Generally speaking, a trade secret is a valuable piece of information used by a business that is not known to the public. A trade secret can be a business plan, pricing model, or almost any other method or process with a proprietary value that is used and exclusively known by a business. While New York is one of the few states that has not adopted the Uniform Trade Secrets Act, its definition of a trade secret, which is taken from Section 757 of the Restatement of Torts is still quite broad: “A trade secret consists of a formula, process, device, or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”
Trade secrets are granted certain protections under the law, and while virtually anything can be considered a trade secret, once information becomes publicly known, it is fair game for anyone to use. That is why it is not only integral that business take necessary measures to protect their trade secrets on paper, but that they are also cautions as to whom they disclose their secrets and risk them becoming public.
As an initial measure, businesses should document information they wish to be classified as trade secrets in order to show that they view and treat the information as such. In documenting trade secrets, businesses should mark the information as confidential information and include a notice of confidentiality expressly stating that the information is protected and owned by the company, is not to be reproduced, and should not be disclosed outside the company or to unauthorized persons within the company unless expressly by the company.
Additionally, businesses should promulgate internal rules and procedures for their employees with regards to the accessing, protecting, and disclosing of company trade secrets. The business should create step-by-step processes, clear definitions of what is considered protected information, and require acknowledgement by employees that they understand them.
Finally, businesses should log any disclosures and uses of trade secrets. Tracking such disclosure and use can be vital for investigating any unauthorized disclosure of use in the future and holding the responsible party accountable.
While these measures are appropriate for documenting the status of information as trade secrets, they do not alone necessarily protect trades secrets from disclosure. Businesses should take additional steps to impose affirmative obligations on anyone who may access the trade secrets not to disclose them, and should diligently protect trade secrets from corporate espionage.
Under New York Law, the two most common means for protecting trade secrets from being disclosed by parties with who may access them are through
non-disclosure agreements and agreements not to compete.
Employers routinely require their employees to enter into contracts in which they agree not to compete with the employer for a specified period of time. While the enforceability of non-compete agreements can vary with the circumstances of employment, the need to protect trade secrets is a factor that weights heavily in favor of upholding a covenant not to compete. The reasoning applied by New York Courts, known as the inevitable disclosure doctrine, is that even though no inappropriate disclosure of a trade secret has occurred, a former employee should be prevented from working for a competitor under the theory that she will inevitably disclose the trade secrets of her former employer. Courts reach this conclusion where, among other factors, an employee would be unable to perform her job with the new employer without using her former employee’s trade secrets, the new employer is a competitor of the former employer, and the overall nature of the industry and the secrets themselves. Employers are strongly encouraged to have all employees who have access to their trade secrets to sign non-compete agreements.
In a non-disclosure agreement, a person or entity is agreeing not to reveal confidential information that another entity is sharing with them. Typically, an employer will require its employees to sign a non-disclosure agreement as a condition to their employment that prohibits the employees from disseminating trade secrets and other confidential information both while they are working for the employer and once their employment is terminated. Employers necessarily need to allow certain employees access to information that they wish to protect, and a non-disclosure agreement recognizes this reality and provides employers with express remedies, including an injunction, for instances where employees breach these agreements.
Another scenario in which a non-disclosure agreement is used is where a business is sharing a trade secret with another entity or person to discuss the prospect of entering into a joint venture, investment, or other business arrangement. An investor or potential partner would need to know what she is getting into before agreeing to anything, but the business has the need to protect its trade secrets, particularly where no subsequent relationship is created between the parties. A non-disclosure agreement allows an investor or other entity to discuss a business’s trade secrets for an express purpose and prohibits any future disclosure under the threat of substantive penalties and an injunction. While in most circumstances a non-disclosure agreement serves as an adequate deterrent, some unscrupulous actors may still decide to disclose trade secrets as a form of espionage or theft, which in turn renders the information public. This is why, in addition to having iron-clad agreements, businesses must perform due diligence on any party to whom they are considering disclosing a trade secret.
Before disclosing any information to anyone, businesses should always look into anyone to whom they are potentially going to entrust with their proprietary information. While it may be the exception to the rule, there are unfortunately some individuals and entities who have no limits to what they will do to gain an advantage over the competition. Business should investigate whether or not a prospective party has ever been accused of stealing trade secrets in the past, has committed any other acts of dishonesty previously, and what his or her general reputation is in the industry.
Additionally, a business should limit the number of persons to whom the trade secrets are disclosed, especially with regards to non-employees and other competitors. It’s common sense that the more people there are that know something, the greater the chances are that it is disclosed. Even though a business may require all parties to each individually sign a non-disclosure agreement, you can never know who will violate its terms.
Under New York law, the cause of action against a person or entity that improperly uses or discloses a trade secret is misappropriation. Misappropriation is the improper use or disclosure of a trade secret that a party obtained through employment or other relationship in which he or she had a duty not to disclose such information. Misappropriation also includes the use or disclosure of trade secrets obtained through improper means, such as fraud or theft.
Pursuant to a claim for misappropriation, a business may receive what is known as injunctive relief in addition to damages (monetary compensation). An injunction is a court order prohibiting a party from further sharing a business’s trade secrets. Damages include the economic losses a business suffers as a result of the misappropriation and can include any profit the defendant made from the inappropriate disclosure. While punitive damages are available, they are rarely granted.
Businesses must do everything they can to prevent the misappropriation and publication of their trade secrets. Public disclosure can be devastating to a business’s livelihood, and although there are legal remedies for the improper use or disclosure of a businesses trade secrets, once they become public, they are no longer unique to the entity that owned them. Non-disclosure agreements, non-compete clauses, internal processes, and due diligence are all essential steps a business should take in protecting its secrets and minimizing the chance they are disclosed.
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