All businesses have trade secrets,
including, but not limited to, proprietary research and development, strategic plans and personnel practices.
One of a company’s most important assets,
it is paramount to safeguard trade secrets.
“Senior management must recognize the
critical nature of trade secrets and properly protect them as they would any other
valuable asset,” says Bruce Truex, senior
partner at Secrest Wardle.
Smart Business spoke with Truex about
what elements of a business are eligible for
trade secret protection, how long protection
lasts and how confidentiality agreements
can be crafted to protect trade secrets.
What elements of a business are eligible for
trade secret protection?
Every business has information that it
wants to keep secret. But not all information used by a business qualifies as a trade
secret. A number of requirements must be
met to qualify for that status. First, a trade
secret must consist of information.
Second, the information must derive economic value — actual or potential — from
the fact that it is a secret. Third, the information cannot be generally known by the
public or others in the industry. Fourth, the
information must be treated as a secret and
be subject to reasonable efforts to maintain its secrecy.
Trade secrets encompass both business
and technical information. Trade secrets
include unpatented inventions and processes, future products, non-public company
documents, test data, formulas, patterns,
compilations, programs, devices and techniques. The courts have recognized as trade
secrets customer lists, customer information, marketing and business plans, strategic plans, surveys, data, pricing information,
research, financial information, manuals
and instructional methods. Even negative
information concerning failed projects or
programs has been treated as a trade secret.
How long does trade secret protection last?
The protection of trade secrets is very different from the protection afforded to
other forms of intellectual property. Unlike copyrights, patents and trademarks, there
are no expiration dates for trade secrets. A
business can maintain information as a
trade secret simply by keeping it secret.
There are no forms to fill out or applications to register. As long as the trade secret
remains a secret, the law allows for a perpetual monopoly concerning the secret
information. In contrast, most patents are
valid for only 20 years.
Unfortunately, trade secret protection is
reasonably easy to lose compared to other
forms of intellectual property protection. A
trade secret, under certain circumstances,
can be legally reverse engineered; that is,
by starting with a known product and
working backward to find the method by
which it was developed. Trade secrets
offer no protection from individuals who
develop the same secret independently.
Trade secret status may also be lost over
time. A new technology today may, over a
short period of time, become generally
known and quite common.
How are trade secrets interpreted by the
courts?
Simply not telling anyone about confidential information is not enough to preserve its secrecy. Courts require active
steps to ensure the secrecy of valuable
information. Trade secret protection stems
from the common law of the 1800s. Today,
Michigan has adopted the Uniform Trade
Secrets Act, which defines trade secrets.
The Act is fairly broad and protects almost
any information that provides the owner of
the secret with a competitive edge.
How should confidentiality agreements be
crafted to protect trade secrets?
Confidentiality agreements, which have
been approved by the Michigan courts for
some time, are contracts between two parties to not disclose to others certain information that the parties have identified as
confidential.
A confidentiality agreement should contain a description of the confidential information not to be disclosed. It should also
describe the information that will be
excluded from the definition. Every confidentiality agreement must detail how the
information is to be handled by the recipient. The recipient must agree not to disclose the information to third parties. The
agreement should also restrict the use to
which the confidential information may be
put. Typically, an employee is prohibited
from using the confidential information
for any matter other than the employer’s
business.
The most important remedy to include in
a confidentiality agreement is a provision
allowing the owner of the information to
obtain injunctive relief if the agreement is
breached. The provision should state that
both parties agree that any breach of confidentiality would result in irreparable harm,
thus avoiding the need to submit proof of
harm in court before obtaining an injunction. The agreement should also provide
that the party breaching the promise of
confidentiality must pay the other party’s
costs and attorney fees incurred in enforcing its rights under the agreement.
BRUCE TRUEX is a senior partner at Secrest Wardle. Reach him at [email protected] or (248) 539-2852.
