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Pssst…It’s a Secret…Don’t tell anyone!!!

Remember back to your youth when keeping secrets was an everyday occurrence? Sometimes it was between classmates or siblings, and the results of not keeping it were temporary. As one grew older, keeping secrets took on a more serious tone as the consequences of disclosure usually had a more significant impact—just ask a certain golfer. In business, keeping secrets can be critical to the success of a company and the products it produces or sells. These types of secrets are commonly known as “Trade Secrets” and are the topic of this article.

The Legal Definition of a Trade Secret

How a trade secret is defined typically varies from state to state. The Uniform Trade Secrets Act (UTSA), adopted in 46 states in some form, defines a trade secret to be “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 secrecy.” That is a pretty dense definition, but essentially says the information is more valuable when kept a secret. You need to take some steps to keep the information secret in order for the information to qualify as a “trade secret.” The other forms of intellectual property (i.e., patents, trademarks and copyrights) are defined and protected by Federal law. Trade secrets are an anomaly and are protected by state law, although the Federal Economic Espionage Act of 1996 (EEA) offers some protection. The EEA is a criminal statute that makes it a felony to sell, disseminate or otherwise deal in trade secrets, or attempt to do so, without the owner’s consent. The definition of a trade secret under the EEA is potentially much broader than the UTSA definition provided above. The EEA trade secret definition includes in part “all forms and types of financial, business, scientific, technical, economic or engineering information, including . . . codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing . . .” (See 18 U.S.C. §1839 (13))

The four states that have not adopted the UTSA are Massachusetts, New Jersey, New York and Texas. Massachusetts, New Jersey and Texas have a separate state statute protecting trade secrets, while New York protects trade secrets under common law. The important point to remember is that treatment of trade secrets will vary from state to state.

Elements of a Trade Secret

To qualify as a trade secret, four elements must be present. Exhibit 1 summarizes the elements, which we’ll then examine in detail.

Exhibit 1: The Four Elements of a Trade Secret

  1. Must consist of information that is categorized as technical or business-related.
  2. Must derive potential or actual economic value from the fact that it is secret.
  3. Cannot generally be known either in the public domain or by others in your marketplace.
  4. Must be treated as a secret and be the subject of reasonable measures to maintain secrecy.

First, the trade secret must consist of information. Typically, information will fall within two categories, technical or business information. Materials that will likely fall within the technical information category include plans, designs and patterns for equipment, devices, implants, etc; processes and formulas that are used to manufacture a food article, chemical, or drug; techniques for manufacturing products; lab and engineering notebooks; negative information, such as plans or designs of objects that did not work; and computer software (e.g., source code). Business information would appear to be more broadly based. Information that likely would fall within this category include non-public financial information, including pricing and cost data; in-house market analysis and product forecasts; manufacturing/production information; customer lists; confidential alliances/business relationships; merger or acquisition targets; product purchase or acquisition possibilities; marketing, advertising, sales and distribution plans for future and existing products and services; and personnel information including special compensation/benefit programs.

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