The “Secrets” to Maintaining a Sometimes Unrecognized Business Asset: Trade Secrets

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Originally published in Bloomberg Law Reports - February 2, 1012.

The basic rule for maintaining a trade secret is a follows: Take all reasonable steps to keep it secret. If not, the trade secret status of the secret may be lost.

While such steps are relatively inexpensive, businesses commonly fail to take them. However, the same businesses will often expend large amounts of money in seeking patents, even if the resulting patents are less valuable than their trade secrets. This typically occurs because businesses do not understand (1) what a trade secret is, and accordingly are not aware they own valuable trade secrets, (2) the enormous value of their trade secrets, or (3) the appropriate steps which should be taken to protect their trade secrets. While briefly touching on the first two points, the focus of this article is the reasonable steps which should be taken to protect trade secrets.

While the definition varies between states, a trade secret is generally any secret information which gives a business a commercial advantage over competitors. Under the Uniform Trade Secrets Act (“UTSA”) adopted by most states, trade secret information may include “a formula, pattern, compilation, program, device, method, technique, or process.” For example, as defined in Comment b of the Restatement of Torts, a trade secret may be “a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.” In fact, a trade secret can be a compilation of information which is otherwise publicly available, but which took time, effort and expense to compile. One well-known example of a trade secret is the Coca-Cola formula.

Beyond the obvious competitive advantages trade secrets can offer if utilized in secrecy, trade secrets can be enormously valuable if they are misappropriated?whether by a departing employee disclosing trade secret information to a competitor or through corporate espionage. Such enormous value can include (1) a large damage award against the misappropriating party, and (2) an injunction or exclusion order against the misappropriating party. As an example of the former, in September of 2011 jurors awarded $919.9 million in damages to DuPont Co., after finding that Kolon Industries Inc. misappropriated trade secret information relating to the manufacture of Kevlar. As an example of the latter, the Federal Circuit recently upheld the authority of the United States International Trade Commission to exclude from importation goods made in China using a misappropriated trade secret manufacturing process.

As to the focus of this article, many businesses are not aware of the appropriate steps which must be taken to protect a trade secret. Under the UTSA, the information must “[be] the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

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