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Can you keep a secret?

In todays competitive business environment, a company's success may depend on its ability to acquire and protect business information. Unfortunately, many competitors have found that the most cost-effective approach to research and development is to steal trade secrets.

The extent of piracy and security leaks among major corporations was highlighted in 1982 when the FBI arrested employees of Hitachi Limited and Mitsubishi Electric Corporation. Those employees were alleged to have paid $650,000 for stolen data on the IBM 3081 computer.

In recent years loss of trade secrets through employee turnover has increased as corporations have lured away competitors' brain power, either to weaken the competition or to bolster their own research and development efforts. Such employees often bring along their former companies' most valuable trade secrets, leading to lengthy and costly legal battles.

An example of such a problem is the multimillion-dollar lawsuit filed by Apple Computer Inc. against its former chairman, Steven P. Jobs. Apple alleged that Jobs violated his fiduciary responsibilities by planning his new company, NEXT Inc., while still serving as chairman of Apple and by hiring key Apple employees to join his new venture. Apple also alleged that Jobs misappropriated his former company's trade secrets.

The loss of trade secrets is not limited to the technological sector of business. Corporations have brought legal action to protect pricing policies, customer information, and other similar information. Companies spend a tremendous amount of time, effort, and funds to develop the proprietary technology and information needed to maintain competitiveness.

How can a company design a comprehensive trade secret protection program? First it is important to understand what constitutes a trade secret and what legal protection may be available to a trade secret holder.

A commonly accepted legal definition of a trade secret is the definition in the Restatement of Torts: "any formula, pattern, device, or compilation of information which is used in one's business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. " That definition comprises four elements: protectable subject matter, lack of common knowledge within the business of the trade secret holder, value to the trade secret holder, and treatment as a secret.

As the breadth of the definition makes clear, virtually any type of information qualifies as a trade secret, provided the other three requirements are met. Trade secrets are not limited to formulas and secret processes but can include plans, designs, confidential business information, customer lists, special pricing and cost information, special knowledge of unusual customer needs, and other similar types of information.

It is crucial to trade secret protection that the information not be commonly known in the business of the trade secret holder-that is, that the information actually be secret. However, the information need not be totally unknown in the industry as long as it is not generally known, nor must it possess the degree of novelty required to make an invention patentable. A unique combination of two or more general concepts may be sufficiently novel to qualify as a trade secret.

The information must also be of some value to the holder of the trade secret. The value may be sufficiently established if the information required considerable time and expense to develop and it gives the trade secret holder a head start over competitors.

PROBABLY THE MOST SIGNIFICANT factor in determining whether trade secret information receives legal protection is the degree to which the trade secret holder takes steps to protect the information. According to the Restatement of Torts, the secrecy procedures should be such that "except by the use of improper means, there would be difficulty in acquiring the information. " If a company does not take sufficient steps to protect its information from disclosure, it may forfeit the right to legal protection of its trade secrets.

A company that takes prudent steps to protect its trade secrets is given legal protection against wrongful misappropriation of the trade secrets by competitors or others who can use the information to the disadvantage of the trade secret holder. The relief commonly available to a party whose trade secret has been wrongfully misappropriated is a legal action to enjoin the use or disclosure of the trade secret or an award of damages against the party misappropriating the trade secret.

To ensure that proper steps are taken to protect its trade secrets, a company should establish a formal trade secret protection program. Since protecting information as a trade secret may require a significant level of company resources, the only information protected should be that which is significantly valuable to the company and not excessively difficult to protect.

The procedures implemented should be appropriate to the information being protected. The company should strive for efficiency in protection, while minimizing the internal disruption to the company. Excessively rigorous procedures should be avoided due to the difficulty of following them regularly. Further, noncompliance with established procedures may adversely affect the enforcement of trade secret protection in litigation.

A properly established trade secret protection program should help protect a company's trade secrets from unauthorized use by or disclosure to competitors. Furthermore, establishing such a program satisfies the legal requirement that a trade secret holder take reasonable steps to protect its trade secrets and increases the likelihood that the legal rights of the trade secret holder will be enforced in the event of wrongful misappropriation.

An effective tool for implementing a trade secret protection program is to conduct a trade secret audit. A trade secret audit is simply a formal procedure to identify trade secret information worthy of protection and to decide on the steps required to protect the information.

The company should establish an audit team composed of company management, operational personnel such as engineers or others commonly using trade secret information, and the company attorney. After identifying the company's trade secrets and appropriate steps for protecting them, the team should implement the trade secret protection program and develop procedures to ensure compliance with the program's rules in the future.

The trade secret policy should be formalized in writing and distributed to the company's employees and others who come into contact with trade secrets. The policy should outline the types of information that are secret, provide examples of how trade secrets can be compromised, and provide an overview of the company's security program.

Those steps help prevent employees from having to follow unwritten rules, and they demonstrate that the company takes its security procedures seriously. After establishing the trade secret protection program, the audit team should review it periodically to determine its effectiveness in the context of changes in the work environment or in the nature or extent of trade secrets held by the company.

While no specific set of security procedures is right for every organization, certain procedures should always be considered. Those procedures generally revolve around four concerns: employee security, document security, premises security, and computer security.

Employee security. Employee security is crucial to protecting trade secrets. Intentional or inadvertent disclosure or use by employees is probably the most common way trade secrets are lost. Access to trade secrets should be strictly limited to employees who need it in the performance of their jobs.

One important and often overlooked way trade secrets are lost is through conventions, trade shows, seminars, and similar activities. Trade secrets are also inadvertently divulged in speeches and publications. It is therefore important to instruct employees periodically about security precautions and to monitor and review all speeches and publications to avoid inadvertently disclosing trade secrets.

Another important step is to require employees who are exposed to trade secrets to sign confidentiality or noncompetition agreements that forbid the unauthorized use or disclosure of trade secrets during or after employment. Such agreements allow a company to define the types of information deemed company trade secrets, thereby formally putting the employee on notice of his or her duty not to use or disclose the information. Requiring such agreements also demonstrates to a court in an enforcement action that the company has taken reasonable steps to protect its trade secrets.

Noncompetition covenants can prevent an employee from competing with the company if doing so would inevitably lead to the use or disclosure of trade secrets. Agreements with employees can also designate the ownership of inventions, discoveries, and developments made by the employee in the course of employment. This designation eliminates any question as to the ownership of such rights and provides the company with a clearly defined legal basis for enforcing its rights.

A company can also take several protective steps at an employee's departure. Employees leaving the company should be excluded from access to trade secret information as a matter of course. Further, exit interviews with departing employees can remind them of their duty not to use or disclose trade secret information. A company may want to go so far as to obtain from the departing employee written acknowledgement of the trade secret information to which the employee had access and his or her obligation not to use or disclose the information.

All documents, security passes, keys, and other company materials should be collected from the departing employee. Where particularly sensitive information is involved, a company may also want to change the locks and combinations for areas in which trade secret information is used or stored.

Document security. The first step in any document security program is to mark documents containing trade secrets clearly with the name of the company and the words CONFIDENTIAL INFORMATION. " That way employees and others coming into contact with the documents will immediately be put on notice of the confidential nature of the document and the need to take precautions to avoid disclosure or use of the information.

Documents and other materials containing trade secret information should be disposed of carefully, not simply thrown into the trash along with other nonsensitive company materials. It is also important to monitor the duplication of all documents containing trade secret information so that the number of copies of each document can be strictly limited.

Any third parties who will be given access to documents containing trade secret information should be required to sign confidentiality and non-disclosure agreements prohibiting the unauthorized use or disclosure of that information. Duplication of such documents without the trade secret holder's consent should be prohibited, and all copies of the documents should be returned after the third party's use is completed.

Documents containing trade secret information should be stored carefully. Particularly sensitive documents should be locked in a vault or other secure location.

Premises security. Segregating and limiting access to areas in the company in which trade secrets are used is another important procedure. Such areas can be secured by using security officers and a badge system that clearly identifies employees entitled to access. Security notices should be posted when and where appropriate to remind employees and others to secure the company's trade secrets.

Many companies provide routine tours of their plants or facilities, including areas where trade secret information is used. Under such circumstances it is crucial to avoid inadvertently jeopardizing trade secrets. formation stored on or accessible by computer must be protected from disclosure to unauthorized parties. Such information must also be protected from intentional or inadvertent destruction or distortion through computer viruses.

Especially with the increased use of networked computers and computers that can be accessed over telephone lines, it is essential to build passwords into the system to prevent unauthorized access. In addition, a company may want to implement systems that identify the program user and the files that were accessed.

All disks, tapes, and other computer generated material should be stored in a secure place. The same steps recommended for securing documents should be applied to computer information.

In today's competitive business climate, a company's success may well depend on its ability to protect its valuable trade secrets. By implementing a trade secret protection program, a company can take a significant step in protecting its trade secrets, thereby helping to maintain its competitive edge.
COPYRIGHT 1990 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:protecting trade secrets
Author:Kisiel, Yvonne M.
Publication:Security Management
Date:May 1, 1990
Words:1997
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