Wednesday, September 18, 2019

Trade Secrets 101 for Startups

Whether your startup is high-tech, low-tech, a manufacturing company, or anything else, trade secret protections can help startups to grow, especially when other intellectual property options are not available. Startups may employ trade secrets in protecting their methods, for example, by shielding their internal operations and processes from public view and restricting access.

What is a trade secret? 

A “trade secret” broadly covers all forms of information for which the owner has taken reasonable measures to keep secret and that has independent economic value as a result of not being generally known. This could include confidential formulas, customer lists, manufacturing techniques, source code, algorithms, or any other type of financial, scientific, technical, engineering, or vital information that the startup takes affirmative steps to keep secret.

In other words, to own a trade secret, a startup must deliberately and affirmatively take measures to protect a trade secret and that trade secret must have economic value because it remains guarded and away from the public domain.

Why use trade secrets?

In their recent article, “Why Do Startups Use Trade Secrets?” David S. Levine and Ted Sichelman note three reasons why startups use trade secrets: 

  1.  “to maintain lead-time advantage and prevent competition”;
  2. when “patent protection is unavailable”; and
  3. when “patent protection is too costly, weak, or difficult to enforce.”

In the first example, Levine and Sichelman use Google as an example of an early pioneer in online search engines. Google was able to start and maintain dominance in the field by “keeping key details of its search algorithms a trade secret.” This works for companies using novel technology that is not easily reverse engineered. If reverse engineering is a concern, patents or even copyrights (in the context of software) are likely to provide more robust protection than trade secrets.

Trade secrets are also used when patent protection is unavailable, too costly, weak, or difficult to enforce. There are several reasons that patent protection may not be available. Patent protection requires an invention be new, non-obvious to a person of reasonable skill in the art/field, and have a detailed written description so that an inventor can build on the shoulders of inventors before them. The “public disclosure” requirement for patents in exchange for a limited monopoly is exactly the opposite of a trade secret where any public disclosure results in forfeiture of the trade secret.

Reasons to keep an asset a trade secret include that the customer list, for example, does not meet the criteria for patent eligibility. Another reason is that a patent is too expensive or may not provide robust protection. In certain instances, trade secret protection may be a better option.

I have a trade secret, what should a startup do now?

A startup that wants to establish robust trade secret protection should begin by identifying and documenting what they consider to be their trade secrets. Next, they should initiate or review policies and procedures to ensure that the level of protection for the information is commensurate with its value to the company.

This process can include:

  • Designing and conducting confidentiality training for new hires.
  • Regularly documenting employee acknowledgement of confidentiality and information technology policies.
  • Limiting access to trade secret information to those who need to know the information.
  • Keeping visitor logs and visitor escort policies.
  • Augmenting IT measures for both controlling and monitoring access to sensitive information. 
  • Conducting exit interviews for departing employees to inform about and ensure compliance. 
  • Auditing form employee and consultant agreements relating to confidentiality.

Establishing practices to protect a trade secret from the outset could be instrumental in preventing trade secret theft. When a genuine problem arises, however, trade secret owners should not hesitate to take action by seeking injunctive relief or a cease-and-desist order when necessary to protect their intellectual property.

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