Your Family Business Trade Secrets Are Important - Protect Them!

What do the recipe for the Big Mac's "special sauce," Google's search algorithm, and the customer list of a distribution firm all have in common? They are all legally protectable trade secrets.

Trade secrets can be incredibly valuable to a business and can drive its success. Like many companies, family-owned businesses have trade secrets worth protecting: think software source code, customer and vendor information, chemical formulations, manufacturing techniques, and knowhow derived from years of operations.

What Is a Trade Secret?

Trade secrets are among the four types of intellectual property and are unique in that they cannot be registered with the government for protection. Patents must be registered in order to be enforced, while trademarks and copyrights can be registered if the owner so chooses in order to make enforcement easier.

The informality surrounding trade secrets can be an advantage and a disadvantage. In particular, the advantage of a trade secret over a patent is that the former can be maintained indefinitely, whereas a party's exclusive rights granted by a patent are statutorily limited; the downside is that if a party independently discovers the "secret" or reverse engineers it, the business's rights in a trade secret essentially end.

There are three basic elements that must be met in order for something to qualify as a trade secret:

The first element is that the information cannot be generally known by either the public or others in the industry. It is possible that if even just one individual outside of the company has knowledge of the relevant information, then the information will not qualify as a trade secret. However, even if distinct pieces of information are all known to others, if a company combines them in a novel way, and that combination is not known, it can qualify as a trade secret.

The second element is that the company claiming the trade secret must derive economic value from the information. Put differently, the information must be valuable to its owner specifically due to the fact that it cannot be put to use by others. Generally, if another company would need to spend its own resources, either time or money, to acquire or develop that information, then this element will be satisfied.

The final element is that the owner of the trade secret must have made reasonable efforts to maintain its secrecy. If an owner merely hopes or wants something to be kept secret, this element will not be met. Instead, owners must engage in tangible and proactive efforts to keep the information secret.

Examples of measures that courts will look favorably on include: limiting who at the company has access to the secret information, requiring those who do know of it to sign confidentiality agreements, and protecting the information by keeping it physically protected such as in a safe or with digital encryption. It is also possible to share trade secrets outside the business, but only so far as necessary to carry out the business and under strict confidentiality agreements and other limitations on the use of the trade secrets.

What Can Be Done to Protect a Trade Secret?

The best way to protect a trade secret is the most obvious way: keep it secret. The measures listed above under the third element provide a good starting place on what a business owner can do to keep a trade secret away from prying eyes.

If, however, another party does discover and starts using a trade secret, the owner can commence litigation to protect it. There is no governmental body that is on the lookout for trade secret violations, so each company must be on the watch for other companies that start using the trade secret. In order to prevail in a claim against another party, it will be necessary to prove that party stole the trade secret; if the other party independently discovers or reverse engineers the "secret," it will not violate the rights of the earlier adopter.

To increase the chances of victory in litigation, management should do their best to clearly, yet securely, document all trade secrets. Going into litigation with documentation of the economic value of the trade secret and documentation of attempts to keep it secret will make a judge much more likely to favor a company's case than after-the-fact attempts to demonstrate those same elements.

While they are a less "formal" type of intellectual property, trade secrets can be an essential part of the value of a company and worth taking steps to preserve. If you are unsure if you have a trade secret, or want to know more about what you can do to protect it, we recommend you consult qualified legal counsel.