Legislation and Legal Definition in Trade Secret Protection
In the United States, the safeguarding of trade secrets is regulated by a combination of federal and state laws. The Federal Defend Trade Secrets Act (DTSA) provides the legal definition of a trade secret as follows:
"A trade secret encompasses all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if— (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."
Furthermore, almost all states in the US have adopted some form of the Uniform Trade Secrets Act (UTSA), which also defines a trade secret similarly to the DTSA. Under the UTSA, a trade secret is described as information, including a formula, pattern, compilation, program, device, method, technique, or process that: (1) obtains independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
It's important to note that while most states have adopted versions of the UTSA, there can be variations between states' statutes. Therefore, it is advisable to review the specific laws of each state to understand the precise scope and details of the legislation.
Ownership
The owner of a trade secret, as defined by the DTSA, is "the person or entity in whom or in which rightful or equitable title to, or license in, the trade secret is reposed..."
Secrecy
To establish the secrecy of a trade secret before any misappropriation or disclosure, both the UTSA and DTSA require that the information not be generally known to, and not be readily ascertainable through proper means by other persons. Therefore, for information to qualify as a trade secret, it must remain confidential and not be common knowledge within the industry or business. Various criteria are used to determine the secrecy of a trade secret, including:
The extent to which the information is known outside of the business.
The level of knowledge possessed by employees and others involved in the business.
The measures taken by the owner to safeguard the secrecy of the information.
The difficulty with which others could properly acquire or duplicate the information.
Commercial Value
The DTSA allows a plaintiff to seek damages for the actual loss resulting from the misappropriation, as well as damages for any unjust enrichment caused by the misappropriation. Alternatively, damages can be assessed by imposing liability for a reasonable royalty for the unauthorized disclosure or use of the trade secret. Various methods are available to establish the commercial value of a trade secret, such as:
Depreciated cost
Replacement cost
Fair market value
Net present value of future cash flows derived from the trade secret
Protective Measures
Determining whether a rights holder has implemented reasonable protective measures to prevent the disclosure and misappropriation of trade secrets depends on various criteria. Courts typically assess the circumstances surrounding the protection of trade secrets, considering factors such as:
The presence or absence of an explicit agreement restricting disclosure.
The nature and extent of security measures implemented by the owner to prevent unauthorized access by third parties.
The circumstances under which the information was disclosed.
The extent to which the information has been made public or easily accessible.
Additionally, courts often take into account the principle of proportionality when evaluating the adequacy of the protective measures. This includes considering the size and sophistication of the trade secret owner. For instance, a small company with limited resources and a small workforce might be held to a different standard compared to a larger corporation with greater capabilities to implement advanced trade secret protections.
Best Practices for Trade Secret Protection
To ensure maximum protection of their trade secrets, rights holders should consider implementing several best practices and internal policies:
Use of Nondisclosure and Confidentiality Agreements: Before disclosing any sensitive information, consider having parties sign agreements that outline the confidential nature of the information and the obligations of the receiving party.
Document Marking: Clearly mark documents and materials as 'confidential' or 'trade secret' to indicate their protected status.
Restrict Access: Limit access to trade secrets to employees and individuals on a "need to know" basis. This can help prevent unnecessary exposure of sensitive information.
Secure Computer Systems: Protect computer servers and individual devices with robust passwords, encryption, and other security features to prevent unauthorized access.
Employee Training: Educate employees on data security best practices and their responsibilities regarding confidentiality. Regular training sessions can reinforce the importance of protecting trade secrets.
Physical Security Measures: Implement physical security measures such as storing hard copies of documents in locked cabinets or rooms to prevent unauthorized access.
Return of Company Property: Include clauses in employment agreements requiring employees to return all company information and company-issued devices upon termination of employment.
Prohibit Personal Device Usage: Implement policies that restrict employees from storing confidential information on personal electronic devices to minimize the risk of accidental exposure.
Third-Party Transactions: Exercise caution when entering into third-party transactions that involve sharing trade secrets. Insist on nondisclosure agreements and secure agreements for the return or destruction of confidential information after the transaction concludes.
Government Disclosures: Be aware of the risks associated with disclosing trade secrets to government entities, especially in bid proposals or regulatory submissions. Understand the potential for public records requests and take necessary precautions to protect sensitive information.
By adopting these best practices and internal policies, rights holders can significantly enhance the protection of their valuable trade secrets and reduce the risk of misappropriation or unauthorized disclosure.
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