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Trade Secrets 101: Protecting Your Company’s Most Valuable Assets from Walking Out the Door

Practical Steps in Protecting Valuable Trade Secrets
from Unauthorized Disclosure and Access

noncompeteTrade secrets are one of the most valuable elements of the business, and can wreak havoc if permitted to fall into the wrong hands, or worse, allowed to walk out the door. Every day, however, companies lose the benefit and value of information they have spent months, years, or decades developing, simply because it was not adequately protected, or it was allowed to come into the possession of someone who never should have had access to it.

In this article, we discuss steps that your business can take in protecting its confidential information and trade secrets from disclosure, including a short and straightforward action guide listing easy steps you can implement to protect your company.

What is a Trade Secret?

A trade secret has to meet a specific definition in order to be considered a trade secret. It does not consist of all information that your business generates or develops. In California, trade secret is defined as confidential proprietary information that provides a business with a competitive advantage or actual or potential economic benefit.  Trade secrets are protected under the Economic Espionage Act of 1994 (EEA) at the federal level as well as the California Uniform Trade Secret Act. Generally, information must meet 3 requirements in order to be considered a trade secret:

  • the information must fall within the defined “information” eligible for protection;
  • such information must derive independent economic value from not being generally known or readily ascertainable by appropriate means by others; and
  • the information must be the subject of reasonable efforts to maintain its secrecy.

There is no black and white definition as to what kind of information actually constitutes information that qualifies for being deemed a trade secret. Generally, however, a trade secret can include:

  • All forms and types of financial, business, scientific, technical, economic, and engineering information;
  • Patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, or codes;
  • Information related to single or multiple events, negative data points that have commercial value such as the results of lengthy and expensive research which prove that a certain process will not work; and
  • Information that can be held or stored in any medium (whether physically, photographically, graphically, electronically, or in writing).

The following categories of information have been found by courts of law to constitute trade secrets:

  • Pricing techniques
  • Marketing techniques
  • The identity and requirements of customers
  • Financial information
  • Customer information
  • Maintenance of data on customer lists and needs
  • Sources of supplies
  • Pricing data and figures
  • Manufacturing processes
  • Product compositions
  • Expiration lists (often used in the insurance industry)
  • Buy books
  • Cost books
  • Customer books or lists
  • Confidential costs

Although not every type of information at a business constitutes trade secret data, many different kinds of information do, and as a result, businesses should implement certain steps to protect that information from disclosure.

Steps to Take in Protecting Your Trade Secrets:

#1 – Identify and Designate

Above all, you should take inventory of your businesses confidential information, and identify what trade secrets actually exist. You should identify what threats exist to the confidentiality of that information, what damage could because of that information leaves your workplace, or falls into the wrong hands, and what security or other protocols are needed to fill in deficiencies.

All trade secret and confidential information should be designated as such. This includes placing documents and specific file folders marked appropriately, placing legends on materials making it clear that they are subject to confidentiality, and otherwise not accessible by employees or third parties.

#2 Lock up Physical Files

If you have trade secrets that are comprised of hardcopy files, remove them from easy access. Place them in locked cabinets or file drawers, with the key protected from access by employees or others. If trade secrets are placed in a file storage drawer, room, or other location, monitor the individuals that are permitted to access information in that particular location.

#3 Monitor Access

Companies also enable system tracking to identify access to Company locations, files, and other materials by employees. This can involve assigning employees with identification numbers, issuing badges, and keeping track of who is permitted entry into the office on specific days and hours. For example, there may be employees that you permit have we can access into the office, but not others.

#4 Compartmentalize Information

Another step to take involves ensuring that your information is compartmentalized, and that not every piece of information is centrally located and easy to access location. Any times, companies use physical servers or online cloud storage based servers, such as Dropbox, Just Cloud, or others, and permit every person in the organization to access all documents. This should not be the case. Certain types of documentation should simply not be in a publicly accessible location.

#5 – Audit Trails and Technical Safeguards

One of the strongest types of protections businesses can take in protecting trade secrets is in setting up digital security mechanisms like audit trails,  keep track of which files are accessed when and by which individuals. When an employee leaves, it is often a very simple task to determine whether there are indicators of files being accessed, copied, or downloaded, in the days or weeks before their departure.  If your company has considered using a document management system, this is one good reason among many to do so.  In addition, there are other technical safeguards that can be implemented. Encrypting confidential information, using access restrictions/limitations, and monitoring large downloads or outgoing emails or data transfers can also detect and flag unusual activity.

#6 – Exit Interviews

Your company should be in the regular practice of doing exit interviews of a departing employee and a departing employee’s immediate supervisor upon learning that the employee is leaving. The purpose of an exit interview is to determine whether there will be problems with the employee’s adherence to obligations of confidentiality owed to the company, and to take the appropriate action if necessary.   The exit interview is also a good place to collect all badges, keys, company-provided equipment, laptops, PDAs, smartphones, and all other materials.

#7 – Ensure Employment Agreements are Used

In addition to all of the foregoing, one of the best ways to protect against trade secret theft is to ensure that you are using agreements when hiring employees, independent contractors, and when dealing with new business partners. Agreements of this nature routinely include a number of provisions, including protecting confidentiality, which establishes permitted uses and disclosures of confidential information; and assignment of inventions, which makes the ownership of all new inventions, discoveries, works concepts and ideas the property of the company; non-solicitation, which will prevent the employee, and a contractor, or business partner from poaching other employees, vendors, or suppliers; as well as restrictive covenants. Obviously, non-competes are unlawful in California, but there are number of provisions that can be put into employment and other agreements to protect the company from specifically these types of risks.

Obviously, there is no one-size-fits-all solution to protecting a company’s confidential, business proprietary, and trade secret information. However, by enacting a series of simple and straightforward steps, you can mitigate the risk of valuable information falling into the wrong hands, are being accessed by individuals who do not have the appropriate authorization to obtain it. As with all things in the legal world, an ounce of prevention is worth a pound of cure and it is often dramatically easier to restrict access to valuable information from wrongdoers then it is to prosecute claims for the wrongful disclosure of such information long after such disclosures have been made.

Getting Legal Help

AXIS Legal Counsel’s Business Practice provides legal advice to numerous small businesses with a variety of legal matters, including business formations, contracts, deals, and transactions, business administration, corporate governance, operations, risk management / insurance,  labor/employment matters, intellectual property, healthcare, crisis management, directors/officers, private/data security, technology, statutory/legal compliance, and business litigation. AXIS represents businesses, corporations, LLCs, LLPS, partnerships, and startups in need of a corporate lawyer, for business legal matters as well as business litigation, such as disagreements, non-solicit agreements, non-competes, trade secrets, and other disputes with businesses. We are also experienced in providing assistance to business clients concerning business contracts, corporate formation matters, contracts and transactions, business litigation, business legal advice for Corporations, LLPs, LLCs, Partnerships, Small Business, Startups, and others involving corporate law.

If you are seeking a business lawyer, or for information on retaining AXIS Legal Counsel to represent your business in connection with any legal matter, contact [email protected] or call (213) 403-0130 for a confidential consultation.

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