Securing Your Business Secrets: A Primer on Trade Secrets / Legal / Last Modified: February 22, 2017

When it comes to trade secrets, owners must be especially vigilant about securing this information since there is no formal procedure.

Many entrepreneurs and small businesses achieve success by introducing new innovations and products into the marketplace.

In so doing, however, their intellectual property faces the risk of being infringed or stolen.

Obtaining a proper federal and international registration of IP such as patents, trademarks and copyrights, provides maximum legal protection.  

When it comes to trade secrets, however, owners must be especially vigilant about securing this information since there is no formal registration procedure in place.

What Are Trade Secrets?

Trade secrets are any unique and valuable information that an individual or company owns such as formulas, designs, practices, processes, or patterns that are not widely known to individuals outside the business. This critical information often affords the holder with a competitive advantage in the market place as well as a monetary benefit.

Many  people have heard of trade secrets in the context of Coca-Cola's secret formula, Google's proprietary search algorithm, and the recipe for the secret sauce used in McDonald's Big Mac sandwich. Small businesses, however, can also have trade secrets.

For example, a local bakery's unique recipe for its popular breads and cookies is a trade secret. Likewise, a small marketing agency's special method for conducting consumer research that gives it a distinct competitive advantage is also considered to be a trade secret. Regardless of the size of your business, it is essential to secure your commercially valuable business secrets.

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Protecting Trade Secrets

While there are Federal and state laws in place to protect innovators and businesses from trade secret theft, there are steps a business owner must take to legally protect this information.

1. The Information Must be Kept Secret

A trade secret must not be generally known to the public or available to your competitors. It is crucial to handle secrets with care and any information that is made available to an outsider or third party, such as in a contract negotiation with a strategic partner or vendor, must be closely scrutinized. Any information that is voluntarily provided to individuals outside your company forfeits its status as a trade secret.

2. Confidentiality agreements

If you provide information to any party outside of your business, it is essential to have the recipient sign a confidentiality agreement. Moreover, any business partners, employees, independent contractors, and minority investors who are given access to any exclusive and valuable information should also sign confidentiality agreements.

3. Restricted Access

While confidentiality agreements are crucial to protecting trade secrets, it is also critical to limit access to secret information. If formulas, designs, methods and practices are detailed in documents, these should only be provided to individuals on a need-to-know basis. Documents should also be stamped with "confidential" labels or marked as such in headers and footers.

This information should not be kept in public spaces in your office, such as a conference room, and also be kept under lock and key. Given the digital nature of the contemporary workplace, any trade secrets that are stored electronically should be secured through encryption or "wiped" from a hard drive or other storage medium.

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The Crime of Trade Secret Theft

Today, many American businesses, both large and small, have been the target of industrial spies who steal valuable trade secrets and leak them to competitors. Trade secret theft is a serious crime that cripples innovation, impedes economic growth, and causes businesses in the U.S. to lose billions of dollars each year. However, there are federal and state laws in place that are designed to protect trade secrets and provide remedies to victims of trade secret theft.

Legal  Protection of Trade Secrets

The most significant protection under federal law is the Economic Espionage Act of 1996 (EEA). This law gives the federal government broad powers to prosecute any individual or company that misappropriates trade secrets. The punishment for stealing, or illegally copying or receiving trade secrets includes potential prison sentences of up to 10 years; individuals may also be fined up to $500,00 and corporations as much as $5 million.

All property that is used and profits derived from the theft can be siezed and auctioned off by the government. There are state laws in effect across the country regarding trade secret theft; however, pursing claims in state courts is often hindered by jurisdictional issues and conflicting procedures.

Congressional Action

The EEA has been in place for 20 years, but trade secret theft continues to be a serious threat to U.S. businesses, especially at the hands of international thieves who are beyond the jurisdiction of federal authorities. In addition, while the Department of Justice has far reaching power to prosecute trade secret crimes, the EEA does not provide a sufficient funding mechanism.

In light of these shortcomings and the limitations of state trade secrets laws, Congressional lawmakers have introduced legislation to enhance trade secret protection and enforcement, The Defend Trade Secrets Act of 2016 (DTSA).

The law, if passed, will create a harmonized, uniform federal standard to protect trade secrets in every state, and provide the U.S. Attorney General with funds and human resources to combat economic espionage more robustly.

The DTSA provides a number of remedies to victims of trade secret theft, including injunctions, civil seizure orders and damages, including actual damages, unjust enrichment, reasonable royalties and exemplary damages.

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The Bottom Line

While the legislation working its way through Congress may provide holders of trade secrets with additional protection against espionage, it is essential for businesses to maintain the confidentiality of this information in order to fall under existing federal and state laws.

Even if all the necessary steps are taken, a business can still become the target of espionage. If your business has been the victim of trade secret theft, an attorney with expertise in intellectual property law can advise you about the options available to you.

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