Protecting Trade Secrets Through Contracting

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Trade secrets are a unique form of intellectual property — they require no filing or examination, no acquisition cost, nor is their value limited by any expiration date. A business can operate under the value of a trade secret for as long as the secret is kept.

Kentucky Fried Chicken and Coca-Cola are notorious examples of entities that go to great lengths to protect their secret formulas to maintain their trade secret status.

Other examples of trade secrets include:

· Commercial bidding information and contracts;

· Customer and supplier lists;

· Financial information and planning;

· Information pertaining to overhead, costs, pricing and margins;

· Strategic plans and marketing programs;

· Proprietary databases, business processes and methods;

· Manufacturing processes; and

· Proprietary computer software programs.

Under law, a trade secret is usually defined as any information used by a company that 1) is not known or available to the public; 2) provides an economic advantage over competitors; and 3) is actively protected from disclosure through reasonable efforts.

When trade secrets must be disclosed, contractual agreements often serve as the mechanism for protection — properly crafted agreements can even strengthen and expand the reach of a trade secret claim.

These agreements often come in the form of employment agreements; inventor agreements; collaboration agreements; confidentiality agreements; and non-disclosure agreements.

Do not attempt to protect trade secrets with cookie-cutter documents. Each organization — and its trade secrets — are unique, and therefore, require an evaluation and drafting specific to its operations. A careful drafting ensures that an organization’s trade secrets stay secret as long as they need — or give them the power to seek damages for the loss should the secret be let out. Once a trade secret is lost, an organization can lose that form of intellectual property forever, because trade secrets only serve as an intellectual property asset if they remain secret. Even minor adjustments to contracts can yield significantly better protection for trade secret owners.

There are five keys to an effective trade secret contract:

– Be specific in defining confidential information.

– Limit what you exclude as confidential information.

– Beware of the end of the term.

– Keep it confidential.

– Review the boilerplate.

Be Specific.

In every trade secret contract, there will be a provision defining what types or categories of information are considered confidential information. The purpose of such a definition is to establish the bounds of the disclosure. The definition should specifically list out the exact forms of materials that the disclosing entity regards as a trade secret or confidential information. A definition that fails to lay out specific categories may be deemed too broad to be enforceable in a court of law.

No matter how “confidential information” is defined, the definition almost certainly will encompass trade secrets, in addition to proprietary information that might not rise to the level of trade secrets.

Limit Exclusions.

Most trade secret contracts exclude some information from the “confidential information” definition. The secret-receiving party will be under no obligation to hold the excluded information in confidence.

Two common exclusions found in such an agreement are 1) excluding known or publicly available information from the scope of confidential information, and 2) excluding information that was created or discovered by the receiving party prior to or independent of the relationship with the disclosing party.

Rather than excluding all known or publicly available information, a disclosing party may wish to limit the exclusions to only information that was known to the receiving party prior to the disclosure by the disclosing party. If the receiving party is accused of trade secret theft, an allegation that the trade secret was available in the public domain (and only discovered after the secret-disclosure) will not offer a valid defense.

Beware the Term.

Agreements typically provide a termination clause, which defines when and how the relationship will end. Some provisions, such as confidential information, indemnification and jurisdiction, may require a life beyond the natural life of the contract, as they may be invoked at a later date.

Depending on the category of trade secret, if you are the disclosing party, it may be in your best interests to negotiate for a period of confidentiality that ranges from a number of years to indefinitely. For instance, if you are a rising tech start up, then you may want an investor to sign a non-disclosure agreement (NDA) with a term of five years — during that time, the startup will apply for another form of protection through patent law. On the other hand, a Nashville-based hot chicken restaurant may require its cooks to sign an employment agreement containing an indefinite confidentiality clause so that it never loses its “secret sauce.”

Keep it Confidential.

A trade secret remains a protected form of intellectual property only so long as it is kept a secret. When a business identifies certain processes and information as secret, it must treat it as such, and include methods of protection within its contractual arrangements.

Common contractual forms of protection include:

· requiring the receiving party to return confidential information or purge its databases and systems at the end of the contracting term;

· requiring the receiving party to hold the information in confidence and use certain methods to ensure its protection (firewalls; encryption; physical security systems, etc.);

· preventing the receiving party from breaching the confidential relationship, inducing others to breach it, or induce others to acquire the secret by improper means.

Review the Boilerplate.

Boilerplate terms, often contained in a “miscellaneous” section at the bottom of an agreement, are included in nearly every contract. However, slight changes to these standard terms can significantly alter the leverage and enforcement power for the contracting parties.

Jurisdictional and choice of law clauses define which states’ laws and courts will apply in the event of a breach of contract. Whichever party has the court in their backyard has the most leverage — the other party will be required to pay for travel and out-of-state attorney’s fees. Further, certain states treat trade secrets more kindly than others.

Attorneys’ fee provisions are only included in agreements where the parties wish to change the standard (each party pays for their own attorney) to where the loser in a dispute is required to pay the winner’s attorney fees. If a company finds it difficult to pay their own fees, a losing dispute could mean the end of the business.

Arbitration clause provides that in the event of a dispute, the matter will not go before a judge and jury, but rather will be decided through arbitration. This can be a cost-saving mechanism and may also be useful if the dispute revolves around a technology that a judge or jury could not easily grasp.

Takeaways

Trade secret contracts are common, and most of the elements mentioned above are common terms (although they may not be freely given through the first draft). Standard documents rarely provide the protection companies need to fully protect their trade secrets and enforce their rights or receive damages should secrets be spilled.

The attorneys at Rockridge Venture Law® are experienced in the language of trade secrets and can help your organization tailor each new agreement with the benefit of that knowledge.