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Companies Need to Establish Trade-Secrets Protection Plan

September 2006
By Diane L. Becker

Historically, intellectual property assets such as trade secrets have been viewed as enhancing a company’s competitive advantage by allowing a company to defend its competitive position in the marketplace.

The current view of trade secrets is much broader: Trade secrets are viewed as a profit center that also can create revenue and value through licensing fees and strategic alliances when sufficient time and resources are devoted to promoting these opportunities. It is, therefore, important for a company to protect its trade secrets, and the law of trade secrets provides an effective and efficient method to do so.

Virtually any useful information can qualify as a trade secret. A trade secret need not be an “invention.” A “discovery,” even if it is a relatively minor improvement on a process already known, can qualify as a trade secret. Trade secrets may include technical secrets, business secrets concerning customers, vendors and employees, and even research and negative data.

To protect a trade secret, a business must show that the information is used in a business, that it provides a competitive advantage and that it is kept secret.

A trade secret protection program is directed at the third point, assuring that the trade secret information is kept secret and is not generally known to the public. The law requires that the owner of a trade secret must have made reasonable efforts to preserve its secrecy.

Developing a trade secret protection program requires three general considerations. First, the trade secret should be disclosed only to individuals needing to know the trade secret information in order to perform their jobs properly. Second, there should be a combination of security elements. Third, the program should be realistic and should not be so rigorous as to become unreasonable or ignored.

A company should have a written statement of its program; this is usually found in the form of a written policy manual. The written statement helps to persuade a court that the company viewed its security procedures as an important concern, as they took the time to write out policies for trade secret protection. Written trade secret protection programs traditionally cover the areas discussed below.

Facilities

There should be a physical separation of trade secret information from other information and the restriction of access to trade secret information. Employees should discuss or utilize trade secrets only in restricted areas. Physical security creates barriers to unauthorized access and reinforces the notion that trade secret information should stay there.

Traditional measures include locked doors, security guards and the separation of confidential equipment and information in facilities. One important means of controlling access is through procedures established for visitors to sign a visitor log that includes a statement acknowledging that the visitor will not take or use any trade secret information from the premises.

In order to restrict access to trade secret information, a company also should restrict the areas that visitors are allowed to tour. Physical security measures also include the locking or the storing of trade secret information in locked files.

Documents

Documents containing trade secret information should be protected by marking the documents with the words “confidential” and “do not photocopy.” An important part of managing documents is regulating what happens after they have served their purpose and are ready for destruction. Special care, such as shredding, should be taken in the destruction of documents containing trade secrets.

Another important aspect of document protection is setting up a classification system. While document protection programs with many levels of confidentiality (private, confidential, restricted) based on clearance level can be overkill in many situations, simply marking “confidential” and “do not photocopy” can serve to protect confidential information from disclosure. Photocopiers must be regulated, and there should be guidelines that regulate their reasonable use.

Computer Secrecy

Computer systems store trade secret information and are accessed easily from outside a company and from within. Special security measures should be taken to restrict access, copying of and transmittal of trade secret information that is stored in computers. Also, computer-related items such as computer disks, CDs, printouts and manuals should be carefully labeled and protected.

Although information supposedly may have been erased electronically, the magnetic information embodied in a file or on a computer device may remain, and it is critical that there be actual erasure. A prudent computer security system should address overall network security and the security of portable devices, such as laptops and mobile telephones, that are used on the job.

Also, the company should educate its employees on the risks and handling of e-mail. Facsimile cover sheets and e-mails containing confidential information always should contain a notice alerting the viewer that information is confidential.

Publicity

A company should avoid unnecessary disclosure of trade secret information at trade shows, and in magazine articles, publications or press releases, and during public speeches. Each of these forms of communication can provide competitors with trade secret information and should be screened carefully by management before disclosure.

Confidentiality Agreements

Contracts are central to the notion of protecting secret information because they define the confidential nature of the relationship that the law seeks to protect. The formality protects both sides engaged in information sharing. The owner of the information obtains assurance of conduct that will protect its rights in the trade secret, and the recipient benefits from a clear definition of its obligations.

Whenever disclosing confidential information to an employee or to a third party, a confidentiality agreement should be signed before disclosure.

Invention Notebooks

Invention notebooks should be used to record the process of invention in a consistent manner. These invention notebooks can be used to make an informed decision about whether to protect an invention as a trade secret or to seek additional protection, such as a patent, and will provide a record of who contributed to the invention and when the work was done. The notebooks should be maintained in a secure location and should be properly prepared, maintained and witnessed.

An effective trade secret protection program requires, first, that there be an inventory of trade secrets. Once the trade secrets have been inventoried, a treatment or method of protection should be provided for each activity that involves a trade secret. Also, there should be training of all employees. Next, there should be assignment of responsibility for supervision of the trade secret protection program to one responsible person. Finally, there should be a review and updating of the program.

A trade secret protection program should include a program for training employees to ensure that all employees are made aware of and continue to follow the program’s security procedures. Also, employees should be required to sign a trade secret confidentiality agreement, acknowledging that they have access to trade secret information and that they will not disclose or misappropriate the confidential information.

Finally, the company should conduct exit interviews of employees leaving the company, where the employee may be reminded of his or her written obligation not to disclose or use any trade secret information. The departing employee should be instructed as to a contact person if any questions arise later concerning post-employment confidentiality responsibilities.

At departure, it is beneficial to have the departing employee sign a document signifying understanding of trade secret obligations. And, most important, the person conducting the exit interview should collect all documents and security information and keep a record of what has been secured. Allowing an employee to do his or her own desk clean out is a recipe for disaster.

The annual trade secret review will provide a periodic evaluation of new categories of trade secret information, compliance with security measures, effectiveness of security measures, effectiveness of education programs, changes in organization or structure of business, changes and threats from competition, changes in the law and changes in exposure from third-party access.

A major aspect of any trade secret program and any trade secret audit is the system’s ability to avoid unwanted contamination with confidential trade secret information of others and to care adequately for third-party secrets that are accessed through confidentiality agreements.

Another challenge is protecting against unwanted exposure to third-party trade secrets through unsolicited submission of ideas or from the hiring of employees who want to bring with them trade secret information of a former employer. Also, a company must educate its employees as to all trade secret confidentiality obligations owed by a company to third parties.

An effective trade secret protection program will avoid lawsuits and disputes. Its objectives are the prevention of loss, the deterrence of theft and of carelessness that causes loss, and a demonstration that the company’s secrets are important to the company. Because virtually every company has trade secret assets, a comprehensive trade secret protection program will enhance the likelihood that a company will engage in sound and beneficial transactions and reduce the chance that a company will incur losses that result from a lack of internal controls with respect to the protection of trade secrets.