Best Practices for Enforceable Trade Secrets

When it comes to trade secret protection, it is typically thought to be enough to ensure that there are strong confidentiality agreements with employees and business partners. But such agreements—while essential—are only a first step. For example, trade secrets are often poorly identified or understood. Measures taken to protect confidentiality are often inconsistent (across time and locations) or simply inadequate. Employees and business partners are inadequately trained on trade secret protection. And businesses frequently do not document their financial investment in the trade secrets, including the research and development (R&D) efforts that lead up to it, in a way that is useful for demonstrating the value of the trade secrets later. We will consider each of these examples in turn.

Know What a Trade Secret Is
As a threshold matter, it is helpful to have a common understanding of what is and what is not a trade secret. Trade secrets are any valuable confidential information that has been kept a secret. This information can include a formula, pattern, compilation, program, device, method, technique, or process. Trade secrets can also include R&D efforts; marketing, sales, pricing, and profitability information; and certain customer information. Importantly, a trade secret need not be novel and thus can include many “known” components. A trade secret can also include a company’s “know how.” Indeed, as a litigator and counselor, when advising clients on trade secrets, I find it helpful to start from the premise that any confidential process or information that is valuable to the client is likely to be a trade secret—or at least contain some trade secret elements—and work back from there.

Identify Your Trade Secrets
Traditionally, conventional wisdom cautions against identifying and listing a company’s trade secrets, for fear that the company would “forget” or inadvertently omit something in creating such a catalog. But let’s consider some of the practical effects of failing to identify your trade secrets. It is very difficult, for example, for employees to know what they can reveal and what they can’t with certain business partners. It is also hard to know and monitor when trade secrets are being shared. Even worse, in litigation, the persons in the company originally in possession of the trade secrets could now be on the other side, which means the persons with the best knowledge of the company’s trade secrets are effectively unavailable to the company for enforcement purposes.

Thus, consistent with more modern approaches to trade secret protection, I recommend that clients periodically go through the exercise of identifying their trade secrets. This is not simply a mechanical exercise. Having a lawyer well versed in trade secret law can be an important part of the process, as she may be better able to assist in identifying valuable trade secret IP that the company takes for granted—because it seems obvious to the engineers, for example, or is something that they are so accustomed to using on a day-to-day basis that they don’t really see its value until they think about its being used by a competitor.

Once this exercise is complete, if the company wants to, a list of trade secrets can be put together and maintained on a periodic basis (whether that is monthly, quarterly, or annually depends on the rate of innovation in the company, its resources to devote to this effort, and its risk appetite). For those concerned that something is being “forgotten,” the list can clearly state that it isn’t meant to be exhaustive and is only for illustrative purposes. Also, as the company’s culture and approach to trade secrets shifts, it will become easier to reach a comfort level that an adequately comprehensive list is being maintained.

How detailed the description of the trade secret needs to be depends on the nature of the trade secret (e.g., a physical system may need less documentation than R&D efforts and the reasons certain options were chosen and others rejected), as well as the extent of existing documentation in the company (e.g., if there are extensive user manuals, inventor notebooks, or the like, less documentation may be needed). From an enforcement standpoint—especially when enforcement could come many years later—an effort should be made to identify and preserve in a central (or at least readily accessible) location and format all documentation related to the trade secret. Taking these steps contemporaneously with the creation of the trade secret will reap great benefits later, as it will make the discovery process less difficult and expensive. This is especially important for trade secrets that might be maintained for long periods of time. At the time of enforcement, memories may have faded and witnesses moved on, making recreating this information difficult, if not impossible.

Protect Your Trade Secrets
Once such a list is created (and any associated documentation identified and secured), counsel can then sit down with key stakeholders and prioritize the identified trade secrets and determine what level of protection is required for each trade secret, with the company’s “crown jewels” of course receiving the highest level of trade secret protection. Exactly what protection is required varies, depending on whether the trade secret can be kept within the company (or, even better, within a select group in the company) or whether it needs to be accessible to third parties (for example, if it is technology being licensed). In the latter situation, agreements need to be well thought out and drafted to include as many protections and restrictions on access as can be obtained.

In addition, practical methods for shielding the trade secrets should be considered. For example, can software and data be housed on secure remote servers controlled by the trade secret owner, instead of on the licensees’ systems? Can some or all of the trade secrets be encased in a “black box”? No matter who has authorized access to a trade secret, one also needs to think about who has incidental access, for example by delivery personnel, housekeeping, maintenance workers, or others coming through a facility on legitimate business. Of course, cyber access is an increasing threat and one not to be taken lightly. In all these efforts, a balance must be achieved between maintaining confidentiality of the trade secrets and practical business realities. Legally, absolute secrecy is not required, and only reasonable steps need be taken to maintain confidentiality. But, in concrete terms, the more secrecy that can be ensured, the less likely there is to be an opportunity for misappropriation. For these reasons, confidentiality agreements alone are insufficient to truly protect trade secrets. It is also critical to document efforts made to protect the confidentiality of the trade secrets, especially over time. Such documentation will be invaluable in future enforcement efforts.

Train Employees, Business Partners, and Independent Contractors
All of these protection systems, however, are only as good as the people enforcing them. Where possible, due diligence should be conducted on the employees and third parties to whom trade secrets will be revealed. Also, an investment should be made in training employees—and business partners and perhaps even their employees—on appropriate methods for handling trade secrets. This will include, of course, a discussion of what is and is not a trade secret, who can have access to what, and the like. One important category of personnel that should not be overlooked (but often is) is independent contractors. There must be confidentiality agreements with and training of independent contractors just as there are of employees and third-party business partners.

All training should take place at the start of the employment or other business relationship, and refreshers should be given from time to time. Upon departure of an employee or termination of a business relationship, give reminders about the duty to maintain trade secrets in confidence even after the relationship has ended and that trade secrets should not be used for an unauthorized purpose.

Document the Value of Trade Secrets
Looking ahead to enforcement, describing—and quantifying—the value of a trade secret to a company is a key component of any trade secrets case. To make enforcement easier, and to minimize the cost during discovery, I recommend that a company create or maintain records of their investment in the trade secret contemporaneously with the creation of the trade secret. Companies also should consider other ways of valuing the trade secret, such as increases in revenue and/or decreases in costs after a trade secret is implemented. Even companies that do a good job of identifying and protecting their trade secrets often overlook this step, which can cause a great deal of work (and thus cost) to try to recreate this information retrospectively. Particularly for R&D trade secrets, trying to ascribe the value to a trade secret years after the fact can be difficult. Companies’ financial records may not be maintained in accordance with particular trade secrets—for example, financial records may exist for the entire R&D department, not for time spent on a particular project, let alone a component within a project. Given the potential lifetime of some trade secrets, it is also likely that accounting systems may change over time and detailed information may no longer be accessible, even if it once existed.

Address Cross-Border Trade Secrets
Cross-border issues must be addressed. Not all countries have the same respect for trade secrets that we do in the United States, let alone a body of laws to enforce them. Companies that do work internationally must be fully familiar with the trade secret laws in the countries in which they work, as well as the cultural perspective on trade secret protection. Even if enforcement takes place in the United States, if trade secrets are being used abroad, the company’s efforts to maintain their protection in foreign countries likely will become relevant and a subject of discovery. Thus, the same efforts that are made to maintain records of trade secret protection efforts at home should be made for uses abroad.

Conduct Due Diligence When Acquiring a Business with Trade Secrets
One final note: when acquiring a business, especially where value is being ascribed to trade secrets, I recommend that due diligence be conducted on the topics discussed here, i.e., what are the trade secrets and how are they documented (if at all), what steps are being taken to maintain their confidentiality now and in the past, where are the trade secrets being used (here and around the world, now and in the past), and what financial documentation presently exists (or can be recreated) supporting the value of the trade secrets to the company. Even if your company is doing a good job of maintaining its own trade secrets, when you inherit what others have done, you may have enforcement issues so severe that they impact the value ascribed to the trade secret in the transaction (caveat emptor!).

Conclusion
No matter how careful and thorough a company is, it is not possible to completely eliminate the possibility of trade secret misappropriation. But, through these efforts and others, the risk of trade secret misappropriation should be decreased, while the effectiveness of trade secret enforcement efforts should be increased. Perhaps most importantly, the efforts at documentation, discussed above, should also help to reduce the cost of enforcement, should it be required.

Keywords: litigation, woman advocate, trade secrets, Defend Trade Secrets Act, intellectual property, confidentiality, due diligence

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