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    How Companies Can Devalue Their Own Intellectual Property: Taking the “Secret” out of Trade Secrets


    By: Paul O. Lopez, Esq. and Jonathan Lewis, Esq.
           
    Trade secrets are the lifeblood of many successful companies, and provide an edge over the competition. Yet too often these critical pieces of intellectual property are taken for granted and inadequately protected. In fact, the lack of due diligence implemented by a business as to its trade secrets may render the intellectual property worthless. So, despite a trade secret’s intrinsic and actual value to a business, if a company fails to understand the nuances of trade secret law, and does not take simple, but fundamental steps, to protect these trade secrets, the intellectual property’s value can be substantially compromised. Companies must develop protocols to identify, designate and secure trade secrets at an early stage, and should revisit these protocols regularly.

    If and when a need to litigate over trade secrets arises, companies that have taken reasonable steps to protect their proprietary information will in turn receive greater protection from courts. More importantly, establishing and following proper trade secret protocols will minimize the risk of misappropriation and may prevent the need for costly litigation altogether.

    STEP 1 – IDENTIFY TRADE SECRETS


    A company can not develop effective policies to protect confidential information without a basic understanding of the types of information protected by trade secret law. In all fifty states, trade secret laws have been enacted to prevent the misappropriation of secret information, that confers a competitive advantage, and that the owner has taken reasonable steps to protect. While the precise definitions applied by trade secret statutes may vary slightly from state to state, the requirements of secrecy, reasonable protection and a competitive advantage are universal components.

    While it may seem self-evident that trade secrets must be kept “secret”, this requirement is often the center of factual disputes that result in lawsuits. Absolute secrecy is rarely obtainable in a business environment, and it is not a prerequisite to trade secret protection. Instead, the first inquiry is usually whether the purported secret is generally known by competitors within the trade. Manufacturing techniques, formulas, source code and similar information which is routinely used by multiple competitors is less likely to be considered a trade secret, even if a company takes steps to prevent such information from being released to the public. Courts will also consider whether or not a purported secret is readily ascertainable by competitors: a customer list assembled through market research and sales data compiled by a company is more likely to be protected than a customer list culled from the culled from a telephone directory or public property records.

    Companies should ask, “what do we have that our competitors do not?” More often than not, the competitive edge that allows a company to succeed is a piece of information, a customer list, a business model or technique which the company does not want to fall into the hands of their rivals in the field. The first step for a company developing effective trade secret protocols is to identify those secrets that convey a competitive advantage and to begin thinking of them as valuable assets.
           
    A secret which conveys a competitive advantage is only half the formula for a trade secret that will receive protection in a court of law. Beyond these requirements, courts will also ask whether a company has taken reasonable steps to preserve the secrecy of their confidential information. The following sections will address good practices in designating trade secret information and taking appropriate steps to secure that information by restricting access and using non-disclosure agreements with key personnel.

    STEP 2 – DESIGNATE TRADE SECRETS
           
    Clearly designating the information that a company considers to be a “trade secret” will help to minimize the chances of confusion and accidental disclosure and will also have evidentiary value in proving that the company took reasonable steps to preserve the secrecy of the information. If the trade secret is in the form of a written document, this can (and should) be clearly accomplished by marking that document with a confidential stamp. The stamp itself is usually not enough in itself to convey trade secret status, but it is a start to persuading a court that the company, itself, considers the document a secret. It is also an important piece of evidence when used in conjunction with the other security measures discussed in this article.
           Trade secrets like manufacturing techniques, source code or business strategies might not be reduced to writing, but companies should still take appropriate steps to designate such information as confidential. Employees with access to confidential information should receive formal training on the appropriate use of that information and the company’s policies with regard to what can and can not be discussed with individuals outside the company or below an appropriate level of security clearance. Employees who participate in these training sessions should be asked to sign an acknowledgement that they participated in a training addressing the company’s trade secret policies and execute a nondisclosure agreement.
    It is also a good practice to reduce these policies to writing in a company’s employee handbook, but this good practice is not an appropriate substitute for training sessions and one-on-ones with key personnel to discuss treatment of trade secrets. Companies should clearly convey the seriousness of its policy of protecting confidential information, and should not allow this policy to be lost in the many pages of an employee handbook reviewed by new employees.

    When possible, a company should also include a reminder of the scope of information which it considers to be a trade secret in the exit interview process for departing employees. Identifying and emphasizing the confidentiality of trade secrets at the beginning, middle and end of an employee’s tenure with the company will solidify the impression that the employee should not treat this information lightly and will also convey to any reviewing court that the company itself considered the information highly confidential. Clearly designating trade secrets may not prevent leaks and misappropriation entirely, but it will significantly reduce the odds of accidental or casual disclosure by well-intentioned employees.

    STEP 3 – SECURE TRADE SECRETS THROUGH RESTRICTED ACCESS AND POST TERMINATION
    AGREEMENTS


    Unfortunately, not all employees (particularly not former employees) are well-intentioned and many leaks of trade secrets do not occur by accident. Safeguards to prevent intentional misappropriation by competitors and disgruntled ex-employees are a necessary component of any policy aimed at protecting a company’s trade secrets. These measures should be aimed at limiting access to confidential information and at ensuring that individuals granted access are deterred from any improper use of that information.
    Common sense restrictions on access to confidential information include keeping records in a locked room or filing cabinet that is separate from other records maintained by the company and using strong password-activated screen savers on computer terminals with access to confidential data (passwords should be at least eight characters long and should contain both letters and numbers). Companies should review their telecommuting policies to ensure that employees who regularly use laptops or mobile devices employ password protection and appropriate levels of encryption when working with restricted information.
    The precise controls a company uses will vary according to the nature of the trade secret and the way in which it must be utilized in the course of business. Common sense and logic come into play when developing appropriate security measures. Nevertheless, what is important is that trade secrets only be accessible to employees who have received specific authorization from the company, and that the company actively controls how and when those authorized individuals have access. The more limited the access, the more Florida law will likely recognize that the information is deemed confidential by the company.
    Once a company determines that an employee will be provided access to confidential information, that employee should be asked to sign a non-disclosure agreement. This agreement should ideally be prepared by an attorney familiar with the nuances of trade secret law within the jurisdiction, and should clearly define the scope of protected information, the authorized and prohibited uses of the information and the consequences of violating the agreement. The agreement should be signed by the employee before access to confidential information is granted.

    The importance of a well-drafted non-disclosure agreement in trade secret litigation can not be overstated. A company trying to enjoin a former employee from using a supposedly-secret customer list will be hard pressed to explain how the list was a secret if access was granted to its employees with no restrictions or agreement to maintain the secrecy of the list. Conversely, when a signed NDA is present, the former employee will have a difficult time arguing that he or she was unaware that information set forth in the document was confidential and subject to protection. Well drafted non-disclosure agreements are a critical piece of evidence in establishing a company took reasonable steps to protect its trade secrets.
    In addition to non-disclosure agreements, employers should consider the use of non-competition agreements for employees with extensive access to sensitive company information. When these key employees leave a company, it is difficult to establish what information they take with them, and even more difficult to establish whether they are using that information for the benefit of a new employer. In order to avoid this speculation, it is preferable to obtain post-term restrictions on the positions an employee may accept with competitors.

    Many states place substantial restrictions on the use of non-competition agreements, but their use continues to be accepted in connection with employees who have been granted access to bona fide trade secrets. Nevertheless, even when non-competition agreements are permitted, state law often restricts the scope and duration of these agreements, and agreements which exceed these parameters may be rewritten or invalidated by courts. Employers preparing non-competition agreements must be careful to craft restrictions which will reasonably protect their business interests without overreaching and exceeding the restrictions authorized by state law. Indeed, many states recognize that what an employee has learned on the job is not necessarily protectable, but the use and dissemination of a company’s trade secret can be prohibited when the employee goes to work for a competitor.

    Conclusion

    In sum, clearly a company’s trade secrets are extremely valuable and should be safeguarded. However, too many times, company’s can expose themselves to losing the value of these trade secrets by not understanding the nuances of trade secret law and by not implementing measures that actually protect the company’s intellectual property. Having competent and experienced counsel who is well versed in this area is essential to ultimately protecting the lifeblood of the company.

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