Podcast Episode 10—Identifying Your Business’s Trade Secrets

Podcast Episode Timestamps

00:00 — Topic
00:04 — Intro
00:28 — On this episode, introductory information
02:05 — TUTSA definition of “trade secret”
03:25 — Simplified definition, and explanation
04:15 — The secrecy requirement
04:20 — Not patents, because patents aren’t secret
05:22 — But, possibly undisclosed aspects related to a patent
06:00 — Not readily discoverable except through improper action
06:34 — A legal purchase followed by reverse engineering is permissible (except for patents)
06:50 — It’s not a defense that reverse engineering was possible, in theory
07:25 — Courts ask “how did the defendant learn the trade secret information?”
07:40 — Must take reasonable steps to maintain secrecy
07:45 — Factors courts may consider to determine whether it’s a secret
08:30 — A warning
09:22 — Factors courts may consider to determine whether it’s a secret
10:13 — As an aside, novelty is not required
10:30 — Is use required? Not necessarily
11:05 — Competitive advantage is a fundamental aspect of a trade secret
11:44 — Categories of potential trade secrets
12:09 — Technical information examples (including “negative know-how” at 12:49)
13:26 — Customer lists as trade secrets (independent economic value and secrecy are still required)
14:55 — Other examples of business information that are potential trade secrets
16:20 — This episode only covers the basic definition of trade secret and the breadth of possibilities
17:00 — Check the show notes for lots of stuff
17:38 — Closing thoughts
18:45 — Outro

What Is A Trade Secret, and Why Should I Care?

Trade secret is a type of intellectual property such as trademark, patent, or copyright—but different. You should care because your business’s trade secrets provide a competitive advantage and will not be protected if mishandled. In Texas, trade secrets are protected under the Texas Uniform Trade Secrets Act (TUTSA). Federal law protects trade secrets under the Defend Trade Secrets Act. In Texas, statutory gaps (meaning, any issues not addressed by the statute) are filled by looking to the common law that protected trade secrets before the state adopted TUTSA in 2013.

The Statutory Definition

The Act (TUTSA) provides that “trade secret” means all forms and types of information, including business, scientific, technical, economic, or engineering information and any formula, design, prototype, pattern, plan, compilation, program device, program, code, device, method, technique, process, procedure, financial data, or list of actual or potential customers or suppliers, whether tangible or intangible and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (1) the owner of the trade secret has taken reasonable measures under the circumstances to keep the information secret, and (2) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

A Simplified Definition

Thus, under Texas law, to be protected, a trade secret must:
(1) be secret;
(2) be used in the owner’s trade or business; and
(3) give the owner a competitive advantage over persons who do not know or use it.

It’s a Secret

First, there must be a substantial element of secrecy. So, information in a patent (or patent application) cannot be a trade secret because a patent provides a limited monopoly (or limited exclusionary right) in exchange for revealing the information to the public in hopes of facilitating innovation. However, information related to the patent that is not disclosed in the patent documents may still be a protectible trade secret.

Absolute secrecy is not required. Limited disclosure to others does not necessarily destroy a trade secret’s protectability, especially if there is a duty of confidentiality.

Second, the trade secret must be something that is not readily obtainable or easily discoverable by others except through the use of improper means. Generally, information is secret only if it is not readily ascertainable or easily discoverable by others except through the use of improper means or by engaging in tortious behavior. However, if the object in question is a complex device and its construction is not “ascertainable at a glance,” the object may have the required degree of secrecy to qualify as a trade secret.

Confidential business information is not protected merely as a reward to its accumulator. It is lawful for a person to gain possession of a product through proper means and through inspection and analysis, create a duplicate, unless the item is patented. However, trade secret law does not deny protection just because a design or object could have been obtained through inspection. Instead, in these types of cases courts look at how the defendant learned of the plaintiff’s design, because trade secret law is usually concerned with how the trade secret was discovered. This means that the fact that lawful acquisition is available, does not mean that a person may, through a breach of confidence, gain the information in usable form and escape the efforts of inspection and analysis. The fact that a trade secret is of such a nature that it can be discovered by experimentation or other fair and lawful means does not deprive its owner of the right to protection from those who would secure possession of it by unfair means. So, just because a trade secret could be discovered through reverse-engineering doesn’t mean a former employee can leave with the plans and use or disclose them.

Third, the owner must have taken reasonable steps to protect the secret from disclosure to an unauthorized person. To determine whether the measures taken were effective to maintain substantial secrecy, courts consider the following factors:
(1) nondisclosure agreements;
(2) plant security;
(3) access to the information; and
(4) other confidentiality measures. These measures must have been in effect at the time that the matter was alleged to have been secret.

Warning, disclosure without appropriate protection—or without making the party to whom disclosure is made aware that secrecy is a condition of disclosure—may result in loss of trade secret protection. For example, the inventor who showed their invention to a manufacturer without taking any steps to maintain secrecy.

To determine whether the secrecy is sufficient, courts look at the following factors. But, keep in mind that the party claiming a trade secret is not required to satisfy all of these factors because trade secrets do not fit neatly into each factor every time. Instead, whether something is a trade secret is determined by courts through a comparing and evaluating all of the relevant factors, including the value, secrecy, and definiteness of the information, as well as the nature of the defendant’s conduct.

• Extent to which the information is known outside the business;
• Extent to which employees and others involved in the business know the information; or, whether the information is restricted to those who need to know;
• Extent of measures taken to guard the secrecy of the information;
• The value of the information to the business;
• The amount the business spent to develop the information;
• The ease or difficulty with which the information could be properly acquired or duplicated by others.

Best practices for maintaining secrecy is to, when possible, have nondisclosure agreements (NDAs) and ensure that secrecy is maintained with passwords and physical barriers, as the situation dictates.

Novelty Not Required

Novelty is not required to satisfy the secrecy requirement. “Novelty” is required for an invention to be patentable. But, information does not have to be novel to be treated as a trade secret.

Use Of the Trade Secret

Traditionally, trade secret protection required that the information be presently used in the owner’s trade or business. But, Texas courts sometimes ignore this requirement. For example, where a trade secret device was never used by its owner, but was licensed to another for use. In Texas, “use” includes something that would provide a defendant with a head start on competitors—assist or accelerate research and development.

A Trade Secret Gives Its Owner a Competitive Advantage

If the information does not provide a competitive advantage, it is not a trade secret. Sometimes, the term “independent economic value” is used and it means that the information provides value not only to owner, but that it would provide value to competitors too. For example, a 1997 court found that a plaintiff’s process for marinating fajitas was a trade secret when it provided the business with the ability to offer better fajitas than its competiors.

Some Categories of Trade Secrets

Technical information, such as formulas and recipes (not just ingredients, but amounts, and process for combining); processes and procedures (maybe not the car wax itself, but the process for applying it); machines used internally in the business; molds; blueprints and drawings; product designs and information; technical specs; computer software; information on what not to do (“negative know how”); and other technical information.

Customer lists are where many of the trade secret fights happen. TUTSA specifically lists customer lists as potential trade secrets.  Texas courts will recognize customer lists as trade secrets, or not, based on how they were created, kept, and the defendant’s specific relation to the owner of the list.  But, as will all trade secrets, “independent economic value” and “reasonable steps to maintain secrecy” must be present for protectability.

Other types of commercial information is protectible as trade secret if it meets the other requirements.  Examples include commercial information relating to product sales or to other operations in the business, such as codes for determining discounts, rebates, or other concessions in a price list or catalog, lists of specialized customers, or methods of bookkeeping or office management may be protectable as trade secrets. Examples of such commercial information include the identity of suppliers, the identity of customer contacts responsible for purchasing decisions, or customer credit information.  More examples include: pricing data, market information, and customer credit histories)], as well as customer preferences, pricing information, and the identity of potential customers ; names, addresses, and information about products purchased by customers); although retail prices are public, cost of upgrades, items sold separately, components, and labor is not public; name, address, billing information, and delivery sites for 52 years); methods of doing business may be protected as trade secrets; business procedures used to help indigent persons obtain state funds for medical expenses held to be protectable trade secrets)], as may marketing and financial information; (marketing information and strategies); (reasons and business justifications for supporting products and information relating to a company’s business negotiations.

Takeaway

Trade secret is a big topic and this blog post only covers the tip of the iceberg—primarily, what a trade secret is and what can constitute a trade secret.

Disclaimer: This audio and blog post are for informational purposes only and should not be misinterpreted as legal or other professional advice. If you have a legal question, you should consult with an attorney in your jurisdiction. Thank you for tuning in to Keith Law, PLLC.

(Photo by Julius Silver from Pexels)