Understanding and Protecting Trade Secrets
Trade secrets are items of confidential information that businesses use to gain an advantage over their competitors. For some businesses, trade secrets are significant assets. Laws governing the use, disclosure, and protection of trade secrets are important for most business owners to understand.
Both state and federal laws govern trade secrets. At the federal level, trade secrets are protected by the Defend Trade Secret Act (DTSA). Most states have adopted some from of the DTSA in their protection of trade secrets. In Washington, the Washington Uniform Trade Secrets Act (WUTSA) clarifies what information is worthy of trade secret protection and defines remedies for misappropriation of this information.
To understand how trade secrets may impact your business, it’s important to know what qualifies as a trade secret, what to do if your trade secrets are misused or improperly disclosed, and what potential pitfalls often accompany trade secret ownership.
What kind of information counts as a trade secret?
The WUTSA defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process that (1) derives independent economic value, actual or potential, from not being generally known to, and not 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.”
In plain English, this means that for information to constitute a trade secret,
- it must have (or could have) economic value on its own;
- that value comes from the fact that it is not known by others who might want to use it; and
- the owner is taking steps to keep it secret.
The WUTSA applies protection broadly to different kinds of information (e.g., business, technical, or financial information). Information protected as a trade secret can include client lists, pricing information, formulas, computer code, or other items. But regardless of the type of information, it must meet the above requirements to qualify for trade secret protection.
What kind of information has or could have economic value?
As mentioned above, things such as client lists, marketing plans, pricing structures, manufacturing processes, formulas and software can all be protected as trade secrets. One thing that all these items have in common is that they can provide economic value to you and your business. For example, your company’s specific manufacturing process, which produces a product distinct from the competition (or produces it more efficiently), provides economic value. A famous example of information that provides economic value is the Coca-Cola formula. Coke’s formula for their soda has extreme economic value because it is a vital element of a distinct product that generates significant revenue.
What does it mean to “have value in not being generally known”?
The types of information listed above have value in and of themselves, but they are more valuable when they aren’t known by the owner’s competitors. Continuing with the Coca-Cola example, part of the reason why their secret formula is so valuable is because nobody else knows what it is. Imagine if the formula was common knowledge; Coke would have a hard time trying to monetize it because the market would be filled with products using the same formula. So, part of the value in your trade secret has to come from the fact that others, if they had access to it, would want to use it.
What are “reasonable efforts to preserve the secrecy of trade secrets”?
Determining what are “reasonable efforts” involves considering the cost of protection (both indirect and direct) and the number of protective methods in place. Absolute secrecy is not required, and the owner of a trade secret is not expected to protect the information from any and all possible methods of discovery. The owner simply must use methods of protection that are reasonable under the circumstances.
Appropriate measures to maintain secrecy generally include marking documents as trade secrets and limiting personnel who have access to the information, entering into nondisclosure agreements, or ensuring you have other agreements in place to protect your information.
Keep in mind that it may be reasonable for large numbers of people, and even third parties and their employees, to have access to trade secrets. As long as proper methods or agreements are in place, such disclosures will not necessarily interfere with trade secret protection.
What should you do when your trade secrets are taken or disclosed improperly?
If your trade secret is improperly taken or released, you have a cause of action for misappropriation under both federal and state law. You may also need to take action to defend a trade secret (or risk not taking the reasonable measures necessary for the trade secret to be protected in the first place). To bring a trade secret misappropriation claim, you must first prove that a valid trade secret exists as discussed above. Then you must also prove one of the following:
That the other party acquired the trade secret information through improper means. Improper means include:
- Physical or electronic theft
- Breach of a duty to maintain secrecy, or inducing such a breach
- Misuse or improper disclosure of information
That the trade secret was used or disclosed by someone who, at the time they did so, knew or had reason to know that
- they acquired the trade secret from someone who used improper means to acquire it;
- they acquired the trade secret under circumstances that would create a duty to maintain its secrecy; or
- they acquired the trade secret from someone who had a duty to maintain its secrecy.
Common trade secret pitfalls
The WUTSA and similar state statutes only protect trade secrets as long as they remain secret. Take, for instance, a trade secret that is disclosed and posted on the internet by improper means. While you may be able to bring a misappropriation claim against the party who disclosed the information, the information itself may no longer be protected because it is no longer secret.
Similarly, reverse engineering can be a valid defense to a misappropriation claim. So if you are distributing a product that embodies your trade secret and you try to bring a misappropriation claim against a third party who you believe stole your secrets, that third party can argue that they reverse engineered the trade secret and defend the claim.
If you would like to learn more about trade secrets and how to protect your business’s confidential information, please contact us today.
*Thanks to Max Faucette for his help drafting this post.