password protected computer files) would be considered an essential element of the mix of reasonable precautions necessary to protect certain kinds of trade secrets. In short, what must be done, regarding trade secrets, is everything possible under the particular circumstances to keep the secret from everyone who does not need to know it. Furthermore, it is always good business practice to have a published policy regarding trade secrets to inform or remind all employees of their obligations and to make written records that each employee has read it.