Under the common law and under California’s Uniform Trade Secrets Act, it is broadly accepted that businesses have the right to protect their trade secrets, to the extent of limiting the employment mobility of their employees. In this blog, we look at the limits of valid and enforceable trade secret protection through restrictive covenants.
What is the definition of a trade secret?
Under the California Civil Code, a trade secret is defined as information with independent economic value that is not generally known in the industry or to the public, and which is the subject of reasonable efforts to protect its secrecy. Common examples of trade secrets include technological processes, product development research, product formulas, business plans and financial data. However, virtually any kind of information can become a trade secret if it is shielded from public knowledge.
Customer lists and other debatable trade secrets
The courts in California have ruled that certain types of information can be protected as trade secrets in limited circumstances:
Customer lists and supplier lists
Pricing, cost and profit margin formation
Key contacts, customer preferences and purchasing history
Employee compensation data and special skills
Specialized techniques and methods of operation
Negative knowhow (what not to do)
Contract expiration dates
Required steps to protect trade secrets
One of the components of the definition of a trade secret is that the business takes reasonable steps to protect it from being disclosed. The U.S. Court of Appeals in E.I. DuPont de Nemours & Co. v Christopher considered the limits of reasonable steps to protect secrecy. The case related to industrial espionage of an industrial plant by means of aerial photography. The court ruled that, although there is an expectation of taking reasonable steps, businesses and inventors are not expected to create an impenetrable fortress against prying eyes. Reasonable protective steps can be divided into external and internal controls. External controls may include measures such as employing security guards and entering into non-disclosure agreements with third-party suppliers and customers. Internal controls may include marking confidential documents with an appropriate stamp, maintaining confidentiality policies in employee handbooks, and setting up password controls on internal servers.