You Have a Trade Secret – Now What?

By Henry Fradkin

Based on my experience in IP commercialization over the past 17 years, I have found myself often considering whether or not a company should protect an invention with a trade secret or a patent, how to protect a trade secret, and then what can be done to leverage its value.  Thus, I am providing some considerations to help business people, working with their IP attorneys, to make such decisions.

First, I want to start with some basic definitions.  A trade secret can be any information that derives independent economic value from not being generally known or readily obtainable.  Trade secrets are very different from patents, trademarks and copyrights.  An entity can not maintain both a patent and a trade secret on the same invention…they are mutually exclusive. A patent confers exclusive rights to prevent others from making, using or selling the patented subject matter. The trade-off is that the patent, once issued, is published for the entire world to know. Thus, nothing in an issued patent can be a trade secret by definition.

Trade secrets include formulas, pattern, compilation, program, device, method, technique, or process.  All of those factors often are considered “proprietary technology and/or information.”  For example, courts consider items as the following to be trade secrets: machining processes, blueprints, and stock-picking formulae, customer lists, pricing information, and non-public financial data.  Moreover, information such as overhead rates and profit margins that help define a price may be found to be a trade secret even if the price itself is known.

The key tenets to be considered a trade secret are:

  • The company must demonstrate that it is doing everything possible to prevent public disclosure; e.g., locking up all key documents, not allowing general access to a manufacturing machine or process, etc.
  • It must make sure that such secrets are only disclosed to outside companies after appropriate written secrecy documents have been executed.

And key factors are:

  • The extent to which the information is known outside the business
  • The extent to which it is known to those inside the business, i.e., by the employees
  • The precautions taken by the holder of the trade secret to guard the secrecy of the information
  • The savings effected and the value to the holder in having the information as against competitors
  • The amount of effort or money expended in obtaining and developing the information
  • The amount of time and expense it would take for others to acquire and duplicate the information.

Having said all this, what should a company do to protect its trade secrets?  By keeping it secret!

There are no forms to fill out or applications to register; no government approval or registration is required.  If the possessor of the secret exercises reasonable means to keep the information a trade secret then as long as the information stays secret and has economic value, trade secret protection remains available.

Therefore, a company should take reasonable precautions to protect any information regarded as a trade secret. This includes marking documents containing trade secrets as “Confidential” or “Proprietary,” locking trade secret materials away after business hours, maintaining computer security, and limiting access to secrets to people with a reasonable need to know.  In particular, a company should:

  • Restrict access to the trade secret by preventing unauthorized entry into the facility where the trade secret is kept
  • Obtain non-disclosure agreements; e.g., part of their employment contract; from key employees who came into contact with the trade secret…and conduct exit interviews to remind departing employees of their secrecy obligations
  • Obtain non-disclosure agreements for the trade secret from suppliers and manufacturers, including those who are sub-contractors, raw material suppliers and component manufacturers
  • Make pertinent documents available to suppliers only for the sole purpose of bidding on or manufacturing
  • Mark all materials and drawings related to the trade secret with a proprietary legend, as noted above, restricting their use and disclosure
  • Follow up any oral disclosure with a letter citing the confidentiality of the material discussed and the resulting obligation by the company and/or people to maintain the material as a trade secret.  The obligation still holds with an oral disclosure but certainly is made stronger with a written account after the fact.

Courts have repeatedly indicated that the use of nondisclosure agreements is the most important way to maintain the secrecy of confidential information.  Without nondisclosure agreements, it is increasingly likely that information considered to be extremely valuable to your business will be deemed by the courts to have no legal protection.  Non-disclosure agreements differ depending on the nature and scope of the disclosure and the value of the trade secret. However, all non-disclosure agreements should include a good description of the trade secret, permissible uses of the trade secret material, a duty of confidentiality, a remedy for non-compliance with the agreement (including injunctive relief), and the term of the agreement, which be “forever.”

Commercialization Implications

Because a technology or invention, including product, process and software, is a “trade secret, that doesn’t mean that it cannot be used to generate new revenues or profits through commercialization on the outside.  Of course, all of the above protection measures must be followed to avoid losing the trade secret status.

Based on my experience and that of others, trade secrets in the form of technical and/or business know-how have formed the basis of many licensing deals.  There is no “silver bullet” as to the proverbial how to ensure no loss of secrecy, but one important action is to try to lock in the licensee into the protection scheme.  The best way is money by having the licensee either make an up-front payment or at least committing to make payments over time.  In essence, if the licensee has to pay for use of the know-how, it is unlikely to release this knowledge into the public domain for free.

Further, as alluded to above in the patent section, inclusion of know-how into a technology and/or copyright deal is a strengthening factor.  The know-how can help a licensee get the technology or invention into the market quicker than working only from a “bare” patent or copyright…thereby generating sales quicker for the licensee and payments for the licensor.  And, as noted earlier, inclusion of the know-how helps the licensor secure a higher royalty.

A company often provides this know-how as part of a technology transfer to the licensee.  Importantly, this requires the cooperation and participation of the activity that created the know-how.  Based on both my personal experience and that of many companies with successful technology licensing programs, the best means to secure this participation is MONEY…i.e., developing a reward system for the activity that will do the technology transfer in the form of sharing earned royalties.

Conclusion

Referring back to my introduction, I said that this paper is intended to be an IP protection and commercialization “101” monograph.  If I have met my objective, it should have provided new licensing executives and attorneys with considerations and tactics related to helping them progress their technology transfer program and even reminded experienced licensing executives of technology commercialization considerations and opportunities.

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