Trade Secrets

What constitutes a trade secret and best practices to protect them
John Nolan
October 17, 2019
COLUMN : Letter of the Law , THE TALK... | Codes & Standards

A trade secret involves confidential information that provides (or will provide) economic benefit or advantage to a business that would be lost if it were misappropriated or disseminated to the public. State and federal laws include various remedies that provide businesses ways to protect the value of these assets. A basic understanding of trade secret protection should enable a business to make an educated decision as to whether to make the effort to maintain confidentiality. Knowing the relative rights and obligations under applicable trade secret laws is also an important aspect of managing risk.

What is a trade secret?

A simple label declaring a trade secret will not invoke legal protections. And, what may constitute a trade secret is often particular to the business. Familiar examples of trade secrets include: internal financial information, customer lists, supplier agreements, formulae, costs of production, designs/drawings, manufacturing processes, use of equipment, use of software, and training methodologies. 

A necessary first step to invoking trade secret protection involves determining whether a specific piece of information, process or method constitutes a protected trade secret under the law. The Uniform Trade Secrets Act, adopted by 48 states in the U.S., defines a trade secret as: … information, including a formula, pattern, compilation, program, device, method, technique or process that:

  • Derives independent economic value (actual or potential) from not being generally known to—and not being readily ascertainable by proper means by—other persons who can obtain economic value from its disclosure or use; and
  • Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Because trade secrets are inherently unique, evaluating whether they meet the legal definition is usually on a case-by-case basis. However, under the UTSA definition, the key characteristics of a trade secret are: 

  1. Its secrecy—the information must not be readily available to the public or otherwise easily ascertainable.  
  2. That it provides an economic or competitive advantage—the trade secret must have demonstrable value to the business which, if disseminated, would confer a benefit to competitors.
  3. That it is being maintained as secret through reasonable efforts of the owner—while this may vary from case to case, there must be a demonstrated effort and intent toward non-disclosure. I.e., a business may not be required to undertake extreme measures, such as keeping the information under lock and key and only accessible to a few company representatives. However, to show a fundamental level of control, a business should be able to demonstrate having communicated the requirement for secrecy to those who are granted access to the information. Furthermore, it is not necessary to literally entitle a document as a “trade secret” to obtain protection. Use of any language that clearly identifies the document as confidential and not for disclosure should suffice. 

Evolution of trade secret protection

The legal mechanism for protection of trade secrets is a legal proceeding instituted by the owner. Unlike patents, trademarks and copyrights, which are protected under federal law, legal proceedings to protect trade secrets were traditionally brought pursuant to state law. For many years, there were few, if any, state statutes relating to trade secrets. Because one state’s trade secrets law might differ from another’s, uncertainty prevailed. 

Since the 1980s, however, states have been adopting consistent statutory remedies for improper appropriation and use of trade secrets, such as the UTSA. More recently, the U.S. provided federal protection for trade secrets when in 2016 the Economic Espionage Act was amended to add the Defend Trade Secrets Act. The DTSA, which mirrors the UTSA in many respects, provides federal jurisdiction of trade secret claims, allowing easier access for businesses to sue in federal court for violations if the trade secret involves interstate commerce.

Whether based in the state or federal statutes, the claim of misappropriation provides a remedy to the trade secret owner. Under the UTSA, misappropriation occurs if:

  • A person improperly acquires a trade secret or possesses it knowing or having reason to know it was improperly acquired; or
  • Disclosure of a trade secret without consent of its owner, or disclosure knowing that the person from whom it was received acquired it through improper means.

Accordingly, the mere wrongful possession of a trade secret, even without publishing it, is misappropriation. Even if the person did not wrongfully acquire it himself, if it is known or reasonably should be known that it is a trade secret, mere receipt may be misappropriation.

Best practices

Given the protections afforded under the law, businesses should consider identifying documents, including electronically stored information, as trade secrets if dissemination of the information would undermine its economic advantage. Employment policies and agreements that obligate employees to keep trade secrets confidential are generally enforceable and survive the end of the employment relationship. 

Supplier agreements, purchase orders and other transactional documents are also ways for businesses to communicate to their industry partners that trade secrets may be disclosed and that the trade secret owner demands confidentiality as part of the transaction. Such provisions may have the added benefit of creating an independent contractual obligation to maintain confidential information. 

Whether in an employment policy or in transactional documents, what the business claims is confidential requires sufficient identification. This may be accomplished by identifying a class of information intended to be protected, and by using references to confidentiality in the documents themselves. 

From the other perspective, businesses should also be on the lookout for similar demands made upon them. Those that receive a demand for confidentiality from a trade partner should review the demand for specificity in order to avoid potential confusion.

John Nolan is an attorney with The Gary Law Group, a law firm based in Portland, Oregon, that focuses on legal issues facing manufacturers of windows and doors. He can be reached at 217/526-4063 or john@prgarylaw.com.