Beware of Losing Trade Secrets

An article provided by the Salt Lake City office of the law firm Stoel Rives

Some Utah companies are losing their edge by failing to protect trade secrets adequately. Misappropriation of trade secrets costs American companies more than $100 billion every year, according to an article by Scott D. Marrs, “Inside Story on Trade Secrets: Protective Measures Are Necessary to Preserve a Company’s Vital Information,” in ABA J. 77 (October 2000). “Considering the high cost of losing trade secrets, companies that rely on proprietary information should be taking aggressive action to first identify and then safeguard that information—the source of their present and future revenue.” That’s according to Mike Mangelson, head of the Technology and Intellectual Property Group for Stoel Rives LLP in Salt Lake City.

The problem of losing trade secrets is as old as business. In a Wall Street Journal article published January 11, 1999, Rachel Emma Silverman cites examples from as early as 552, when the Byzantine Empire stole silkworms, mulberry leaves, and know-how from a Chinese silk factory. As she points out, “[a]lthough industrial espionage occurred before this millennium began, it has become increasingly common in the past 500 years—when there have been many more secrets worth stealing.”

Too true. Any company—from a mature company to a start-up—that creates new technology, has information that gives it a competitive edge, or has any type of secret, needs to understand what a trade secret is and how to protect it. Trade secret protection is important to all industries. Manufacturers of biomedical devices, plastics and chemical companies, automobiles, electronics; information-technology and computer-related companies; restaurants, food producers, chicken growers with proprietary feed formulas, soda companies, and others can have trade secrets to protect. Think of Kentucky Fried Chicken and the Colonel’s “eleven herbs and spices.” Do you know what they are or how they are prepared? No, because they are protected trade secrets. Without this protection, KFC would not be the fast-food leader that it is.

What Is a Trade Secret?

A trade secret is information (such as a product plan, manufacturing process, or recipe) of a company or individual that has commercial value because it is not generally known to the public or to competitors. Unlike other forms of intellectual property, trade secrets are not “infringed.” A claim based on trade secret law is simply an allegation that the trade secrets were improperly disclosed or that trade secrets have been stolen or improperly used, or “misappropriated.”

Trade secret laws protect the owners of trade secrets by prohibiting use of or profit from the trade secret without the owner’s consent. If a third party misappropriates a trade secret, the owner of the trade secret can obtain an injunction to prevent further use of the trade secret by the third party and can also collect damages for any economic injury incurred due to the misappropriation and unauthorized use of the trade secret.

For trade secret protection to apply, the owner of the trade secret must make reasonable efforts, under the circumstances, to maintain the secrecy of the information that is the subject of the trade secret. The general requirement is that the owner treat the information as confidential and proprietary in nature. Clearly, then, revealing sensitive information, whether intentionally or unintentionally, may impede a company’s competitive advantage and even affect the enforceability of its intellectual property rights.

What’s the Catch?

To engage in business partnerships, start a company, or build one’s business, some information has to be disclosed. On such occasions, keeping proprietary information confidential can become especially tricky. Knowingly or not, employees and company representatives face several dangers when they engage in discussions with third parties that involve the potential disclosure of the company’s proprietary information. “Product demonstrations or ‘pitch’ meetings, which can be essential for promoting one’s business, are also notorious as the easiest settings in which to divulge trade secrets inadvertently,” Mangelson asserts. “Companies and entrepreneurs alike frequently rely upon on-site meetings with potential customers, strategic partners, and investors to market their business or demonstrate the value of a particular product or service.”

Protecting Trade Secrets When You Have to Disclose

“Pitch” meetings are important to businesses as an opportunity to determine whether a potential customer, partner, or investor will take the next step to enter into a more formal relationship with the company. In the case of start-ups, a failed pitch meeting can sometimes mean financial failure. This is why company representatives often approach these meetings with an aggressive attitude, hoping to sell themselves, their company, and their product or service.

The danger is that company representatives may inadvertently disclose confidential information regarding a product, service or the business itself. “In these settings,” says Mangelson, “company representatives must walk a fine line between adequately disclosing enough information to entice potential partners on the one hand and protecting proprietary secrets and intellectual property on the other hand.”

In pitch meetings, trade secret protection becomes paramount. Disclosing proprietary information without taking steps to protect it as confidential can result in a loss of trade secret rights for the owner. Although certain classes of persons, such as attorneys and accountants, are always required to keep your secrets confidential, most people—including venture capitalists, potential business partners, manufacturers, and others—are under no general duty to treat the information as confidential and proprietary to you. Rather, they may have the right to use and disclose your information for their own competitive advantage—even if such advantage is to your detriment. In addition, if you are not taking adequate steps to protect your own confidential information, you may be violating the trade secret rights of third parties if your lax practices result in the disclosure of their confidential information.

Richard Nelson, President and CEO of UITA, explains how this applies to the 2,600 IT companies in Utah. “UITA conducts peer forums with small groups of CEOs, CTOs, and CIOs to discuss issues of mutual concern and interest. This is an ideal setting in which to mentor younger execs through their initial growth (seedling) period and is critical to their success. Too often, though, we hear of executives and technologists who have a great idea and are so eager to get venture capital that they overlook obvious precautions—notably the execution of nondisclosure agreements—and lose their secrets. The bottom line is thatif you want someone else to keep your confidential information confidential, you better state that explicitly in all your communications with that party, and you absolutely must keep the information as private as you can.”

Six Smart Strategies for Safeguarding Trade Secrets

To protect your proprietary assets, put these straightforward safeguards in place. The goal is always to adequately limit and control disclosures of proprietary information in order to maintain both the intellectual property rights and your commercial advantage:

Require Nondisclosure Agreements. Legally bind third parties to keep your proprietary information confidential by executing a nondisclosure or confidentiality agreement with those third parties to whom the information will be disclosed.
Use a Sign-In Log. Require that third parties sign a log at the entrance to your building or office. Include a statement that the visitor may become privy to confidential information while on the premises and that such information must be treated as confidential at all times by the visitor.
Mark Information as “Confidential.” Put recipients of confidential information on notice, whether they have signed an NDA or not, by marking sensitive materials confidential. Place the notice conspicuously and include it on each page or item that contains confidential information.
Record Disclosures. Document in writing any confidential information that has been disclosed. Include who (the disclosing party and the recipient), what, where, when, and why along with a statement that the information disclosed was confidential or proprietary in nature and that the recipient was warned not to disclose it. Keep a copy of the record in your company files, send a copy to your attorney, and send the original notice to the recipient to remind it of its obligations.
Limit the Disclosure of Your Proprietary Information. Minimize the number of persons who are privy to your proprietary information by disclosing it only to those persons with a need to know. When you do disclose information, ensure that you are in an area or a room that provides adequate secrecy.
Rehearse. Finally, conduct a full internal “dress rehearsal” in advance of your upcoming presentation or demonstration, and include your attorney to ensure that sensitive information is not improperly disclosed.

Sally Brown, Chief Patent Counsel for Autoliv, an auto-parts manufacturer, agrees that nondisclosure agreements constitute the first line of defense. She says, “In our industry, we often seek to establish partnerships with manufacturers to produce our automotive products economically. When we approach a potential partner, we make sure to execute mutual NDAs. The mutual NDA not only ensures that our trade secrets and those of the partner are protected, but it enhances the business relationship because the other company can see that we are as intent on protecting its interests as we are in protecting our own. It clarifies which information belonging to each company is confidential and is the single most important step we take to secure the company’s confidential information.”

KFC and Coca-Cola are excellent examples of companies that have taken the type of steps the courts expect of a company that wants to claim trade-secret protection and be able to deter any who misappropriate those secrets. Clearly, both companies understand very well that the secret to their success and the value of their products originate from the secret recipes for their products,” says Mangelson. Both have protected their respective secrets for decades, which is much longer than any other type of intellectual property protection available to them.

If treated properly, a company’s valuable, confidential information can be maintained as a trade secret indefinitely. To maintain trade secrets, evaluate which information is valuable and then take steps to ensure that the trade secrets are not inadvertently disclosed outside the company, taking particular care in settings in which some disclosure is necessary. Every company should be very careful about (1) who has access to confidential information and (2) through what means (knowledge, documentation, electronic media and storage). They should then take positive steps to prevent the improper disclosure or outright misappropriation of that information.

For more information about protecting trade secrets, contact Mike Mangelson, Stoel Rives LLP, (801) 578-6903, memangelson@stoel.com, or visit http://www.estoel.com and click on the Hot News link.

This article was provided by the Salt Lake City office of the law firm Stoel Rives LLP. Freelance writer Elizabeth Wilcox assisted in its preparation. For more information, contact Stoel Rives intellectual property attorney Mike Mangelson at (801) 328-3131.

| 4/24/2009 1:36:45 PM | 0 Comments