What does this mean?
You want to safeguard your confidential information if you want it to retain any value. If your information is confidential and you take the proper steps to keep it confidential, it can still be a trade secret. If not, you can lose your trade secret protection.
Does this apply to me?
If you have confidential information, then yes.
Why could this mistake hurt my business?
Simply put, a lot of times your trade secrets are your entire business’s value. If you don’t keep the relevant information confidential, they won’t be considered trade secrets and your company will be worth nothing.
This could all be avoided by:
Taking the proper steps to protect your confidential information. Here’s a long-winded answer of how to do that.
- Physically protect your information.
The first thing to do is to keep the secret “physically protected.” If you’re in an incubator, you can’t leave it out on your desk. It needs to be locked up. Do you have it on a computer? That computer needs to be locked up—both with a password and physically. If you left your laptop at a coffee shop and someone got the trade secret off of it, you’d probably lose protection. Granted, if you have it locked up and someone breaks into your home, you’d have a good argument that you still maintained enough physical protection. Obviously there are limitations to what you need to do—you don’t need to build a nuclear-bomb-protected vault to protect it. But it has to be under “lock and key.”
- Limit the number of people with access to the information.
You also need to limit the number of people with access to the info. For example, the Coca Cola formula is supposedly only known by two employees at any one time. So who can know about it? Basically, only people who need to know about it. You don’t need all your employees of your business to know your trade secret, for example. You certainly don’t need anyone unrelated to the business to have access to it.
- Use Non-Disclosure Agreements
But this brings up a good point. What if you need to show investors that you have this great idea or process? That’s when non-disclosure agreements, also known as confidentiality agreements, come into play. An NDA is a contract between two parties that says that the person getting the info won’t tell others the secret. These are extremely important and must be utilized if you want to keep your trade secret valid. You should also use them for your employees that have to know the information as well. Basically—anyone who you tell the information to should be signing an NDA.
If the receiver of info violates the NDA, you can sue them and be compensated for your damages. Also, NDAs are great because it tells the receiver that—hey, you need to keep your mouth shut about this stuff. They also make you list out what’s supposed to be the info that’s kept secret—you can’t just say that “everything you tell them is a secret.” Otherwise, if you told them some sport statistic or the weather for the week that they repeated to their spouse, you’d be able to sue them. Obviously that can’t be true. Check out our blog on NDA for some good drafting tips—these contracts are important and can’t be too broad or burdensome, otherwise you won’t even be able to enforce it. So you gotta be careful with these.
- Think about reverse engineering.
Let’s talk about reverse engineering again briefly. Earlier I mentioned that if someone reverse engineers your product, you’ll lose your trade secret. So what can you do? Well, let’s say your product is something physical that’s a component of another device. Let’s be honest—that can probably be figured out, in which case patents make more sense. Trade secrets can make more sense if you have software, in which case you can spend money on great encryption tools that increase your chances of not being figured out. Or what if you have a great formula or process? There’s some good precedent indicating those can be difficult to find out—just look at Coke’s recipe. So you have to factor all this in and not be a “penny pincher” when it comes to securing your trade secret as strongly as possible so you can prevent reverse engineering. See Avoidable Mistake 45 to see why you should be careful when deciding between Trade Secrets or Patents.
- Have a trade secret protection policy.
Additionally, you need to consider having a trade secret protection policy if you’re going to be having employees know about the trade secret. This is a better version of the NDA that applies to your employees. The policy will allow you to disclose info and still let you conduct your business. Essentially, it is a company policy that tells your employees the importance of protecting the trade secret and points out the consequences of being careless with the trade secret info. Employees can be the greatest threat to your protection. They could be careless and cause a lot of damage. Also, employees are the most susceptible to seek to profit from the info you have by selling it to your competition. If you have employees and you’re serious about your trade secret, do one of these and have them review it at the first interview. You're best protected if you do this in conjunction with an NDA.
- Mark your documents as “confidential.”
Finally, you should put a notice of confidentiality on your trade secret documents along with language that indicates your documents are part of a trade secret. This is important for two reasons—one, it identifies that the documents aren’t to be disclosed to anyone. And two, it lets everyone know exactly what is considered part of the trade secret. You could get yourself in trouble by expecting that everything relating to certain information is part of the trade secret. Instead, you need to specifically identify only the documents that are actually the secret ones—don’t label everything as being a trade secret, otherwise it will hurt your chances of having a trade secret because someone else will argue that you disclosed part of the secret, even though what you disclosed was incidental to the actual secret. This is important, so if you’re not sure what is and isn’t part of the secret, talk to a professional. Also, checkout or Avoidable Mistake 47 to see why you should limit what you “tag” as confidential.
- If you have to disclose vital information,
- Consider how trustworthy the other party is;
- Consider the minimum amount of information you can disclose; and
- Keep good working relationships with employees
What if you need to disclose vital info? Everything I’ve mentioned so far is helpful and should be implemented, but it helps if you can take even further steps. For example, KFC, to maintain their recipe’s secret, has two companies make their spice coating—each create half and then they’re combined. That way, each group only knows half the recipe.
You can do the same thing with your company. Figure out what’s the minimum amount of info you have to disclose, and disclose only that.
Also, how much do you trust the party you’re disclosing the info to? If you’re not sure about them, don’t disclose anything—simple as that. And do you think the party might try to steal your info? This is common sense stuff, but if you don’t trust them, don’t disclose.
Finally, keep a good working relationship with your employees. This isn’t really a “legal avenue,” but think about it—if an employee feels loyal to the company, simply put, he’s probably not going to try to screw you over.
Will hired a contractor to manage his social media accounts for his online business. They didn’t sign any contracts, and the contractor had access to Will’s company’s Google Drive, which contained all their contact information.
The contractor disappeared and Will found out months later that the contractor got an offer to work with a competitor who created a similar product as Will’s. Will knew that the contractor had stolen all Will’s confidential information, including his customer list, because he saw the similarities in the products and he found out that the competitor was stealing Will’s customers.
Will would have little recourse here because the “confidential information” wasn’t confidential if it was shared with someone who didn’t sign an NDA. This means that the confidential information wouldn't be a trade secret because to be a trade secret, one of the requirements is that your information is “confidential.” So technically the contractor wasn’t stealing anything.