What Is a Trade Secret? Key Elements and Legal Protections Explained

What Is a Trade Secret? Key Elements and Legal Protections Explained

Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. Businesses need to know how to protect their valuable trade secrets and what to do if proprietary information falls into the wrong hands.

So, what is a trade secret?

A trade secret is proprietary information that is not generally known and provides a business with an economic advantage over competitors or customers. Examples include customer lists, recipes, sales data, marketing strategies, computer algorithms, non-patented inventions, and other confidential, proprietary information. In order to obtain legal remedies, trade secret owners must be able to demonstrate that they have taken reasonable measures to keep the information a secret.

Elements of a Trade Secret

The Defend Trade Secrets Act of 2016 (DTSA), S. 1890, 114th Cong. § 2 (2016), is a federal law that protects trade secrets and provides definitions for the terms “trade secret” and “misappropriation.” It defines a trade secret as:

“All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing, if:
(A) The owner thereof has taken reasonable measures to keep such information secret; and
(B) The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”

The trade secret laws of most states, including New Jersey, are modeled after the Uniform Trade Secrets Act (UTSA), which defines “trade secret” similarly. Enacted in 2016, the DTSA provides that trade secrets encompass a wide range of information types, including but not limited to financial, business, scientific, technical, economic, or engineering information. To qualify as a trade secret, the information must derive independent economic value from not being generally known or readily ascertainable by others who could obtain economic value from its disclosure or use. In addition, the owner must take reasonable steps to keep the information secret. Courts largely consider the trade secret definitions under the DTSA and various state laws under the UTSA to be “functionally equivalent.”

How to Protect a Trade Secret

Once proprietary business data is no longer secret, it is no longer protected under trade secret law. Moreover, it generally does not matter whether the disclosure was intentional or accidental. Businesses that fail to take reasonable steps to protect trade secrets do not get the benefit of intellectual property protection, so it is vital to act early to protect and enforce your trade secret rights.

While courts will always examine the unique facts of each case, the following factors will often be taken into account:

• Requiring non-disclosure agreements: Non-Disclosure agreementsorNDAs are an important protective measure when sharing proprietary information with employees, contractors, vendors, business partners, etc. When properly drafted and executed, such agreements make a company’s rights clear with respect to the specific information that constitutes a trade secret (along with its other intellectual property rights), requires the other party to maintain the secrecy of the information, and will take steps to pursue any misappropriation (defined below).
• Cataloging and monitoring trade secrets: Keeping an inventory of one’s company’s trade secrets, how they are protected and with whom they are shared can go a long way in demonstrating to the court that one is serious about trade secret protection. Remember, in order to have a trade secret under the DTSA, a company has to “take reasonable measures to keep the information a secret” – the company has to know the information is secret in order to protect it.
• Training employees: Employees must know what information is considered proprietary and what steps they should be taking to protect it. This may involve, at a minimum, including a trade secret policy statement in employee handbooks, marking documents as trade secrets, and requiring workers to sign NDAs.
• Restricting physical/electronic access: Companies should limit access to proprietary information to only those who “need to know” by implementing strict security controls preventing unauthorized disclosure. Examples include physical locks, password protection, and restricting public access to facilities.
• Establishing procedures for departing employees: One of the biggest risks to a company’s trade secrets is when  employees leave the company, it is advisable to have policies in place that immediately discontinue access to documents, databases and cloud storage systems as well as request that all company-owned devices are immediately returned.  Having an adequate confidentiality agreement (NDA) in place before the employee leaves is important.

When to Pursue Trade Secret Litigation

Trade secret misappropriation can take a variety of forms. The DTSA defines “misappropriation” as:

(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(B) disclosure or use of a trade secret of another without express or implied consent by a person who—

(i) used improper means to acquire knowledge of the trade secret;

(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

(I) derived from or through a person who had used improper means to acquire the trade secret;

(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or

(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

(iii)before a material change of the position of the person, knew or had reason to know that—

(I) the trade secret was a trade secret; and

(II) knowledge of the trade secret had been acquired by accident or mistake;

Common examples of misappropriation include employees taking confidential information with them when taking a job for a competitor or starting their own business; third parties, such as vendors, contractors, or suppliers, misusing confidential information; and competitors, foreign governments, or other bad actors gaining access to trade secrets through hacking or other illegal activities.

When theft occurs, trade secret litigation can be a valuable tool to protect your valuable property rights and prevent the offending parties from any further wrong doing. Remedies are often available under both federal and state law, and the proper legal forum will depend on your unique circumstances.

The DTSA provides that “an owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Once the court determines that a trade secret has been unlawfully misappropriated, the owner is entitled to compensatory damages, which may include (i) actual loss of the trade secret; (ii) any unjust enrichment; or (ii) a reasonable royalty for the use.  Punitive damages are available when a trade secret is “willfully and maliciously misappropriated,” while attorneys’ fees are available in cases of bad faith.

The DTSA also provides for injunctive relief to prevent any actual or threatened misappropriation of trade secrets. Unlike state laws, the federal statute allows trade secret owners to seek a civil seizure “to prevent the propagation or dissemination of the trade secret.” When “exceptional circumstances” exist that render injunctive relief “inequitable,” courts are also authorized to order the defendant to pay a reasonable royalty for the continued use of the trade secret.

Consult With an Experienced Trade Secret Attorney

In the digital age, trade secrets have become an increasingly valuable form of intellectual property protection. It is imperative that businesses understand how to safeguard their proprietary information and reduce the risks of trade secret misappropriation.

At Scarinci Hollenbeck, the members of our Intellectual Property Group can help you devise and implement a comprehensive trade secret protection strategy. Should misappropriation occur, you can also count on our team to aggressively defend your rights and pursue all available remedies.