McAfee & Taft tIPsheet - November 2012: Common sense trade secret protection by Bill Hall

by McAfee & Taft

[author: Bill Hall]

Are your trade secrets at risk?
Yes, every minute of every day.

Can you minimize the risk?
Yes, by creating a corporate culture where each employee recognizes the value of trade secrets to corporate health. 

The above sentences were the original sum total of my article. After all, these four sentences, in a nutshell, identify the problem and provide a preventive law solution. My editor advised me to provide more details. She’s a hard task master. So to keep the peace, I offer the following for your consideration.

When I give presentations at intellectual property seminars, I lead with a section on trade secrets. Likewise, when asked to review a client’s IP management, my initial inquiries concern management of trade secrets. Why? Because trade secrets are the least understood, yet most vulnerable, component of intellectual property. As a result, many companies fail to adequately protect their valuable trade secrets.

To understand the vulnerability of trade secrets, one need only consider the definition of a trade secret. The Economic Espionage Act and the Uniform Trade Secret Act provide long legal definitions of the term “trade secret.” However, for our purposes, I prefer the following definition:

A “trade secret” can be any technical, scientific, or business data not generally known to the public. The trade secret must provide an economic value to the owner and must be protected by reasonable efforts to secure the trade secret.

The vulnerability of trade secrets derives from the bolded portion of the definition. Trade secret owners must treat the information as a trade secret. Thus, a trade secret owner must be able to demonstrate reasonable due diligence to maintain the confidentiality of the trade secret.

Before discussing steps suitable to demonstrate the requisite due diligence, let’s discuss how others failed to exercise due diligence. One of the most common examples concerns the improper handling of customer lists. Customer lists frequently exist in hard copy and electronic format. In one instance, a court concluded that the customer provided economic value to the business owner. However, because the owner did not secure the customer lists in locked filing cabinets, the customer lists did not carry appropriate markings of confidentiality, and the employees were not trained to treat the customer lists as confidential, the court refused to grant trade secret status to the customer lists.

Lack of employee training is the biggest obstacle to creating a culture where each employee values trade secrets. Employee training needs to address two major issues: the handling of trade secrets and the identification of company trade secrets. Before the employees are trained on how to safeguard trade secrets, they need a mechanism to identify corporate trade secrets.

I recall one instance when a client called to complain about some engineers who had published a trade secret in a peer review article. Even though the engineers did not follow proper protocols for publishing a paper, they did not intentionally publish the trade secret. They simply didn’t know their paper inadvertently included important trade secret information. Knowing the corporate history, I explained to my client that the corporate culture did not provide an adequate basis for identifying technology that constituted trade secret information. In an engineering environment, engineers tend to believe that everything is obvious and well known to all in their field. I proposed two tasks to remedy the problem:

  1. Top-down reminders to all employees of the company’s publication criteria; and,
  2. A comprehensive review of the corporate technology.

I further recommended that the review establish levels of confidential information. For example, levels assigned to information might be:

  • Public domain;
  • Confidential;
  • Sensitive confidential; and,
  • Critical confidential.
By establishing levels of confidential information, the company would be able to easily identify those employees having access to each level of confidential information, thereby establishing the necessary due diligence in safeguarding the confidential information. Employees should only have access to trade secrets on a “need-to-know” basis. The review required six months to complete; however, upon completion the client had a firm foundation for protecting its critical trade secret information.

Further, the review emphasized the importance of the trade secret technology to the entire company. As a result, the corporate culture toward trade secret information changed significantly. With the change in corporate culture, this client would not likely face the problem encountered by the Ford Motor Company in 1999.

In 1999 Ford was encountering difficulties in protecting its trade secrets. Someone in house was mailing internal documents to a small web-based journalist, Robert Lane. Mr. Lane, a Ford enthusiast and an employee at a PEP BOYS® store, ran the website Through a contact with a local car club, Mr. Lane became aware of a Ford technical meeting being held at a nearby Holiday Inn. Putting on his journalist hat, Mr. Lane attended this confidential meeting unchallenged. He subsequently published the agenda from the meeting on his webpage. Ford naturally brought suit seeking an injunction against publishing the material from the meeting and other material provided to Mr. Lane. “Injunction denied,” said the court. Ford obviously had an internal problem; however, beyond the improperly disclosed documents one has to question the wisdom of holding a technical meeting at a Holiday Inn. The meeting clearly lacked any security as Mr. Lane was able to walk in unchallenged, obtain a copy of the agenda, and leave with two coffee mugs and four posters. By the way, at the time of the meeting, Mr. Lane owned two F-150’s and four Mustangs, including a 1969 model that he drove to the meeting.

I use this story during seminars and have been known to have a “stranger” drop in just to see if anyone in the seminar will challenge an unknown “guest.” Usually, everyone in the audience is appalled when I throw the stranger out of the meeting … that is, until they hear the Ford story.

One client took this scenario to heart and decided to change the corporate culture using a game. Employees were divided into teams. The goal: steal or otherwise gain access to confidential information through the other teams. For example, if an employee left a computer workstation unattended and not password protected, an opposing team that accessed that station would be awarded points. More points were awarded based on the level of access gained. If a laptop was not secured to the desk, bonus points were gained by absconding with the laptop. By the end of the three-month game, protection of trade secret information was a cultural trait.

The benefits of culturally protecting trade secrets will extend beyond the office walls. As employees gain awareness, they will be less likely to accidentally reveal critical trade secrets when attending conferences and conventions, flying on airplanes, etc. Conferences are prime risk areas. Part of the employee training should include awareness factors. For example:

  1. Are you familiar with everyone in the audience?
  2. Does the audience have a need to know the information (or are you bragging)?
  3. Where are you? Is the audience constantly changing?
  4. Will the disclosure lead to or include corporate trade secrets? 
Finally, a word on contracts (and another story): confidentiality agreements are dangerous. Boilerplate confidentiality agreements are really dangerous.

Confidentially agreements are necessary tools for many research companies. However, please be aware that confidentiality agreements have a narrow purpose. Many years ago as a new attorney, I received a request from a client for a confidentiality agreement that would allow them to assess a contractor’s capabilities. Six months later, I asked the client how the review went, only to learn that they had engaged the contractor three months prior. When I asked who prepared the services agreement, the client informed me they were using the one I had provided. For the last 20 years, I consistently remind each and every person requesting a confidentiality agreement that these agreements are ONLY for the exchange of INFORMATION. If money or services will be changing hands, they need a different agreement.

In summary, to establish a corporate culture with a focus on protecting trade secrets, companies should identify and classify their trade secret data, establish access to the trade secrets only on a need-to-know basis, secure the data in locked cabinets and secure electronic systems, ensure that all employee agreements contain an obligation to safeguard corporate confidential information, escort all visitors to corporate facilities, and conduct employee exit interviews.

It’s 1:30 in the morning. Do you know who has access to your trade secrets?


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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