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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.

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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. 

Dig Deeper: Could You Profit from Incorporating Patent Licensing?

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.

Dig Deeper: Providing a Safety Net for Confidential Data

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.

Dig Deeper: Should You Monitor Employees' Computer Use?

How to Protect Your Trade Secrets: Protect Yourself in a Deal

Many business alliances, such as licensing arrangements, require a company to lay bare its secrets. Protect yourself here again with a nondisclosure agreement. The NDA delineates specifically which information is confidential (and which isn't), limits what the counterparty may use it for, and specifies how long it must remain secret (usually two to five years). Be sure to craft an agreement, says Pooley, that asks for all copies of the information back at the end of the term. Besides reducing the risk that a stray copy will wind up in the wrong hands, "this reinforces the idea of confidentiality by requiring someone to go through a physical act," he says.

If your counterparty declines to sign an agreement, proceed cautiously. Sometimes, you can establish an "implied" confidential relationship, which will grant you rights similar to those of a signed agreement, but it is naturally more difficult to prove. It helps when the other party solicits the information from you. Indicate that you are providing the information for a business proposition in which you hope to be paid, and request that it remain secret. Pooley recommends that before attending a meeting at which you plan to disclose secrets, document your intent by sending an e-mail or letter indicating the information is confidential and can be used only for the intended purpose: "If there's nothing that comes back denying that, then almost certainly the court will agree the meeting is confidential, even though the other party hasn't put their signature on an NDA." Pooley also recommends putting confidentiality stamps on any documents you present.

Dig Deeper: The Merger that Ate My Customer

How to Protect Your Trade Secrets: Trademark Style

When you publicize a business, you are claiming a trademark, whether or not you realize it. That's because there are two kinds of trademarks. Many businesses officially register their mark as a statutory trademark with the U.S. Patent and Trademark Office (uspto.gov), which entitles a company to use the name in every state. But a common-law trademark is yours once you start using a name, whether or not you register it. Provided it doesn't infringe on another's existing mark, it allows you to use the name in your local market or state, and your claim to it grows stronger as your business grows.

A company intending to go national should register its trademark even before it opens its doors. Before filing, do a comprehensive search (in the USPTO's searchable online database) of other national trademarks and of locally registered and common-law trademarks. (See "Resources" below for trademark searchers.) You are looking for any mark that could be confused with yours in the same line of business or in a connected one.  

A registered trademark allows you to force another company using the same or a confusingly close name to change it -- but only if the other company adopted the name after yours was registered. A company using the name locally first is free to continue doing so, can limit your entry into that market, and can even object to your application, making the process more expensive.  

Even a company that plans to stay local should avoid potential conflicts by confirming that its chosen name hasn't already been nationally registered, says Jonathan Jennings, a trademark lawyer at the Chicago firm Pattishall, McAuliffe, Newbury, Hilliard & Geraldson.

Dig Deeper: How to File a Trademark

How to Protect Your Trade Secrets: What's in a Name?

Lawyer Susan F. Fisher has identified a hierarchy of name types that offer increasingly stronger protection when registering a trademark: 

A descriptive name, which describes the product or service offered (Mufflers On Main), is the most difficult to register and defend and should generally be avoided. (Over time, such a name can acquire "secondary meaning" that is well protected -- Office Depot, for example.) 

Better is a suggestive name -- one that suggests the nature of the business. Microsoft, for instance.

Better still is an arbitrary name, which has a common meaning that's unrelated to the product or service, as in Apple.

A fanciful name, like Kodak or Xerox, which means nothing outside the context of the company's identity, is the easiest kind of trademark to defend. 

In general, a personal name cannot be trademarked.

Dig Deeper: What to Know to Build an International Brand

Resources

Inc.com has an extensive archive of articles on intellectual property. Visit www.inc.com/topic/intellectual+property.

The website MegaLaw.com aggregates resources and links on intellectual property, patents, and trademarks.

Two main trademark-search services are CT Corsearch (ctcorsearch.com; comprehensive search from $605) and Thomson CompuMark (compumark.thomson.com or 800-692-8833; full U.S. searches from $595).

Last updated: Dec 1, 2009




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