Protecting Trade Secrets

• Author: Joanna H. Kim-Brunetti - Jeffrey K. Riffer - Gregory S. Bombard - Emily J. Friedman
• Pages: 51-87

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CHAPTER 3

Protecting

Trade Secrets

In 2005, more than 60 percent of U.S. businesse s reported attempts to

compromise their trade secret information.1 As much as $300 billion is

lost each year as a result of trade secret theft. 2 Given these statistics,

it is not surprising that trade secret litigation in federal courts is grow-

ing exponentially.3 With a thorough inventory of properly protected

trade secrets, businesses can improve their legal position in the event

of misappropriation—and perhaps avoid theft altogether.

One consistent theme throughout this book is that the subject mat-

ter of the trade secret must, in fact, be—and remain —a secret. Every

jurisdiction demands that a business employ “reasonable means” or its

equivalent to ensure secrecy.4 The Uniform Trade Secrets Act (UTSA)

requires that a trade secret be the “subject of efforts that are reason -

able under the circumstances to maintain its secrecy.” UTSA § 1(4).

The Restatement (First) of Torts makes the putative trade secret owner’s

efforts to safeguard the information one of the factors in determining

whether the information is, in fact, a trade secret.

RESTATEMENT (FIRST) OF

TORTS

§ 757 cmt. b (1939). While the Restatement (Third) of Unfair Compe-

tition does not address reasonable protection measures in its definition

of trade secrets, Restatement (Third) of Unfair Competition § 39 (1995),

whether reasonable measures have been taken is probative of whether

a trade secret has been wrongfully acquired, id. § 43 cmt c.

The sufficiency of these “reasonable measures” is determined on a

case-by-case basis.5 “What is considered ‘reasonable’ under the facts

of one case may be considered inadequate under the facts of another.”

Northern Elec. Co. v. Torma, 819 N.E.2d 417, 427 (Ind. Ct. App. 2004).

Industry practice and the nature and value of the in formation are all

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Guide to Protecting and Litigating Trade Secrets

52

taken into account. If the effort to protect the trade secret is commensu-

rate with the value of the information, the trade secret will retain its pro -

tection. If, however, a trade secret owner fails to take reasonable steps

to preserve the trade secret’s confidentiality, trade secret status is lost.

E.g., Wyatt v. PO2, Inc., 651 So. 2d 359, 363 (La. Ct. App. 1995) (declining

to protect a customer list primarily because of a lack of effort to safe-

guard its secrecy). Businesses that own trade secrets need to take seri-

ous steps, therefore, to identify their trade secrets and ensure that they

are adequately protected. A trade secret audit is a good place to start.

I. Conducting a Trade Secret Audit

Identifying trade secrets is the first step in protecting them. The pro -

cess of identifying a business’s trade secrets and the measures in

place to protect them is commonly referred to as a trade secret audit.

A. Reasons to Perform a Trade Secret Audit

What your clients do not know can hurt them. Your clients must take

reasonable measures to protect trade secrets or the value of those

trade secrets may be forever lost. Trade secret audits provide your

client with a thorough, independently investigated directory of trade

secrets, making it easier to identify a nd prove any misappropriation of

a trade secret. Failing to identify and properly protect a trade secret

makes it vulnerable to theft. It also hinders your client’s ability to rec-

ognize when a valuable trade secret has been misappropriated.

A trade secret audit ensures an organized, thorough, and reg ular

review of a business’s trade secrets and trade secrets policies. The

audit is designed specifically to identify information that is both v alu-

able and confidential, and it is the first step to identifying the best,

most cost-efficient protection measures. The audit also provides an

edge should a lawsuit arise involving trade secret material. A court

is more likely to afford “trade secret” status to information internally

designated a “trade secret” outside of a litigation context. The audit

helps prove the owner viewed it as valuable. In some cases, it may be

worthwhile to produce the audit list in discovery, forgoing an asser-

tion of the attorney-client or work-product privilege.

PRACTICE TIP

Employ counsel to participate in the identification of your trade secrets.

This will ensure a more complete list of actual or potential trade secrets. In

some litigation, it may be advantageous to protect the list from discovery.

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Protecting Trade Secrets

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Counsel’s participation in drafting the list can afford the list attorney-client or

work-product privilege, particularly when what is included or omitted from

the list reveals counsel’s mental impressions and legal advice.

A trade secret audit identifies assets of a business that may not

be reflected on a balance sheet. Your client’s most valuable asset may

be a trade secret. Regular trade secret audits assist your client in

accounting for these valuable a ssets.

A trade secret audit provides helpful information for employee exit

interviews. Employers can use the audit to identify easily information

that the employee must return. A 2013 Symantec survey of employ-

ees recently leaving their position showed that more than half of the

employees took confidential and proprietary corporate data on depar-

ture, and at least 40 percent of those stated that they intended to use

the data in their new jobs.6 The audit also serves as a basis from which

to communicate the confidential nature of any trade secret informa-

tion the employee may recall after leaving the business.

A trade secret audit also provides an opportunity to review struc -

turing and location of intellectual propert y for tax purposes. There is

growing interest in trade secrets by tax authorities worldwide. In early

2019, the Organization for Economic Co-Operation and Development

(OECD) released a policy note regarding new proposals to combat

base erosion and profit sharing (BEPS ) activities of international cor-

porations.7 The proposals suggest a move to a global system of taxa-

tion based on where the trade secret is consumed or used, instead of

where it is located.

Even if a trade secret audit has been performed in recent years,

an additional audit may be necessary to ensure your client’s poli-

cies are line with recent domestic and foreign developments in trade

secret law. In June 8, 2016, the European Union (EU ) adopted a direc-

tive (Directive 2016/943) on the protection of undisclosed know-how

and trade secrets against their unlawf ul use and disclosure, and busi-

nesses with intellectual property in Me mber States were required to

comply by June 9, 2018. Similarly to the DTSA, the primar y purpose

of the directive is to introduce a more uniform approach to trade

secret management across the EU and incidentally it has more closely

aligned their definition of a trade secret to that provided under the

DTSA. Notably, the definition requires that the trade secret “has been

subject to reasonable steps under the circumstances” to protect it by the

person lawfully in control of the trade secret. The “reasonable steps”

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