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What Is a Trade Secret?

woman whisperingNDAs won’t protect just any business information; the information must qualify as a trade secret. A trade secret is born in secrecy and spends its life in concealment, disclosed only to those bound to maintain confidentiality.

Trade secrets typically include such items as:

  • unpublished computer code
  • product design definitions and
    specifications
  • product development agreements
    and other related agreements
  • business plans
  • financial projections
  • marketing plans
  • sales data
  • unpublished promotional material
  • cost and pricing information
  • customer lists, and
  • pending patent applications.

In order for business information to qualify as a trade secret, the information must:

(1) not be generally known or ascertainable through legal methods;
(2) provide a competitive advantage or have economic value; and
(3) be the subject of reasonable efforts to maintain secrecy.

Now, let’s look at each of these requirements in detail.

Information Not Generally Known or Legally Ascertainable

If your competitors already know the material you want to protect, it isn’t much of a secret. Once it’s generally known or can be learned by the people within an industry, the information loses its special status and is not protected by nondisclosure agreements.

  • Obtaining the secret from a supplier, consultant, financial advisor or other person who signed a nondisclosure agreement.
  • Stealing it through industrial espionage such as electronic surveillance, bribery or tapping a company’s phone lines or computers.
  • Learning it from an employee who changes jobs and discloses the secret to a new employer.

NDA lightbulbState laws may prohibit employees from stealing trade secrets even in the absence of nondisclosure agreements.

The issue of whether a trade secret is readily ascertainable often arises when an NDA is used to prevent disclosure of a customer list. A business argues that an employee stole a customer list; the employee claims that the customer list is readily ascertainable. If it is, an NDA will not prevent the employee from disclosing the information because it does not qualify as a trade secret. For example, one court permitted an employee to use a former employer’s customer list since the information was readily derived from a telephone directory. USAchem, Inc. v. Goldstein, 512 F.2d 163 (2d Cir. 1975). For more on customer lists, see Section B7.

The Information Provides Economic Value or a Competitive Advantage

To protect business information under an NDA, the information must have some economic value or provide an advantage over competitors. For most trade secrets, this requirement is easy to fulfill and can be demonstrated by benefits derived from the use of the trade secret, the costs of developing the secret, or by business or licensing offers for use of the secret.

Another way of assessing the competitive edge or value of a trade secret is to ask whether a business would be damaged if a competitor acquired the information. For example, one trade secret in the pizza industry—the process for freezing precooked sausage—was the subject of a legal dispute. A court determined that the information was a valuable secret, and a jury awarded $10.9 million in lost profits to the meat packer from whom it had been stolen. C&F Packing Co. v. IBP, Inc., 1994 U.S. Dist. LEXIS 973 (N.D. Ill. 1994).

A trade secret loses its economic value after public disclosure or in some cases, after the passage of time.

EXAMPLE: CommCo owns a trade secret for connecting teletype machines. The trade secret has lost its value because teletype machines have been replaced in the communications industry by computers and fax machines.

The Company Has Taken Reasonable Steps to Protect the Information

You cannot protect information under an NDA unless you have taken reasonable precautions to keep the information confidential. These precautions usually involve reasonable security procedures as well as the use of nondisclosure agreements. If you don’t maintain reasonable security, the information will lose its trade secret status. For example, a federal court of appeals ruled that a blood bank did not keep its list of blood donors sufficiently confidential when it posted the list on a computer bulletin board accessible to its competitors. American Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407 (11th Cir. 1998).

In general, a business is considered to have taken reasonable steps if it uses a sensible system for protecting information— for example, locking its facilities, monitoring visitors and labeling confidential information. (We provide some suggestions for a trade secret maintenance system here)

A crucial part of your company’s trade secret maintenance should be to require contractors, employees, investors and others exposed to confidential information to enter into a nondisclosure agreement. If the secret is disclosed you can sue the loose-lipped person for money damages and ask for a court order preventing further disclosure.

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