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

What is a trade secret and why you you protect them? 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. But what is a trade secret? And how do you protect them? 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 gives a business an economic advantage over competitors or customers. Examples include customer lists, recipes, sales data, marketing strategies, computer algorithms, and non-patented inventions. Other confidential, proprietary information may also qualify.

To obtain legal remedies, trade secret owners must 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” in a similar way.

Enacted in 2016, the DTSA states that trade secrets include various types of information. This may include financial, business, scientific, technical, economic, or engineering information.

To qualify as a trade secret, the information must have independent economic value. It cannot be generally known or easily obtained by others who could gain 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. c

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 agreements (NDAs) are a crucial protective measure when sharing proprietary information with employees, contractors, vendors, and business partners. When properly drafted and executed, NDAs clarify a company’s rights regarding its trade secrets and other intellectual property. These agreements require the other party to maintain confidentiality and outline the steps the company will take to address any misappropriation.
• Cataloging and Monitoring Trade Secrets: Maintaining an inventory of a company’s trade secrets, their protections, and who has access to them is essential. This helps demonstrate to the court that the company takes trade secret protection seriously. To qualify as a trade secret under the DTSA, a company must take reasonable measures to keep the information confidential. A company must first recognize which information is secret to ensure it remains protected.
• 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 occurs when employees leave. It is essential to have policies that immediately discontinue access to documents, databases, and cloud storage systems. Companies should also require the prompt return of all company-owned devices. Having a strong confidentiality agreement (NDA) in place before an employee leaves is crucial to protecting sensitive information.

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 when joining a competitor or starting their own business. Third parties, such as vendors, contractors, or suppliers, may also misuse confidential information. Additionally, competitors, foreign governments, or other bad actors may gain access to trade secrets through hacking or other illegal activities.

When theft occurs, trade secret litigation can help protect your property rights and stop further wrongdoing. Remedies are often available under both federal and state law. The appropriate legal forum will depend on your unique circumstances.

The DTSA provides that an owner of a misappropriated trade secret may bring a civil action under this subsection. This applies if the trade secret relates 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. These may include: (i) actual loss of the trade secret, (ii) any unjust enrichment, or (iii) a reasonable royalty for its use.

Punitive damages are available when a trade secret is willfully and maliciously misappropriated. 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. This is intended to prevent the propagation or dissemination of the trade secret.

When exceptional circumstances make injunctive relief inequitable, courts have another option. They are 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. Contact us today for a free consultation.