You worked hard to launch your business, overcome obstacles and create a successful system that runs like a well-oiled machine. You may have even devised a few tricks along the way that mean your business is really booming. Now imagine that someone from inside your company shared that specific business information with the competition.
Thanks to trade-secret laws such as the Uniform Trade Secrets Act, the Defend Trade Secrets Act and the Economic Espionage Act, you may have legal recourse even if you do not hold any patents, trademarks or copyrights for the information.
That's because trade secret information secrets are intellectual property that gives your business a competitive advantage, and therefore, you take steps to keep it a secret. United States trade-secret laws act as an alternative to patents, which can be costly, but only protect intellectual property that meets certain criteria and is obtained in a certain way. For example, trade-secret laws don't apply to information that is generally known or doesn't provide some sort of advantage by remaining a secret.
When trade secrets are improperly shared, it's called "misappropriation." What if someone shares information without knowing it was a trade secret? Understanding trade-secret laws and intellectual property will help you train your employees appropriately and keep an eye out for any breaches of confidence, whether intentional or accidental. Documents like non-disclosure agreements can help establish expectations among your employees, but if history is any indication, written agreements are merely a precaution and not a fail-safe.
What Is a Trade Secret?
The Uniform Trade Secrets Act, or UTSA, defines a trade secret as any information from which an economic value can be derived due to its inaccessibility and that is subject to reasonable efforts to keep it secret. This information can include recipes, formulas, algorithms, confidential information, manufacturing processes, marketing techniques or inventions that are too new to be protected by a patent.
Trade secret protection is crucial for secret information that your business uses on a continuous basis. Such information could include the date of a new product launch, how much you pay your employees or the terms of your contract generally don't represent trade secrets. Although it's information you probably don't want your competitors to know, it will change on a regular basis or become moot after a certain date.
In short, a trade secret is something that will provide an advantage to your business for the foreseeable future and is something about which you don't want your competitors to know. Therefore, you take steps to make sure it doesn't end up in their hands. What kind of practical measures can you take to prevent trade secrets from being leaked? Nondisclosure and noncompete agreements are some of the simplest actions that can help you keep trade secrets under wraps.
Nondisclosure and Noncompete Agreements
When you hire new employees, you can require them to sign a nondisclosure agreement, a noncompete agreement, and/or a confidentiality agreement. A nondisclosure agreement forbids sharing company or proprietary information with anyone outside the company. A noncompete agreement forbids current and/or former employees from performing work, whether as a job for another company or as an independent contractor, in the same capacity as the hiring company to prevent employees from becoming competitors. A noncompete agreement can even remain in effect after an employee leaves the company.
If employees end up breaking either agreement, you may be able to take legal action if desired. The agreements could help show that the employee "knew better." Without having a signed nondisclosure or noncompete agreement on hand, the employee could have disclosed information without knowing it was a trade secret. In the eyes of the law, that could make it more of an accident rather than misappropriation.
Of course, you'll want to consult a lawyer before drafting any agreements. There are virtually no guarantees in court. It's also worth noting that if you do bring a trade secret case to trial, the UTSA compels the court to also take reasonable measures to preserve the secrecy of the information that may have been misappropriated, such as "sealing the records of the action" and "ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval."
What Is Misappropriation?
Misappropriation refers to the act of acquiring a trade secret inappropriately while having full knowledge that it's a trade secret. You don't even have to be the person disclosing the trade secret. Simply learning about and using a trade secret that you know to have been improperly shared is also considered misappropriation under the UTSA.
The UTSA defines improper acquisition as bribery, theft, espionage, misrepresentation and a "breach of a duty to maintain secrecy." However, the act also states that it's impossible to fully list all improper means of obtaining a trade secret and therefore endeavors to define "proper" as well, which includes discovery ascertainable by reverse engineering, independent invention, observation in a public display or from published literature or while under license from the trade-secret owner.
Trade secrets lose value if misappropriated and shared with more and more people. Once confidential information becomes generally known, it no longer gives a company an economic or competitive advantage and therefore is no longer a trade secret.
Trademarks, Patents and Copyrights
One thing a trade secret is not is formally registered with the government. Intellectual property can be formally registered and protected via trademarks, patents or copyrights. Anyone wishing to reproduce intellectual property under these protections must get permission from the owner or pay to become the new owner of the property.
Copyrights protect intellectual property from unlawful reproduction. Copyrighted material may overlap with trade-secret laws if it is generally unknown and has economic or competitive value due to its secrecy. Copyrighted information that is easily obtainable, such as a book that is lawfully reproduced and distributed, does not represent a trade secret due to its accessibility.
Trademarks typically represent a company's logo or slogan, which provides economic value to the company when it is easily recognized and associated with certain values, like high-quality merchandise, charitable contribution or a celebrity endorsement. Trademarks are not trade secrets because they are not kept private. Patents, the final type of intellectual property protection, provide a high level of protection for brand-new ideas. It costs money to register a patent, and business owners may wonder if they should simply rely on trade-secret laws.
Pros and Cons of Trade-Secret Laws
Trade secrets forms of intellectual property and are an alternative to patents, but there are pros and cons to choosing trade-secret protection vs. patent protection. It may seem more beneficial to protect intellectual property under trade-secret laws because there is no time limit placed on trade-secret protections, unlike the 20-year limit for patents. However, federal patent law provides protection against reverse engineering, unlike trade-secret laws.
In other words, a patent may represent a better choice if there's a chance that the same technology could be independently discovered by another individual, even if the "discovery" happens from direct observation of your product. In such a circumstance, a patent would prevent other people from using "your" technology. Trade-secret laws, on the other hand, don't prohibit use of trade secrets that are obtained without misappropriation. Public observation and reverse engineering are therefore allowable under the Uniform Trade Secrets Act.
Another difference occurs in when and how the laws for patents vs. trade secrets take effect. By applying for a trademark or patent, you're proactively stating that you own a particular and tangible intellectual property. Trade-secret laws, on the other hand, don't provide any proactive defense against misappropriation of trade secrets. The trade-secret laws will only go into effect after a misappropriation has occurred.
Peabody vs. Norfolk: The First Case
The first U.S. cases brought to court over trade secrets were tried in the 19th century. In particular, the 1868 case of Peabody vs. Norfolk is considered the first modern trade-secret case. Peabody created machinery that could manufacture gunny cloths from jute, and he hired Norfolk to work for him. Peabody knew that the machinery he invented was part of his factory's success and had Norfolk sign what was essentially a nondisclosure agreement, acknowledging that the technology was to be kept a secret.
In the end, Norfolk left Peabody's employment, taking drawings and notes with him about how the machines worked, and he was hired to build machinery at a competing factory ... machinery that was suspiciously similar to Peabody's. Peabody took Norfolk to court over a breach of confidence, saying that Norfolk knew the technology was to be kept a secret and because it had now been shared with competitors, Peabody's factory would suffer. In addition, the owners of the competitive factory appeared to have known that the information was obtained without consent (misappropriated), but they built the machines anyway.
The Peabody vs. Norfolk case happened back in 1868, but similar circumstances probably occurred before that time and have certainly occurred throughout the years since. The court's decision on this particular case influenced subsequent rulings and laws. Essentially, the court said Peabody's ideas were his property and should be protected as such, even though he did not have a patent or a trademark. Thus, the first modern description of U.S. trade-secret law was recorded.
The Continuing History of Trade-Secret Laws
After Peabody vs. Norfolk, states began to put their own version of trade-secret laws on the books. However, with the rise of interstate corporations, it became clear that a uniform law was needed to unite the various state laws. The Uniform Law Commission drafted the Uniform Trade Secrets Act in 1979 to do just that.
The UTSA was merely a suggestion, and it was up to each state legislature to enact the UTSA. Each state could also make modifications to the UTSA, which made the UTSA a valiant effort but not necessarily a completely unifying law. Finally, a federal law called the Defend Trade Secrets Act of 2016, based on the UTSA, was passed in 2016 to determine how trade-secret misappropriation is to be handled across all states.
Enforcement and Litigation of Trade-Secret Laws
In addition to the UTSA and DTSA, the Economic Espionage Act of 1996 also provides grounds for the U.S. Attorney General to enforce cases involving the theft of trade secrets. Individuals found guilty of intentionally stealing or receiving trade secrets could face up to 10 years in prison and up to a $500,000 fine. Corporations can also be charged under the Economic Espionage Act, facing up to a $5 million fine.
The statute of limitations for trade secret litigation under the DTSA is three years from the time the misappropriation was first discovered by the trade-secret owner. If you feel you have intellectual property that qualifies under a trade secret claim and that it has been misappropriated, contact a lawyer who specializes in intellectual-property law to learn more about what can be done to minimize damage to your company.
Cathy Habas specializes in marketing, customer experiences, and behind-the-scenes management. Cathy has contributed to sites like Business and Finance, Business 2 Community, and Inside Small Business. She served as the managing editor for a small content marketing agency before continuing with her writing career.