How to Protect Your Trade Secrets
Advice for the small-business owner on protecting trademarks, writing nondisclosure agreements, and other tools for protecting intellectual property.
When it comes to intellectual property, or IP, many people's knowledge begins and ends with patents, which grant inventors exclusive commercial use of their creations. And, yes, if you invent something potentially valuable, you may very well want to invest in obtaining a patent. But most companies haven't invented anything -- and yet they still own intellectual property that needs protection.
Their names, for example, are trademarks. Some may copyright written work. And most companies have trade secrets, which include "any formula, method, or information that gives you a competitive advantage," says Susan F. Fisher, an attorney with Denver's Fairfield and Woods. "Anything that takes time, money, or effort to develop and that you don't want your competitors to know about."
Trade secrets are rarely breached as a result of a determined adversary, such as an industrial spy or disgruntled employee. Instead, says James Pooley, a partner in the Palo Alto, California, office of Morrison & Foerster and a past president of the American Intellectual Property Law Association, "the vast majority of instances of loss of confidential information are inadvertent."
A good trade-secrets policy can minimize the chances of that happening. You may want to consult a business lawyer, perhaps an IP specialist, for guidance. But the following pages lay out the basics on protecting your company's trade secrets -- and sketch out the basics of trademarking for good measure.
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How to Protect Your Trade Secrets: Establish Priorities and Procedures
What constitutes a trade secret depends on the business. It can be a manufacturing process, a "secret sauce," or products in development. It might include a customer list, a business plan, financials, or projections. It can also be "negative know-how": the avenues that you tried that led nowhere.
Putting safeguards in place not only protects this information but also shows interested parties -- such as judges and juries -- that you tried to protect it, should a dispute ever come to litigation. A trade secret is protected by law only when the owner has, as the model Uniform Trade Secrets Act puts it, made "efforts that are reasonable under the circumstances to maintain its secrecy." "It's not as simple as just saying, 'I have this idea, and it's a secret,' " says Paul Ulanch of the North Carolina Small Business and Technology Development Center. "You must clearly show that you recognized it in advance as a trade secret."
That said, courts have allowed flexibility in what constitutes reasonable measures. "It has to do with the kind of secret, what the company does, and the threat it faces in the real world," says Pooley. "If you have high employee turnover, in a highly competitive market, then you have to trust information with a lot of people. But if you're a low-turnover industry, it probably won't require as much vigilance."
The first step is to prioritize your proprietary information and categorize the results, says Pooley. Consider the relative importance of each category and the relative risk of loss; then try to gauge how well the measures you might take would protect that category.
The next advice may sound superficial, akin to washing behind the ears, but these steps are in fact necessary and unfortunately often ignored. At a minimum, a reasonable policy should require that a company identify proprietary material as just that -- with a big CONFIDENTIAL stamp, say, on the document itself. Once the material has been labeled as secret, the next step is simply to keep it secret. First, "you limit it to people who need to know," says Fisher. And "you make it inaccessible to anybody who doesn't need to know -- in a safe or, for computer files, under password protection." Here you follow the commonsense rules of passwords: Make them random and impossible to guess, use numbers as well as letters, and change them often. When the IP is a process or formula, some companies fragment the process so that no one employee knows it from beginning to end. KFC, for instance, separately mixes parts of its "11 herbs and spices" at two locations.
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How to Protect Your Trade Secrets: Get Your Employees On Board
Educate. Start with a company policy, outlined in an employee handbook. It ought to articulate why keeping information confidential is important to the company and how it can be hurt when secrecy is breached. It should establish how the company determines what is confidential information and the procedures for protecting it -- highlighting the employees' role in that process. "These policies should be stated in general, high-level terms," says Pooley, but "as detailed as they need to be so employees don't exercise discretion beyond what you want them to do." Because receiving the trade secrets of a staff member's former employer can put your company in jeopardy, the policy might also address that concern. And follow up with periodic refresher training and e-mail reminders.
Ensure confidentiality. Insisting that employees with access to proprietary information sign a confidentiality, or nondisclosure, agreement is perhaps the most important element of trade-secrets policy, at least as far as the courts are concerned. A lawyer will help you draft one, but in the simplest terms, says Fisher, it should establish that the company has confidential information that must not be disclosed, detail the actions the employee must take if it is improperly disclosed, and reserve for the company legal remedies in that instance. Pooley recommends including an annual certification of compliance by the employee, which serves as another reminder.
Nondisclosure agreements often include a noncompetition provision, which attempts to keep ex-employees from going to work for, or becoming, rivals. These clauses are, says Pooley, "of dubious enforcement" in some states and entirely unenforceable in California. "In almost every state, you will find judges extremely skeptical about these restrictions," he says. Your best bet is to set the terms as generously as you can: Keep the subject matter and geographic restrictions narrow and the duration under one year. Firing an employee without cause will probably weaken a company's hand in attempting to enforce a noncompete agreement.
