TRADE SECRETS 101: WHAT EVERY BUSINESS OWNER SHOULD KNOW

TRADE SECRETS 101: WHAT EVERY BUSINESS OWNER SHOULD KNOW

Reportedly, Coca-Cola keeps its soda formulas in a vault inside its headquarters. The vault has a palm scanner, a numerical code pad, and a massive steel door. Only two senior executives know the ingredients, and the identities of these execs are virtually unknown. Supposedly, protocol dictates that these executives cannot even ride on the same airplane. (CNN – more on Coca-Cola secrecy policies)

What’s the idea behind this strict protocol? Should both executives perish, the recipe would be gone forever. Talk about top secret!

What is a trade secret, exactly?

Trade Secrets fall under Intellectual Property law (“IP Law”). Under IP law, work products are not treated the same and belong to one of four classifications – patents, trademarks, copyrights and trade secrets.

To understand the difference between patents, trademarks and copyrights, read our previous article – “Do I need a Trademark, Copyright, or Patent?” or click here.

Trade Secrets consist of information in the form of a formula, pattern, compilation, program, physical device, method, technique or process. To meet the most common definition of a trade secret, it must be used in business and present an opportunity to obtain an economic advantage over competitors who do not know or use it.

In most states, for information to qualify as a trade secret it must (1) have commercial value; (2) the owner must have taken reasonable steps to keep it a secret; and (3) it must really be a “secret” (i.e., your vendors, competitors, and all 15 of your employees do NOT know your secret, and the secret isn’t generally known or readily accessible to circles that normally deal with the kind of information in question).

Simply put, a business owner would not want a competitor obtaining information that would minimize their competitive advantage. If customers are knocking down your restaurant door for your special BBQ sauce, you need to take the necessary precautions to prevent the restaurant across the street from using your specially formulated BBQ recipe.

What are examples of trade secrets?

Survey methods used by professional pollsters

A new invention for which a patent application has not yet been filed

Customer lists

Manufacturing techniques

Computer algorithms

Recipes

Sometimes sensitive information like recipes and formulas aren’t able to meet the legal standard for a patent; therefore, trade secrets are an alternative IP option.

Unlike trademarks, copyrights and patents, protecting your proprietary information as a trade secret does not require a strict application or registration process and fees. However, there are practical costs and logistics associated with keeping your information a secret. Trust me, Coca-Cola has spent a lot of time and money over the years keeping its Coke formulas top secret.

Trade secret protection arises organically through purposeful action taken by the trade secret owner to protect it (no matter whether they labeled the information a trade secret). The owner simply needs to take steps to secure from disclosure or discovery information that they deem highly confidential.

Exception to the General Rule: Despite all the care and precaution you may take in safeguarding your sensitive information, there’s one form of appropriation that will not prevent a competitor from using, copying or benefiting from your trade secret – Reverse Engineering. Simply put, IP law does not prevent someone from analyzing a product or components of a product with the purpose of figuring out how it’s constructed and how to recreate it. Reverse Engineering is lawful assuming that the engineer discovered the secret independently or without violating an agreement or the law.

How can business owners protect their trade secrets?

There are several ways business owners can protect their trade secrets. However, the most common way to do so is with a Nondisclosure Agreement (or “Confidentiality Agreement”). This type of agreement includes provisions that prevent an employee or vendor from sharing certain proprietary information under the penalty of damages and injunction (a court order preventing further disclosure or use of the secrets).

Not only would disclosure of the company trade secret violate the terms of the Nondisclosure or Confidentiality Agreement itself, disclosure would also violate state law. The Uniform Trade Secret Act (“UTSA”) is the blueprint or model set of laws governing trade secrets. All states, including Georgia (Ga. C.A. Secs.10-1-760 et seq.), have adopted some form of the UTSA in the development of their trade secret laws.

Do I need a Nondisclosure or Confidentiality Agreement?

As mentioned above, outside of taking affirmative action to keep information confidential, Nondisclosure Agreements are the best way to protect your trade secrets. Well-drafted agreements manage employment and vendor expectations and obligations, and they reduce misunderstandings about what materials or devices are deemed highly sensitive and proprietary information. The law governing employment agreements and Nondisclosures significantly changed in 2011. Do not simply rely on old forms or contracts you found and adopted from Google because they may contain unenforceable or out-of-date provisions.

If your secret sauce is that spectacular, be proactive about protecting your rights and investments.

Your Thoughts: Are you creating dishes or sauces using your mom’s or grandmother’s famous recipes? Do you have an organic skincare or hair product that you’re formulating? What steps have you taken to protect it? Any suggestions you can give to those who need to take better steps to secure their information?

This article is intended to provide you with general information; it does not constitute any type of legal advice. For recommendations related to your specific matter, we encourage you to review our Practice Areas page for additional information and then contact us to discuss your company’s legal needs.

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