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Are Your Trade Secrets Really Secret?

You have your secret sauce that you have finally perfected and now it is the basis for your new business.  Customers love it and you have finally figured out how to fill all the orders as they come in.  You “secret sauce” could be a really snappy BBQ sauce for your new wings and ribs restaurant, program code for a new game app that has record downloads, or a new financial analysis algorithm used in your financial planning consulting business.  Whatever your “secret sauce,” the value is that you have it and nobody else does.  And the law provides mechanisms for you to keep someone from stealing your trade secret.

Although the government and the courts provide trade secret protection, the government can also be the source of disclosure of your trade secrets.  If you are working with a government agency on a grant or contract, inadvertent disclosures can be made by persons within the agency who might not realize the value of secrecy, or the secret can be disclosed by freedom of information (FOIA) requests.  Since there are no concrete standards that apply to the government, some agencies will release trade secrets when they determine that they involve public health and safety issues, or even if financial risks are involved.

So, before we go further, what is a trade secret?  Trade secret protection is one of those areas of intellectual property protection that are least understood, but very valuable, nonetheless.  One reason is that, unlike in the case of patents, trademarks and copyrights, there isn’t a federal trade secrets law, as trade secrets are generally protected under state law.  Forty-eight states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands have enacted the Uniform Trade Secret Act (USTA) in one form or another.  Maryland’s version is called the Maryland Uniform Trade Secrets Act (MUTSA).

According to MUTSA, a trade secret includes information, formulas, patterns, compilations, programs, devices, methods, techniques, or processes.  Customer lists, marketing plans, financial information, secret recipes or formulas, and so forth are common trade secrets held by companies.  In order for a court to determine that a company has a trade secret, the information has to be kept, well, secret.  The information must be valuable to the company, and its value must be from the fact it is kept secret and that others who obtain it can also gain value from knowing the secret.  Additionally, a court will determine whether the company used reasonable efforts to maintain the secrecy of the information.  Were there locked cabinets, passwords, “need to know” disclosure to employees, compartmentalization of information throughout the organization, escorted visitors through the company, and even whether doors are locked at night.  In short, the court isn’t going to protect your assets if you aren’t willing to do so as well.

However, despite protections afforded by states, 5-Hour Energy has been fighting state lawsuits to reveal its formula.  At least 33 states, citing health concerns and false advertising, have sued Living Essential, the owner of the brand.  An Oregon judge overseeing one case expressed his frustration that, due to Oregon State law, he was prevented from issuing a protective order to prevent disclosure of the trade secrets.  Living Essential asserts that the formula is its most valuable asset, and disclosure to states would allow the formula to be handed over to competitors through Freedom of Information Act (FOIA) requests.  In another example, Sea World is battling the U.S. Occupational Safety and Health Administration (OSHA) for release of proprietary information requested by OSHA, to monitor worker safety at its parks.  And, Sanofi-Aventis sued the U.S. Food and Drug Administration to prevent the release of its formula for the new over-the-counter cold medication, Nasacort.

To complicate matters further, states have differing laws.  For example, in Maine, an agency which determines that a trade secret can be released can only be overturned if a court determines that there was abuse of power by the agency, or the decision was clearly wrong.  This is a very big wall to climb for a company wishing to protect its trade secrets because the court is prohibited from substituting its judgment (based on the facts presented in the case) for that of the agency.  Agencies, of course, will side with the state government of which they are a part; in essence, the fox is guarding the chicken coop.  However, a competing company that wishes to appeal a denial of disclosure by a state or federal agency faces a different level of review much more in its favor: the judge must look at the case from scratch and not give any deference to the agency’s decision.  A company wishing disclosure (the competitor) has a much easier time winning in court than a company trying to protect its valuable trade secrets.  So, companies which typically do business in multiple jurisdictions may find it difficult to protect their trade secrets, in the face of so many differing laws.

There might be some relief on the horizon in the form of a bill before the U.S. Senate, called the Defend Trade Secrets Act, and was introduced in April 2014 by Sens. Chris Coons (D-Del.) and Orrin Hatch (R-Utah).  A similar bill in the U.S. House of Representative is called the Trade Secrets Protection Act of 2014 and was introduced in July 2014 by Reps. Holding (R -NC), Steve Chabot (R-OH), Howard Coble (R-NC), John Conyers (D-MI), Hakeem Jeffries (D-NY), and Jerrold Nadler (D-NY).  The bipartisan bills would strengthen the protection of trade secrets held by US companies, but also give the courts some guidance when dealing with federal agency rulings on handling of confidential information.

So, how should a company attempt to protect its “secret sauce?”  First, follow the elements of the USTA: use reasonable efforts (for your industry) to protect the secret.  Use passwords, lock doors and cabinets, tell employee only on a need-to-know basis, and prevent access to information from outside groups and recently terminated employees.  Make sure your network is secure with the latest updates, firewalls, virus-checkers and so forth.  In this world of hackers, phishing and viruses, what was considered sophisticated network protection would not be considered “reasonable” by today’s standards.  Make sure your IT professionals have the most up-to-date systems in place to protect your data.  You might even want to keep your formula off the gird completely.  Breaking into a safe is a lot harder than through a back door of your server.  When working with government agencies, only disclose what you need to and clearly mark documentation as proprietary and confidential.  Simple markings can go a long way to preventing inadvertent disclosure by a distracted government worker.  If you treat your data as valuable, they are more likely to as well.  Finally, if you are served with a law suit or a letter requesting disclosure, contact your attorney immediately for advice how to proceed.