Earlier this year, the U.S. Commerce Department released a report titled "Intellectual Property and the U.S. Economy: Industry in Focus," which made clear the following point:
Innovation has a positive pervasive effect on the entire economy, and its benefits flow both upstream and downstream to every sector of the U.S. economy. Intellectual property is not just the final product of workers and companies—every job in some way, produces, supplies, consumes, or relies on innovation, creativity, and commercial distinctiveness.
In other words, computer hardware and software companies, pharmaceutical companies, and medical equipment manufacturers are not the only companies with intellectual property. “Every” job in some way creates or relies on it. That’s every. As in every.
While intellectual property can include works and inventions protected by copyright, trademark, or patent law, the “innovation” and “commercial distinctiveness” referred to in the report bring to mind another class of intellectual property: trade secrets. Trade secrets are what make companies unique, and every company that believes it has an advantage over its competitors has them.
By law, trade secrets can be any business or technical information, such as, to name a few, customer lists, training methods, sales strategies, market projections, product evaluations, and manufacturing techniques. To be a trade secret, though, the information must first have value that comes from not being generally known through independent development or reverse engineering. Second, companies owning this valuable information must take reasonable steps to protect the secrecy of it.
A recent trade secret case in federal court showed the importance of both elements in, of all things, the context of pizza. Little Caesars Enterprises, Inc. filed suit in federal court in South Dakota alleging that a former franchisee, Sioux Falls Pizza Company, Inc. ("SFPC"), was stealing the company's "Hot-N-Ready" pizza system. SFPC had been a franchisee for twenty years, but when the franchise agreement ended, SFPC established a competing pizza company in the same location where it had operated the Little Caesars franchise. Little Caesars alleged SFPC was using the company's trade secrets, including the "Hot-N-Ready" system and the specifications for how to let the dough rise, how to apply sauce and toppings, and how to cook and store the pizza. Without the information, Little Caesars contended SFPC could not operate profitably. Little Caesars asked the Court to shut SFPC down pending the remainder of the trial.
Before one questions whether the making of a pizza can even constitute a trade secret, keep in mind this observation made by a North Carolina federal court several years ago in a similar case. When confronted with the argument that “pizza is pizza,” the North Carolina court said:
Ever since Neapolitan Gennaro Lombardi opened the first American pizzeria in New York's Little Italy in 1905, this confection of dough, cheese, tomato sauce, spices and assorted toppings has inspired intense local and regional rivalries. Chicagoans vehemently reject any “Second City” designation when it comes to their succulent “deep dish” pizzas; and, as counsel has acknowledged, Giordanno's and Gino's East have their advocates (although the Court prefers Pizzeria Uno and Due). Elsewhere, New Yorkers prefer it thin and by the slice, while San Franciscans dote on their gourmet pizza. Even in the south, barbecue has begun to appear atop pizza. Wherever and whenever pizza is sold, there are few quicker ways to set Americans to bickering then to ask them who makes the best pizza.
The South Dakota federal court refused to find a trade secret in the Little Caesars' case, though. Under the first required element, the Court said "Little Caesars did not make a clear showing of, and the court could not discern, specifically which information within Little Caesars' system is not generally known." References to "preparation, timing, and amounts of food per hour to minimize waste is not specific enough to constitute a trade secret." Little Caesars could not identify any specific software or computer program, nor any complex manufacturing process, nor any secret that was unique to it. Ultimately, "Little Caesars' description of what makes up its system is too generic or general to amount to a trade secret under the evidence presented at this stage of the litigation."
The court also found that Little Caesars did not do enough to protect whatever secrets it might have. Little Caesars did require its franchisees to sign confidentiality agreements protecting proprietary business information, but Little Caesars required nothing from the franchisee's employees. These employees, who made the dough, applied the toppings, cooked the product, and sold it to customers, had "the most detailed knowledge of Little Caesars' system" but "had no duty or promise to keep that information confidential because they were not required to sign confidentiality agreements."
The court's opinion is yet another reminder that all companies, no matter their industry, should undertake extensive reviews of their business practices and sensitive business information. By conducting a "trade secret audit," companies can better define what their unique processes are, which will serve them well if they must file suit against a former employee or competitor. With a solid grasp on what its trade secrets are, a company can do more than allege it owns "processes" and "methods." The company will not risk having a claim dismissed for lack of specificity.
Once it identifies its trade secrets, companies should also ensure they are creating a culture of confidentiality in the workplace. Improving how employees are trained to handle such information, reviewing physical and cyber-security measures that limit access to the trade secrets, and revising contracts will prove to any court that the company has taken reasonable steps to protect its trade secrets.
Without such precautions, a company's trade secrets will be available for anyone to obtain by (pardon the pun) take-out or delivery.