Legalese Column: The Value of Trade Secrets

 This article originally ran in the October 2017 issue of AVN magazine. Click here for a link to the digital edition. There are essentially four kinds of “intellectual property”: copyrights, patents, trademarks and trade secrets. The last is the least talked about, but often the most important. Trade secrets can be a really big deal. The formula for Coca-Cola has been a secret since its invention in 1891. Had its inventor, John Pemberton, opted to obtain a patent on it instead, it would have been public domain after about 20 years. Nobody could have used the trademark “Coca-Cola”—but everyone could have made an identical product. The most common circumstance under which trade secrets become an issue is that of the defecting sales executive. That is because the paradigm of a trade secret is the identity of customers, vendors and pricing. Other trade secrets can be pretty important, too. For example, if you are Ford, wouldn’t you like to see the designs that the other carmakers have on the drawing board for three years hence? And don’t you think Apple would like to see what Samsung has on the drawing board for its next generation of smart phones, and vice versa? And how about the anticipated pricing, not only of the phones but what is being paid for chips and other outsourced parts? The point is that patents, copyrights and trademarks can’t protect everything. Patents protect inventions for about 20 years. Copyrights protect works of art practically forever. Trademarks protect names and logos pretty much so long as they are in use. The function of a trade secret is different than any of those. Decades ago, when Lee Iacocca was running then-beleaguered Chrysler, he was sitting by his swimming pool one sunny afternoon when he had an epiphany: All Chrysler vehicles should come with five-year warranties. At the time, the industry standard had been three. Now, you can’t get a patent or a copyright or a trademark on a five-year/50,000 mile warranty. But you can keep it a secret until it launches, which is what Chrysler did. You can bet that Ford and General Motors would have loved to have known about what Chrysler was up to before its new-model advertising blitz with the five-year warranty. And Ford couldn’t just change its warranty in the fly to five years. After all, it needed to be figured into the pricing of the vehicle; it needed to be incorporated into the new-model advertising campaign, on which millions had been spent prior to any knowledge of Chrysler’s five-year warranty surprise. The way all of the above protected themselves from the competitors was by keeping secrets—trade secrets. Often, a company will be required to make a tough choice between a patent and a trade secret. A patent, you see, allows the inventor exclusive use of the invention (or the ability to require people to pay to use it) for about 20 years. A trade secret is forever until someone finds out the secret. Recall that a patent is a tradeoff. You disclose to the world in your patent application exactly how the invention works; in return, you have exclusivity for about 20 years. That is why when a patent on a drug expires, the price drops through the floor—anyone can manufacture it. Your company probably has quite a few things that you would not like your competitors to know about. This article covers what you can do to protect those secrets. The first thing about a trade secret is that it needs to be a secret. That may sound stupidly obvious, but it is pivotal. Crucial is that your employees need to be required to sign and understand your company’s confidentiality policy. Your lawyer can write such things. Also crucial is that departing employees need to be grilled about your company’s trade secrets. They need to be made to understand that they can’t take your trade secrets with them to their new job with the competitor. That is particularly important because often the precise reason that an employee is hired is to find out his/her former employer’s top-secret items. Here is an example: During the early 1990s, competition in the market for sports drinks and the exploding market for so-called “new age” drinks (such as Snapple, not so “new” any longer) was fierce. Quaker Oats had the behemoth Gatorade; PepsiCo had followed with copycat All Sport, shooting for the same market. Quaker had purchased Snapple, a skyrocketing product; PepsiCo was angling to get into the same market. One William Redmond Jr. worked for PepsiCo as an executive, knee deep in sports/new-age beverage marketing. Not surprisingly, PepsiCo required Redmond to sign a confidentiality agreement, which he did. You probably already have guessed what happened: Redmond quit PepsiCo to take a comparable position with Quaker. That, as you probably can imagine, did not sit very well with PepsiCo, which immediately filed suit, as also you certainly have already figured. Now, generally the idea of such a suit would be to obtain an injunction prohibiting the disclosure of any trade secrets. However, PepsiCo took it one step further, seeking an injunction to prevent Redmond from working for Quaker at all because they claimed that in his position there he inevitably would disclose and use PepsiCo’s trade secrets. The court agreed in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). The majority of courts that have considered such cases have declined to adopt the “inevitable disclosure” doctrine from the PepsiCo case. But some courts have. In many states, the most significant exception being California, you can avoid the above problem by including a non-competition agreement in your employment contract with each employee. However, even where permitted, non-competition agreements are carefully scrutinized by courts, which tend to “blue pencil” them if they are too broad in terms of territory, duration and/or scope. Another point here is everyone’s favorite: independent contractors. Many independent contractors correctly should be treated as employees (an important topic beyond the scope of this article). Independent contractors need written contracts; those written contracts need to include confidentiality provisions for trade secrets. Because without one, an independent sales broker may be free to walk off with your customer list to do whatever. And, as noted, it isn’t just customer lists; it’s pricing, terms of sales and more. So, as noted above, there are vehicles for protecting trade secrets. Most fundamentally, an action could be brought for misappropriation of trade secrets. To bolster the ability to make such a claim, a bunch of legal eggheads (the National Conference of Commissioners on Uniform State Laws) got together and wrote the Uniform Trade Secrets Act in the late ’70s. What that does is to allow a lawsuit for a myriad of remedies for disclosure or use of trade secrets. The Uniform Trade Secrets Act has been adopted by all but two states, and it is under consideration in those. Additionally, states have enacted criminal penalties for theft of trade secrets. However, Congress believed that not to be enough. Extending the Economic Espionage Act of 1996, which criminalizes certain trade secret misappropriation and was described by Forbes magazine as the “Biggest Development in [Intellectual Property] in Years,” Congress enacted the Defend Trade Secrets Act of 2016 (“DTSA”), 18 U.S.C. § 1836, et seq., something much needed in the era of computer hacking, the 21st-century version of the long-standing, dishonest and illegal practice of industrial espionage. The DTSA includes extraordinary ammunition. However, it does not pre-empt state laws on the subject (as, for example, does the Copyright Act, which voids every state law protecting rights equivalent to those secured by that Act). To put the above in perspective, DTSA defines a trade secret as follows (and this definition was a product of a whole bunch of smart people thinking about it): “[T]he term ‘trade secret’ means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” Read that a couple of more times and think about your business while you are doing so. All kinds of things are trade secrets! DTSA is a Howitzer in terms of remedies. Double damages (and “damages” include losses of the trade secret owner and ill-gotten gains of whomever purloined the trade secret), attorney’s fees, injunctions, and seizures. Additionally, it includes whistle-blower protection—and that is interesting. Employers are required to notify employees of that right; a person who blows the whistle on a trade-secret thief can benefit from that and cannot be throttled by the thief. Another aspect of DTSA is that it is a ticket to federal court, coupled with a right to sue anyone anywhere (though presumably with due process limitations). All told, DTSA adds to a considerable body of law that allows owners of trade secrets—if proper procedures are in place to make sure that the secrets are secret—to drop the hammer on trade secret thieves. Three things are to be learned from the above. Thing One is that if you have a company, make sure you have adequate trade-secret safeguards in place. Thing Two, also if you are a company, be sure that your employees—and particularly your independent contractors—have executed adequate trade-secret protection documents. Thing Three is that if you are an employee, or even an independent contractor, don’t think for a minute that you can run off and work for a competitor or start your own thing by capitalizing on what you’ve learned from your employer, especially the customers and really especially if you are in sales and think you will steal the customers for your new employer or for your new venture. Did you ever think about any of this? You should!