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Can You Keep A (Trade) Secret?

Date

September 5, 2005

Read Time

5 minutes

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Businesses, like people, keep secrets. Whether you’re a real estate firm with a confidential prospect list, a manufacturing concern with formulas or technical data, or a hedge fund with software that can analyze investments, chances are you’ve thought about how critical this information is to your business. You have invested a significant amount of time, money and effort into creating your “trade secrets,” and it is essential that their confidentiality be protected and their dissemination limited. Unfortunately, even sophisticated business owners will sometimes wrongly assume that their company information is automatically “protected and secret.” This article will briefly address what constitutes a trade secret and how it can be protected.

Trade secret protection operates outside the framework of copyright, patent and trademark law. The holder of a patent or a trademark, for example, can take advantage of certain presumptions and rights that arise from a structured and recognized registration processes. This is not the case with trade secrets. Though most states have adopted some form of trade secret legislation, the statutes themselves provide only a starting point. Whether a trade secret exists, and can therefore be kept out of the hands of your competitors, is a factually intensive inquiry engaged in by the courts on a case-by-case basis. For this reason, it is important to know what the courts look to in making these decisions.

The Illinois Trade Secrets Act (ITSA) (765 ILCS 1065/1 et seq.) provides, in part, as follows:
“Trade secret” means information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data or list of actual or potential customers or suppliers, that is:

  1. Sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use
  2. The subject of efforts that are reasonable under the circumstances to maintain it secrecy or confidentiality

In other words, to possess a trade secret it must be shown that the information is sufficiently secret to give its holder a competitive advantage and that steps were taken to prevent others from acquiring or using the information. If a trade secret exists and is misappropriated, there are remedies available to the trade secret holder, such as an injunction preventing its continued wrongful use or monetary damages.

In addition to ITSA’s definitions, Illinois courts often look to the following six factors when deciding whether a trade secret exists:

  • Extent to which the information is known outside the business
  • Extent to which it is known by employees and others involved in the business
  • Measures taken to guard the secrecy of the information
  • Value of the information to its owner’s competitors
  • Amount of effort or money expended in developing the information
  • Ease or difficulty with which the information could be legally acquired or duplicated by others

Paramount to any analysis are the efforts taken to keep the information secret. In this sense, a trade secret is no different than any other type of secret – if everybody knows it, it’s not a secret. In one Illinois case, the seller of tools developed a customer list by calling service stations and tool dealers to acquire customer names. Although the prospective customers were listed in the telephone directory (public knowledge), there existed no easy or available method to find and combine them. New customer information was entered into a computer to which only two key employees had access; information was given to others on a need-to-know basis. Hard copies were locked in an office and salespeople were not allowed to remove customer cards from the premises. In addition, employees were required to sign confidentiality agreements and were often reminded of the lists’ confidentiality. Based on what the court called the “laborious” method of creating the customer list, and the security efforts taken to protect it, the customer list was found to be a trade secret.

Another Illinois court reached the opposite conclusion, finding that a customer list was not a trade secret, despite the fact that it was generated over a span of thirty-five years and could not be easily duplicated, because there was no requirement that the employees sign confidentiality agreements, the owner did not advise the employees that the records were confidential and the information was not labeled as confidential.

There are some steps every business can take to help create and protect a trade secret. When it comes to trade secrets, it is always better to do too much than too little. Consider the following:

  • Create a confidentiality policy that clearly states what the business believes to be confidential and the expectations on its employees
  • Maintain trade secrets on computers and identifying them as such on warning screens that require passwords from those who seek access
  • Label trade secret documents as “Confidential Trade Secret. Do Not Copy. Do Not Distribute”
  • Store trade secrets in a secure area such as a locked file cabinet, drawer or safe
  • Require your employees to execute confidentiality agreements that specifically identify trade secrets and the restrictions on an employee’s use and access to them
  • Investigate with your counsel whether your trade secret can be patented, trademarked or copyrighted

While trade secret disputes typically arise in the employer-employee context (when, for example, an employee changes jobs), there are times when it is necessary to disclose trade secrets to third parties, either as part of your day-to-day operations (such as to manufacturers, suppliers or vendors), or if you are considering a sale, joint venture or strategic alliance. These situations call for careful consideration and planning (especially as to the ownership of the trade secret if the business relationship is terminated) and a balancing of the risks of disclosure and the rewards that may come from collaboration.

Most important, don’t assume that the outside world knows what you value. Take the time to specifically identify your trade secrets, communicate a confidentiality policy to your employees and take concrete and visible steps to keep the information secret.

Circular 230 Disclaimer
In conformity with U.S. Treasury Department Circular 230 this document and any tax advice contained herein is not intended to be used, and cannot be used, for the purpose of avoiding penalties that maybe imposed under the Internal Revenue Code, nor may any such tax advice be used to promote, market or recommend to any person any transaction or matter that is the subject of this document. The intended recipients of this document are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this document.


Filed under: Litigation

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