5 Steps to Keeping Your Trade Secrets Secret
By Procopio Partner Mindy M. Morton
A high-stakes trial that began this week between ride-sharing market leader Uber and self-driving car designer Waymo is front-page news. We frequently see patent and copyright cases in the headlines, but this is a trade secret case, which infrequently achieve such a high profile. What many people don’t realize, however, is that trade secrets are vital to the U.S. economy. According to the Office of the National Counterintelligence Executive, companies collectively lose as much as $300 billion per year due to theft of trade secrets. Such theft frequently leads to costly and protracted litigation. An injunction is often the only way to stop a competitor or ex-employee from using your trade secrets, but there are steps you can take to protect your information.
So what exactly is a trade secret? It’s information that derives economic value from not being generally known to the public and which its owner seeks to keep secret. A trade secret could be technical information or know-how; internal business information including marketing and finance strategies; customer lists; software, computer programs and source code; formulas; or external business information on, for example, suppliers and competitors. Famous examples of trade secrets include the recipes for Coca Cola and Kentucky Fried Chicken, as well as the google algorithm. The Waymo-Uber case is about self-driving automotive technology using LIDAR.
Trade secrets are different from patents, although many companies take advantage of both patent and trade secret protection. To obtain a patent, you need to publish the details of your invention, and in return, you can stop others from using that invention for a limited period of time. Trade secret protection can last forever, but you need to take steps to keep it secret and it can’t be something others already know or could easily figure out. Both Coca Cola and Kentucky Fried Chicken allegedly keep their trade secret recipes in a vault. You don’t need to go to that extreme to protect trade secrets, but you do need to take reasonable steps.
Congress recognized the importance of trade secrets in 2016, when it passed the Defend Trade Secrets Act, or DTSA. Among other things, DTSA created a federal cause of action when trade secrets are misappropriated. Before the DTSA was enacted, trade secret cases were governed by state laws. The DTSA also allows ex parte seizures in extraordinary circumstances when a temporary restraining order isn’t sufficient. Although the seizure provisions have been highly publicized, very few cases have addressed seizures in the almost two years since enactment. Notably, the DTSA does not preempt state trade secret laws. This is of particular importance in California, which handles more trade secret cases than any other state. (See David S. Almeling et. al., A Statistical Analysis of Trade Secret Litigation in State Courts (2011) 46 Gonz. L. Rev. 57, 74.)
The ideal for any trade secret owner is to avoid litigation and economic harm by keeping secrets in-house. While nothing can 100% guarantee the protection of a company’s trade secrets, these steps can help:
- Identify and protect your critical trade secrets. It’s hard to protect your secrets if you haven’t identified them. Once you’ve itemized them, determine the best way to restrict access to any details involving those secrets. That protection system should consider access by your own employees as well as any outside parties. Recognize the ways companies can lose valuable trade secrets. Theft via flash drives and cloud servers is on the rise, as are cyberattacks.
- Have a company-wide trade secret policy in place. Now that you’ve worked out a protection system for your trade secrets, capture in a formal policy how any given employee will interact with confidential documents such as customer lists and technical information, which are involved in most trade secret cases, and make sure employees are familiar with the policy.
- Require all new employees to sign a confidentiality and invention assignment agreement when they start work. Your work hasn’t ended once you’ve addressed your existing employees. You need to proactively manage new hires as well, with the signing of a confidentiality and invention assignment agreement. For protection under California trade secret laws, it’s critical that the agreement reference California Labor Code Section 2870. It’s also important that the new employees certify that they have not brought any confidential information from a previous employer, to ensure your company isn’t liable for any theft of someone else’s trade secrets. Should you discover any material from a previous employer in your computer system, immediately preserve the evidence and consult with an experienced investigator.
- Take action the moment an employee gives notice. In over 75% of trade secret theft cases, the alleged thief is an employee or former employee. (Id. at 68-69.) Thus, it’s critical to act quickly when an employee with access to trade secret information informs you that he or she is leaving. Suspend the employee’s computer access and don’t allow him or her to delete anything. Make sure to schedule an exit interview, and remind the departing employee of signed confidentiality obligations. You may want to consider making a forensic image of the individual’s computer and/or emails, particularly if the employee was involved in critical development work or if you believe he or she is going to work for a competitor.
- Don’t forget about interactions outside the company. The second biggest threat is business partners. Approximately 20% of trade secret cases involve business partners as alleged misappropriators. (Id.) Whether it’s a manufacturer in your supply chain or a customer, there are times when a company will need to share elements of a trade secret with individuals outside the company. At a minimum, obtain a signed nondisclosure agreement with anyone having access to trade secret information, and limit access to what is absolutely essential.
Unfortunately, even the best-intentioned companies can find themselves dealing with trade secret theft. Should you pursue a trade secret case in court, you’ll be in a better legal position if you have taken the proper steps to protect and identify your trade secrets. You may be able to avoid litigation if the case involves a former employee joining another company, if the new employer is willing to cooperate. If the trade secret is valuable enough, litigation may be the only possible recourse.
Over 25% of trade secret cases involve temporary restraining orders or preliminary injunctions, and seeking this type of relief is expensive and requires you to explain your case at a very early stage. (Id. at 84.) Further, trade secrets owners only prevail in about 40% of state court cases. (Id. at 86.) Given the risks and expenses involve in trade secret litigation, taking steps to protect your trade secrets before they are stolen can save you time and money.
Mindy M. Morton is a Partner with Procopio in the Silicon Valley office. Her practice focuses on internet and intellectual property litigation. She helps clients resolve disputes involving trade secret, patent, trademark, copyright, computer fraud and non-compete agreement litigation, and litigates cutting-edge cases at the intersection of technology and free speech issues.