Protecting Trade Secrets

• Pages: 47-84

CHAPTER 3

Protecting Trade

Secrets

In 2005, mor e than 60 perc ent of U.S. business es reported at tempts

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 growing exponentially.3 With a thorough inven-

tory 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

matter 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 that secrecy.

4 The Uniform

Trade Secrets Act (UTSA) requires that a trade secret be the “sub-

ject of efforts that are reasonable under the circumstances to main-

tain its secrecy.” UTSA § 1(4). The Restatement (First) of Torts makes

the putative trade secret owner’s efforts to safeguard the informa-

tion 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 Competition 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.

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Guide to Protecting and Litigating Trade Secrets

48

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 infor-

mation are all taken into account. If the effort to protect the trade

secret is commensurate with the value of the information, the trade

secret will retain its protection. If, however, a trade secret owner

fails to take reasonable steps to preserve the trade secret’s confi-

dentiality, 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 safeguard its secrecy). Busi-

nesses that own trade secrets need to take serious 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

process 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 and prove any misap-

propriation of a trade secret. Failing to identify and properly pro-

tect a trade secret makes it vulnerable to theft. It also hinders your

client’s ability to recognize 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 poli-

cies. The audit is designed specifically to identify information

that is both valuable 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” sta-

tus to information designated “trade secret” internally outside

Protecting Trade Secrets

49

the 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 assertion 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 advan-

tageous to protect the list from discovery. Counsel’s partici-

pation 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 assets.

A trade secret audit also provides helpful information for

employee exit interviews. Employers can use the audit to iden-

tify easily information that the employee must return. The audit

also serves as a basis from which to communicate the confidential

nature of any trade secret information the employee may recall

after leaving the business.

B. How to Perform a Trade Secret Audit6

The trade secret audit process is as dynamic as the business. The

level of formality, for instance, will depend on the nature of the

business and the type of trade secrets. In any case, it is best to

map out the audit in advance to ensure that the audit is thorough

and to avoid unnecessary expense and delay. The following Prac-

tice Tip offers practical advice about creating an audit plan. As a

starting point, the plan should identify employees or consultants

who can identify the company’s valuable, confidential business

information and its location. This typically requires interviews of

employees at every level of both operations and marketing. It may