Trade Secrets

What Is Protected?

In principle, any information which does not need to be published or distributed to persons who are not contractually bound to keep it secret, may be protected as a commercial secret. Trade secrets need not be recorded or documented in writing. Such secrets may include customer lists, work methods which streamline production processes, production and distribution information, and information concerning R&D which is conducted by the company.

Main Elements

A trade secret is any instrument, information processing, or formula which enables the achievement of a competitive edge, be it as temporary as it may. Even information that is in the public domain, but whose utility in a certain field is unknown, may be regarded as a commercial secret.

The holder of a trade secret must prove that he or she took reasonable measures to safeguard such secret against disclosure. He or she has to point to the procedures maintained by him or her in order to keep the information secret and demonstrate that he or she indeed followed such procedures for instance, a procedure whereby customer-related information is protected by passwords and is accessible only by the relevant persons, or a procedure whereby guests visiting the offices of the company are not exposed to confidential production processes and are escorted at all times.

It is always advisable to require potential customers and investors (especially strategic investors who are themselves active in the field) to sign a confidentiality agreement before disclosing to them trade secrets and patents of the company. Obviously, consideration should be given to the probability that such an agreement will be signed (many investors will refuse to sign such confidentiality agreements), and to the risk that an argument over such an agreement will cloud the actual transaction that is being sought (an investment or purchase of products).

The Protection of Trade Secrets

The protection of trade secrets is composed of many elements. This subsection will review only some of the methods used by companies to protect their secrets. It does not provide a comprehensive list, and specific procedures are always required for each company.

Many companies have their employees sign a confidentiality agreement whose components are similar to those included in confidentiality agreements with outsiders. A principal element provides that employees will not use trade secrets of the company outside their duties in the company. In addition, the agreements often contain provisions preventing employees from being employed by competitors for a certain period of time following the termination of their employment with the company.

Clauses of non-competition by employees (as opposed to non-competition clauses in agreements between shareholders, including entrepreneurs) might be deemed to be contrary to the public interest. The concept is that provisions in employment agreements which restrict competition are unlawful unless they are designed to protect "legitimate interests" of the employer. U.S. law in this matter usually differs from one state to another, and in states such as California, many non-competition clauses are not recognized as lawful by the courts.

However, even if the restriction of employment with competitors may be invalidated by the courts: it is important for companies to have their employees sign confidentiality agreements whereby information gathered by them in the course of their employment, which is a trade secret of the company, is the company's property.

In recent years, companies have frequently sued former employees for the disclosure or use of trade secrets in the employees' new jobs. For instance, the retail chain Wal-Mart sued Amazon, claiming that a senior employee of Wal-Mart who was recruited by Amazon to build a logistics system, used trade secrets which he had acquired in his previous position with Wal-Mart.

Many companies have procedures for compartmentalizing information which they share with their employees, if sharing such information with outsiders is perceived as risky. It should be taken into account that many fragments of information may be meaningless when viewed separately, but could become valuable when put together. In this context, industrial espionage is very common in the industry, and job interviews are used to gather information on competitors both in the framework of attempts to recruit workers from competing companies and by sending employees to interview with competitors in order to elicit information on these competitors. Even classified ads seeking employees may at times disclose a company's development intentions when integrated with other pieces of information.

From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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