Guard trade secrets with vigilance, or lose protection
IP is the umbrella term for patents, trademarks, copyrights and trade secrets, and it can cause issues that affect your business from an offensive and defensive perspective. Two questions need answers: How do you protect your IP, and how do you avoid exposure for violating the IP of others?
What’s secret?
The first step in developing a strategy for managing your trade secrets is to understand what constitutes a trade secret. Trade secrets are uniquely different from the three other types of IP.
While patents, trademarks and copyrights require public disclosure as a condition for legal protection, a trade secret is information that is not generally known to the public. Trade secrets include any proprietary knowledge and information that you want to keep out of the hands of competitors, such as computer codes, business processes, pricing, manufacturing processes and raw material costs.
Trade secret protection takes many forms. You are probably familiar with confidentiality and non-competition agreements, but those agreements really only provide a framework for enforcing rights for violation of confidentiality and non-use obligations. They do nothing to actually protect confidential information.
As the owner of trade secrets you must take commercially appropriate steps to protect your confidential information. While these steps will vary depending on the size of the company and the nature of its confidential information, all tangible property containing trade secrets should be conspicuously marked as ‘proprietary and confidential’.
Employees, consultants and business partners should be required to execute confidentiality agreements before they are given access to confidential information, and companies should restrict dissemination of their confidential information only to those who have a need to know the information.
Furthermore, steps should be taken to implement appropriate security procedures such as locked premises, secured entry points and visitor logs. Access to electronic information should be password protected and subject to prohibitions on copying and forwarding such information in electronic form.
With increasing media reports of data breaches through lost or stolen laptops, you may even want to install encryption software and biometric authentication technologies on laptops and handheld devices. A written policy regarding the protection and non-dissemination of trade secrets and confidential information should be distributed to all employees on a regular basis.
With respect to employees, there are several commitments you should obtain. Employees should agree to maintain the confidentiality of the company’s trade secrets. Moreover, in the age of e-mail, blogging and instant messaging, your written policy needs to explicitly prohibit dissemination of information except through approved channels.
Depending on the nature of your business, you may want to consider developing a non-compete agreement, stating that employees agree not to compete during the term of their employment as well as a specified period after they leave the company. It may also be appropriate to obtain agreements not to solicit other employees to leave your company for a similar period of time.
An invention assignment agreement is also crucial to ensure that an employee does not claim any rights to IP developed during the term of employment.
A company that does not take the necessary precautions to plug every potential hole will have a great deal of trouble claiming trade secret protections. What is reasonable varies by size of the organization and by industry, but if steps taken generally reflect standard industry practices, you will be in a much stronger position to protect your trade secrets when the time comes.
What could go wrong?
Assuming all of the protective steps outlined above have been duly taken, what else could possibly happen to threaten a company’s trade secrets?
There have been instances of litigation where an employee took IP belonging to a former employer and introduced it into a new employer’s business or technology. In such circumstances, former employees are not the only targets of this type of litigation. It can be argued that the new employer received a substantial financial benefit by using someone else’s assets.
In one recent example, a now defunct technology company alleged that former employees took IP they had developed while at this company and used those assets as the foundation for a new company, which was acquired for more than $400 million, fewer than 12 months after it was founded.
The lesson here is that trade secret management cannot be limited to trade secrets developed by your company; it also must extend to preventing trade secrets owned by third parties from being introduced into your company.
Like a virus attacking a computer system, the introduction of another company’s trade secrets into your business can have disastrous consequences for your technology and your business, including the exposure and bad publicity of a lawsuit, the loss of product development/marketing/sales momentum, and distraction from the primary focus of the business.
To avoid this situation, have all new employees represent in writing that they do not possess any trade secrets of third parties and will not introduce any such technology or information into your company’s business.
Another source of exposure for your company may be outside contractors and vendors. With the use of contractors comes the potential risk that they will introduce trade secrets belonging to someone else, just as an employee can ‘infect’ you with third-party trade secrets.
The fundamental problem is that many consultants and contractors do similar work for several clients, some of whom are probably your competitors. This type of residual information cannot simply be erased from the contractors’ minds. To address this, your agreement with the contractor should contain a warranty that the contractor will not include any third-party IP in the deliverables and the contractor should indemnify you in the event it breaches that warranty and your company suffers any losses as a result.
Taking reasonable steps to protect your trade secrets cannot guarantee total security, but it will greatly diminish the chances of the worst-case scenario.
