Identifying and managing trade secrets

Trade secrets represent a significant business asset in any company. In this article, Canadian IP lawyer Noel Courage breaks down the practical considerations for companies to identify and manage their trade secrets.

Business and technical information

Many companies have confidential technical information and business information. For example, customer lists and business plans are often secret information in most businesses. R&D-based businesses and manufacturing businesses may additionally have secret processes, formulas and data. If this confidential information is protected and has value, it can often be considered trade secrets.

Low threshold of innovation

Trade secrets do not have to be significant innovations to have value. There should be at least a minimal degree of skill applied to obtain the innovations.

The well-known Mott’s Clamato beverage is an example of a trade secret. The Clamato brand owners did not create the concept of a beverage made from tomato juice and clam broth. Their specific proportion of clam juice, seasonings and tomato juice in the Clamato product was protectable as a trade secret in court. It was a trade secret even though the product label listed all the beverage ingredients, except the specific “spices”. The trade secret was narrow, but it still had significant value and was enforceable against a former distributor.

Commercial advantage

A key characteristic of a trade secret is that it provides a business with an opportunity to obtain a commercial advantage over competitors who do not know or use the secret. The secret must be managed carefully to protect the legal rights and maintain the advantage.

The most common ways to commercialize a trade secret would be to:

1. Use it yourself in a product, method of manufacture or service offering;
2. Licence it to another company that will use it; or
3. Sell it.

To identify trade secrets, think about whatever technical and business innovations your company has generated that are new, kept unknown and have economic value. The value of trade secrets is quite variable between businesses—whether it is customer lists, formulations or processes you developed for scaling up your product. Since the economic valuation of trade secret assets is complex, start-up companies do not typically try to put a specific dollar value on trade secrets as part of their day-to-day business.

Triggering trade secret protection

If confidential information is not treated as secret and carefully controlled, then it is unlikely that trade secret protection will be available. Companies create and maintain their trade secret rights by maintaining confidentiality and control through good company practices and contracts.

If there is a misappropriation, trade secrets are enforced through legal action, such as cease and desist letters and lawsuits.

How do NDAs and employment agreements help?

Agreements and access restrictions for those handling confidential information is a good practice. Standard employment agreements and independent contractor agreements should include confidentiality and IP clauses. Exit interviews can also be used for departing employees to remind them of confidentiality.

Confidentiality agreements (e.g. non-disclosure agreements or NDAs) should also be used from the outset with business partners that will become aware of trade secrets in a collaboration. A good collaboration agreement deals with confidentiality and ownership of pre-existing and future information and IP that is generated in the collaboration.

Agreements should require return or deletion of confidential information once the working relationship ends.

For companies with a lot of employee turnover or a lot of collaborative activity, there are higher risks; it is especially important for companies like this to be proactive.

Will I have trade secret protection if no agreement was used?

Even if you have not used a confidentiality agreement, you may still have a trade secret. If a reasonable person would have thought that the information is confidential, that may be sufficient to make that information confidential. The case involving the Clamato beverage provided no express confidentiality clause in the distribution agreement.

Factors that increase the effectiveness, enforceability and value of a trade secret may include:

• The secret information is not a type that is generally known in the industry;
• Substantial cost and challenges to develop the trade secret;
• Difficulty of acquisition of the secret by others (reverse engineering, as discussed below);
• Appropriate measures used to maintain confidentiality of information and practical ability to keep the secret; and
• The business generates money from commercializing the secret.

If it is essential to expose the trade secret to potential risk of public disclosure, for example during testing, then do so on a minimal basis to accomplish necessary goals. Ensure that those exposed to the trade secret agree to confidentiality, when possible. Talk about results achieved with the trade secret, rather than the secret itself. If practical, use physical barriers (e.g. black box) to prevent others from seeing the secret or taking samples. Mark items and packaging as confidential.

University policies vary as to whether the university will take rights in the IP, so this needs to be investigated for each institution. When developing a technology in conjunction with a university or other partner, contracts should be in place at the outset to control confidentiality. These contracts should also address ownership of improvements to the trade secrets, as well as other intellectual property, such as any patentable inventions. If no agreement is in place, then the partner may own the IP in the improvements, instead of your company.

Employees and contractors are mobile, and may take and use information when they depart, whether permitted or not. Electronic documents can be easily copied in large batches. New technologies in areas such as chemistry, artificial intelligence and 3D printing can accelerate reverse engineering and copying of more types of publicly available products each year.

If there is a threat of a loss of trade secret, quick action is required to block the competitor and prevent further disclosure. In a case involving Hellman’s mayonnaise, a departing employee went to a competitor that made private label mayonnaise. The specific formulations and scaled-up manufacturing processes owned by Hellman’s were trade secrets. Competitor mayos that had previously been soupy became similar to Hellman’s mayonnaise. The court found that the mayonnaise processing conditions were not readily reverse engineerable and that trade secrets had been wrongfully taken. An injunction was put in place to prevent misuse of the trade secret to fill customer orders.

There was also a Canadian trade secret case involving a fermentation process. An employee that developed microbes that produce the drug lovastatin went to a competing company. The court said that the former employee springboarded his new company ahead to develop its own fermentation process. The new employer was liable for misappropriation of the trade secret.

Trade secrets can exist in relation to products sold on the market. Examples in food tech would be if the formulation or the chemical process used to make the product cannot be readily reverse engineered. High tech inventions may also be able to keep trade secrets, such as where customers upload information that is processed by your company’s trade secret algorithms.

There is a role for companies to use a combination of patents and trade secrets to protect their intellectual property. Many inventions start out as trade secrets, and this can still be applicable after filing a patent application. The publication of a patent application is typically not until around 18 months after filing. Publication means that trade secret protection for the contents of the patent application is no longer applicable and the patent filing is the only IP protection. It is high stakes for a start-up company to get the patent granted once its technology is disclosed to the public, or else that published information becomes public domain if the patent filing goes abandoned.

Unpublished improvements to the disclosed technology—for example, the actual commercial formulations and processes developed after the patent application filing date—may still be protected as trade secrets. These improvements may also be considered for filing in a new patent application. Minor technical improvements and certain categories of inventions that are difficult to patent are typically treated as trade secrets. However, a secret that cannot be kept secret is better protected with a patent, if possible. Even if your company decides not to patent, it is important to be aware of other people’s patents, as they can affect the ability to freely sell your products.

There is specialized software available for tracking and recording trade secrets. Most start-up companies manage their trade secret information using conventional software and databases, for cost and simplicity reasons. Some of the important things to track in a registry include the following:

• Contributors:
• Dates; and
• Places of the discovery or development, and any linkage to the company’s products or product lines.

If there is a confidentiality agreement, companies should also track the date of the agreement and any expiry.

This is the first article in a planned three-part series. Look for upcoming installments on commercial handling of trade secrets, and enforcement of trade secret rights.

• Use confidentiality agreements
• Identify and categorize trade secrets
• Keep records of the trade secrets and who has access
• Mark documents as confidential and limit access
• Require return of confidential information‎