Tradesecrets: Protect Them or Lose Them

Author: A. Howard Metro Date: 08/16/2011

Categories: Corporate and Business Law, Employment Law & Litigation

Every business has trade secrets consisting of confidential and proprietary information such as its business processes, marketing plans and client and price lists, all of which are integral to the success of the business. The absence of affirmative action by the business owners to protect trade secrets can be catastrophic.

The primary threats to a company’s trade secrets are its current and former employees. By being proactive, business owners can prevent the disclosure and loss of these critical business assets.

Most state statutes define what constitutes a trade secret. Maryland, Virginia and the District of Columbia are among 46 states that have adopted the Uniform Trade Secrets Act (referred to herein for all three jurisdictions as the “UTSA”). With minor variations, trade secrets are defined in the UTSA as:

…information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy (emphasis added by author).

While the UTSA provides specific remedies for misappropriation of trade secrets, the Courts have generally required some affirmative action by the business entity seeking to enforce its rights. As set forth in the bold language above, the UTSA requires “reasonable efforts” on the part of the business. This includes informing employees of what is and is not confidential.

Although employees have a common law duty of loyalty to their employers which precludes them from divulging the trade secrets of their employer, there are specific actions that an employer should take, at a minimum, to insure the protection of its trade secrets. These include the following:

  1. Mark all hard copies of confidential and proprietary information, such as client and customer lists, as: “Confidential and Proprietary Information – Property of ABC Company”
  2. Direct your IT staff to install an initial “pop-up” screen reminder on each computer used in business advising that the information contained in the local and network files are ABC’s confidential and proprietary information and require the user to affirmatively acknowledge the same during the computer’s boot process;
  3. Include a statement of confidentiality at the bottom of all e-mails and facsimile cover sheets as follows: The information contained in this facsimile/e-mail message is confidential and proprietary information intended only for the use of the individual or entity named above. The review, dissemination, distribution or copying of this communication to anyone other than the intended addressee is strictly prohibited. If you have received this communication in error, please immediately notify us by telephone and discard this document/e-mail.
  4. Limit the number of hard copies of documents that contain confidential or proprietary information to the minimum absolutely needed. Implement an office policy to destroy hard copies when they are no longer needed;
  5. Require all employees to sign confidentiality agreements (or incorporate confidentiality provisions in their employment agreements) and, in the process, educate them on the importance of these agreements to your business, the employees’ affirmative obligation to protect these trade secrets and your insistence on execution of the agreement as a condition of employment. Require the employees to certify in writing that they have returned all confidential material and property listed in such agreements;
  6. Use annual reviews to remind employees of their need to protect the employer’s trade secrets in their day-to-day activities. Often, employees minimize the breach of loyalty by rationalizing that the trade secret is neither important or valuable to the employer or that the employer will not look to enforce its rights.
  7. Limit access to electronic files that contain sensitive information to those with a need to know by utilizing passwords, secure drives, offsite data storage facilities or logins;
  8. Limit access to physical files that contain sensitive information to those with a need to know by keeping them in locked rooms, locked file drawers or offsite storage;
  9. Include a provision about the confidential and proprietary nature of the employer’s data and materials in the employee handbook as yet another reminder;
  10. During exit interviews, remind employees that all employer trade secrets must be kept confidential and all documents, programs and any other property of the employer must be returned immediately. Follow this with a letter confirming the discussion and relating again what is in the employee’s agreements and confirm that the employee stated that he or she returned all documents and property and did not retain electronic or paper copies; and,
  11. As necessary, promptly enforce any and all misappropriations of trade secrets.

Implementing and enforcing these concepts will greatly improve the likelihood that your business will avoid having to use the Uniform Trade Secrets Act to enforce its rights.