I. What is a Trade Secret?
In California, a trade secret is: "[I]nformation, including a formula, pattern, compilation, program, device, method, technique, or process," that has value in being kept a secret and must be subject to efforts to maintain its secrecy. Cal. Civ. Code § 3426.1(d). Accordingly, the trade secret must not only have value to the holder of the secret, but the information must also have value to a competitor, such that if it knew the information, it could put it to beneficial use.[1] There are several types of information that qualifies as a trade secret. For example, courts have found the following types of information to be a trade secret:
Ø “Know-how” (methods, procedures, and expertise that are not patentable)[2]
Ø Internally developed techniques, formulas, and specifications regarding industrial or consumer products[3]
Ø Information relating to any research, development, tests, reports, or studies regarding a particular product or customer (this list can include customer lists)[4]
Ø Information concerning a customer’s business plan, including financial goals and strategies for manufacturing, production, marketing, packaging, and distribution of products[5]
Ø Computer software and databases[6]
As such, an employer and company should conduct an audit of its information to identify its trade secret information and then set up ways to protect the information from disclosure and theft. There are several ways for a trade secret owner to protect itself. The most common is via confidentiality, nondisclosure, and nonsolicitation agreements. Other methods include labeling or marking documents containing the information, limiting access to the information whether it is on a computer or on the shop floor, and limiting the number of persons who have access to the information.
The amount of protection varies and the company should consult an attorney with experience in developing trade secret protection plans. If the information is the company (e.g. the recipe for Coca-Cola), then the company may want to implement as many ironclad ways to protect the trade secret as possible. On the other hand, if the information is the type that it will not have value in a short period of time, then the company may want to enlist lesser options of protection. the cost of the protection may also play a factor, as well as the accessibility of the information to employees or third parties.
One fairly easy way to protect a company's information is to remind an outgoing employee of their obligations to maintain the secrecy of the company's trade secrets pursuant to a nondisclosure agreement. If there is no such agreement in place, then the company may ask the outgoing employee to sign one during the exit interview. In some cases, the employer may want to inform the outgoing employee's new employer of the former employee's nondisclosure obligations. While this option has been fairly common in the technology sector (everyone wants to protect their trade secret information), this last measure should be done after consulting an attorney in order to make sure that the company is not running afoul of any rights or laws of the former employee. For example, the company should not threaten litigation based on the new employment, somehow prohibit the employee's ability to move to a new company or career, defame or otherwise make misrepresentations about the former employee.
A new employer can also proactively protect itself from potential liability for trade secret misappropriation by discussing with the new employee any confidentiality agreements with prior employers or the possibility that the new employee knows of his/her former employer's trade secrets.
When advising employers and employees about trade secrets be very careful to impress upon them the consequences of their actions or inaction. Trade secret protection is lost with very little effort. Also, for an employer, designating too much information as a trade secret can work against you.
Overall, while this is a very brief overview of trade secrets and how to protect them, it is clear that both employers and employees should work together to avoid the loss of a trade secret. Once a company stops protecting its trade secrets or otherwise discloses the trade secret to others, that company can lose the trade secret. That is why a company should be vigilant in maintaining and improving its trade secret protection plan.
[1] See Abba Rubber Co. v. Seaquist, 235 Cal. App. 3d 1, 18 (1991).
[2] See Surgidev Corp. v. Eye Technol., Inc., 648 F. Supp. 661, 687 (D. Minn. 1987), aff’d 828 F. 2d 452 (8th Cir. 1987) (applying both the California and Minnesota version of the UTSA). This includes “Negative know-how” or “negative research.” See Courtesy Temporary Sev., Inc. v. Camacho, 222 Cal. App. 3d 1278, 1287 (1990).
[3] See Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443 (2002).
[4] See Abba Rubber, 235 Cal. App. 3d at 18; Daniel Orifice Fitting Co. v. Whalen, 198 Cal. App. 2d 791 (1962).
[5] See PepsiCo, Inc. v. Redomond, 54 F. 3d 1262, 1265 (7th Cir. 1995).
[6] See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 520 (1990) (applying California version of UTSA).
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