Trade Secrets and the Internet

6 May 1998

When businesses think about being on the Internet, they're thinking about spreading the word about their business to the world. At first blush, the idea of an "Internet-related trade secret" seems like an oxymoron, but it's not. Companies in the Internet business and businesses that use the Internet need to have a battle plan to protect their trade secrets from theft.

If your plan fails (you do have a plan, don't you?), the consequences include your competitors making money on what you developed. Here's how to develop an effective plan.

Let's start by defining the term "trade secret." Generally, a "trade secret" is any information that is valuable because it is not generally known to or readily ascertainable by other people who could profit from knowing it. Reasonable efforts must be made to maintain its secrecy. Once information is generally disclosed, you can no longer claim that it's a trade secret.

There are some variations on this basic definition depending on your state. Some definitions require that you use your trade secret continuously in your business or risk losing your legal protections. Some states require actual economic value, while some states protect trade secrets with only "potential" value.

In deciding whether information is a trade secret, courts look at many factors:

  • How widely known is the information outside of the business claiming the trade secret status?
  • How many people know the secret?
  • What security measures are used to maintain secrecy?
  • How valuable is the information to its owner and competitors?
  • How much effort and money were used to develop the secret?
  • How hard would it be for a competitor to duplicate the information using proper methods?

Don't underestimate the value of your information nor the legal protection available to you. Trade secrets are quite different than other types of intellectual property. Unlike with copyrights and patents, your information need not be novel, creative, original or tangible to be entitled to protection. When in doubt, consult with your lawyer.

Internet Trade Secrets
If you think that the concept of "trade secret" has no place around the Internet - which is the ultimate publisher of information to the world... think again. Surprisingly, you can post information on a Web site and still retain trade secret status. How? The "how" doesn't require any special magic. What it does require is some common sense security procedures.

The law recognizes that a trade secret that is absolutely secret is useless. You have to share it with some to exploit it. As long as you control access to those that have a reasonable need to know and follow the other procedures outlined below, you can maintain trade secret status for your information.

This clearly means that you can't post a trade secret on the Web for the world to see. Still, you can use the Internet to share information with those who need to know or work with your trade secrets. When you do, you need to do things like require a password to access the information and encode the transmission so that only your intended recipient can read it. I believe that a court will likely see these measures as part of a reasonable security plan. Unless, of course, your judge has absolutely no understanding of the Internet and thinks that if you're "hooked up" that anybody can look inside your computer. If that describes your judge, well then, good luck and remember the word "appeal."

Other examples of how the Internet and trade secrets can coexist are with businesses that are somehow in the Internet business. They have business plans, customer lists, licensing agreements and financial information that they consider secret just like any other type of business. They also develop software; information about the software may be a trade secret if access to the software would save a competitor time and money in developing a competing product.

The Battle Plan
It's not possible to provide rules that are always right. The law doesn't require absolute secrecy, but only secrecy that is reasonable under the circumstance. Here are some guidelines:

  1. Nobody should ever touch your confidential material until they have signed an appropriate confidentiality agreement. This includes contractors, employees, investment bankers and developers. If you're making trade secrets available over the Net, make sure that the receiver doesn't get the password until she signs the agreement. A well-drawn agreement will place the other party on notice that you're revealing information that you consider to be a trade secret and will require them to use the information only for your intended purpose.

  2. You must have appropriate employment and consulting agreements in place. If you don't, you may have to battle over who owns the intellectual property rights for the work product. Just because you pay someone to do some work for you doesn't always mean that you own the copyright or other intellectual property rights to the result.

  3. You should label everything that contains confidential trade secrets as such. Your documents, data files, tapes, disks, videos and everything relevant should say "Confidential and Proprietary."

  4. You must store your confidential material under lock and key. Papers should be stored in a locked file cabinet in a locked room in a secure building with an alarm system that's monitored. Confidential computer data and programs should be encrypted using a good encryption program and a good password. Then store the computer in a locked room in a secure building, etc.

  5. You must restrict access to the information to only those that have a need to know.

  6. You should periodically subject yourself to a trade secret audit with the assistance of your lawyer. This will include determining the integrity of your trade secrets, destroying unneeded copies, requesting the return of copies from employees, consultants and others if they no longer need them, and reviewing your computer security procedures. In some ways, maintaining trade secrets is no different from or easier than the task of maintaining state secrets.

  7. Create a procedure for reviewing all material before it's posted to a publicly available Web site. An employee may inadvertently post secret material, thus causing it to lose its trade secret status.

  8. Have your lawyer create a written trade secret policy. Distribute and post it; have those with access to trade secrets sign it. Then periodically discuss, redistribute and repost it. People need to be reminded.

  9. If security is breached, contact your lawyer immediately. She will probably recommend immediate action to try to protect the trade secret status of your information.

If you take all these steps, you've done as much as you reasonably can to protect your intellectual capital. If you're forced to ask a court to enjoin the improper dissemination of your trade secrets, you are more likely to get a favorable result if you can convince the court that you did everything that you could to protect your secrets. If you go into court without agreements, security procedures and the other things I've discussed, you're more likely to find a judge who isn't very enthusiastic about using his injunction powers. Courts will protect you, but only if you carry your end of the bargain.

Mark Grossman's "TechLaw" column appears in numerous publications. Mark Grossman has extensive experience as a speaker as well. If you would like him to speak before your group or corporate meeting, please call (305) 443-8180 for information.

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