Trade Secrets

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Q1. What is a trade secret?

A1. "A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."

RESTATEMENT OF TORTS § 757 comment b (1939).

Q2. When is a person liable for disclosure or use of another's trade secret?

A2. "One who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if

a) he discovered the secret by improper means, or

b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or

c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person's disclosure of it was otherwise a breach of his duty to the other, or

d) he learned the secret with notice of the facts that it was a secret and that its disclosure was made to him by mistake."

RESTATEMENT OF TORTS § 757 (1939).

Q3. How does a court determine that something is actually a trade secret?

A3. Just because a competitor says that its information is a trade secret doesn't necessarily make it so. In determining whether a trade secret exists, courts generally weigh the following factors:

1. the extent to which the information is known outside the claimant's business;

2. the extent to which it is known by employees and others involved in the claimant's business;

3. the extent of measures taken by the claimant to guard the secrecy of the information;

4. the value of the information;

5. the amount of effort or money expended by the claimant in developing the information; and

6. the ease or difficulty with which the information could be properly acquired or duplicated by others.

Q4. What types of physical security steps can we take within our plant to protect our trade secrets?

A4. Here are some guidelines:

1. Identify potential trade-secret "leak points." Minimize exposure of trade secrets to them.

2. Password-protect confidential computer files and establish secure storage files for "hard copies" of confidential documents.

3. Establish general and restricted zones within the plant. Confine all trade-secrecy development and utilization, where possible, to the restricted zones.

4. Utilize warning signs on all entrances to the physical plant to advise non-employees to utilize only a secure, monitored "main entrance."

5. Utilize color-coded identification badges for external use by all employees during work hours. Have specific colors of the badges correlate with permission to be within restricted and general zones of the plant.

6. Post "Authorized Employees Only" signs at the entry to all restricted zones.

7. Use locked doors for all restricted zones. Make them openable only by scanning correctly colored ID badges or ID cards. Some companies scan fingerprints.

8. Utilize painted, directional floor lines for visitors and tours to ensure they do not stray into restricted zones.

9. Screen all visitors by having them sign a log book. Some companies make visitors produce a passport or a birth certificate.

10. Prohibit any photograph taking, videotaping or tape recording by visitors.

Q5. Do we have to use all those steps to protect our trade secrets?

A5. No, just enough to convince a court that you are reasonable in your efforts, given the value of the secret. It's better to err on the side of caution, in terms of the number of steps you take, but they have to be within your comfort zone.

Q6. What advantages are there to our keeping a trade secret?

A6. A trade secret can give a company an edge over a competitor in making a device. Further, it can be used by a seller to bind a prospective purchaser or jobber to secrecy for a product made with the trade secret.

Q7. What disadvantages are there in relying on trade secrecy for protecting an invention?

A7. One who has lawfully acquired a trade secret may use it without liability unless he acquired it subject to a contractual limitation or restriction as to its use. For many products, trade secrecy is therefore not feasible because the nature of the product can be readily determined by any purchaser, either directly by inspection or by reverse engineering.

Q8. When should we rely on trade secrecy alone rather than the patent system for protecting an invention?

A8. Trade secrecy should be relied on if the invention is not patentable. Further, trade secrecy might be relied on when the process or product is one which can be readily kept and defies reverse engineering, such as the COCA COLA^® recipes, so that the period for which its exclusivity may be preserved is potentially longer than the term of a patent.

Q9. What are some of the disadvantages with the trade secrecy route compared to the patent route?

A9. While a patentee has a monopoly by which he can stop people from making, using or selling his invention, the owner of a trade secret has no rights, except against those who have contracted, expressly or by implication, not to disclose the secret, or who have obtained it by unfair means. Further, if a trade secret is disclosed to the public by a breach of confidence, the trade secret dissolves and the former trade secret holder generally has no recourse against new people who use it.

Q10. Are there any steps we can take to discourage a prospective jobber from peddling our own inventions to another company?

A10. In addition to using a simple trade secrecy agreement between you and any outsider that does work on an invention, your company should stamp a notice, such as the following, on each blueprint sent to them:

Corporate clients often want to explore joint ventures with another company to market a new company, for example, in Europe. Or, they may want to use a consulting company to help create a new product, associated equipment, or software.

All too often, the deal sours and the other company tries to use the client's confidential information, without permission, to "re-sell" the same equipment to a competitor or to open shop themselves. To prevent this scenario, patent attorneys usually recommend that a Confidentiality Agreement be used from the onset.

One of Holland & Bonzagni's standard Non-Disclosure Agreements is reproduced on the following three pages. It is a "two-way" agreement under which both parties agree to maintain the confidentiality of the other's trade secrets. Feel free to use it.

NOTE: Non-Disclosure Agreements (sometimes spelled Nondisclosure Agreements) are also called Secrecy Agreements or Confidentiality Agreements.