Proprietary Data and Trade Secrets

Proprietary Data and Trade Secrets
By Michael Sanibel


Overview

The United States has laws and regulations to protect other business from stealing your products and ideas.  Among the most common are patents, copyrights, trademarks, service marks, and registered marks.  However, you may have information that you want to protect that doesn’t fall into any of these categories.  Or, maybe you don’t want to go through the effort and expense of getting the government to grant you the protective license you are seeking.

The terms most often applied to such information are "proprietary” and "trade secret.”  When information is labeled with these terms, it provides a method of limiting who can view or use it.  The government issues security clearances and classifies certain documents to accomplish the same objective.  Unless a private company is working on a government contract, it can’t use that classification system as a means of shielding the contents of important documents.


Definition

A trade secret is a design, process, formula, or any collection of information that:

  • Enables the holder of the information to derive a current or future economic benefit
  • Is not generally known to the public, and that lack of knowledge is the underlying reason for the economic benefit
  • Is subjected to reasonable efforts to protect it by the holder of the information
While the precise language may vary by jurisdiction, these three factors are required in order to establish legal protection for your proprietary data.  If you own your own company, you hold the power to determine what information you want to protect within the above criteria.  

Unlike a patent that is disclosed to the outside world when you sell a product, a trade secret is kept secret.  Another difference is that a patent expires at some point, but a trade secret is protected indefinitely.  One of the best-known and most valuable trade secrets is the formula for Coca-Cola.  If it had been patented, the protection would have been lost decades ago.  However, without a patent, there is no minimum period of protection and the formula could be legally discovered through other means such chemical analysis.


Examples

Some or all of these examples of proprietary information may not apply to your small business, or you have no compelling reason to worry if it’s compromised.  It pays to be aware of the different types of data in case you do engage in work that you want to keep confidential.

  • Marketing data, statistics, strategy, and competitive position analyses
  • Customer inputs, comments, complaints, and surveys
  • Financial information including sales, profits, costs, budgets, and order quantities
  • Business forecasts including sales volume, income targets, and product quotas
  • Production data such as current inventory, supplier list, unique processes, unit capacity, and chemical formulas
  • Technical documents including product specifications, performance data, research & development results, and code names
  • Future plans including new products, release dates, target customers, and expansion plans


Laws

Misappropriation or theft of a trade secret became a federal crime when the Economic Espionage Act was enacted in 1996.  It covers protected commercial information, not classified government documents and information.  It applies criminal penalties to two activities:

  1. Misappropriation of a trade secret with the intent that the theft benefit a foreign entity
  2. Misappropriation of a trade secret related to a product that is placed in interstate or international commerce, causing injury to the owner of the secret
In addition to possible fines and imprisonment, the act also mandates forfeiture of all property used in the commission of the crime and all proceeds of the crime.

Most states have adopted the Uniform Trade Secrets Act which imposes civil liability for misappropriation of trade secrets and provides a private cause of action.  The available remedies include money damages, injunctions, and punitive damages.


Protecting Data

If you are a sole proprietor with no employees, the protection of your data is greatly simplified.  Mark important documents as "proprietary” or "confidential” and lock them up.  Only dispose of such documents with a high-quality shredder.

If you have employees, you can require them to sign agreements that restrict the disclosure of information during their period of employment.  You can require them to sign over rights to any intellectual property or proprietary data that is created during their employment.  In addition, you can impose a non-competition agreement that further restricts disclosures after leaving your employment, so long as it is reasonable in geographic and time scope.  These agreements can include financial penalties in the event they are violated.

You can control who has access to the combinations or keys to confidential files.  Computer files can be controlled by passwords and secure access restrictions.  If you occupy an open office area, be careful with visitors who may inadvertently be exposed to proprietary data.  When possible, meet them in an area that does not house such information.  Important files should be stored safely away from prying eyes.


Dealing with Customers and Suppliers

If you are in a situation where you must disclose trade secrets in order to do business with another person or company, you should implement a nondisclosure agreement (NDA).  This is a legal contract that defines the material to be shared, the purposes for which it is to be shared, exactly how it is to be protected, and how long the agreement remains in effect.

Most NDAs are unilateral, where one party has information to be shared with the other in order to complete a business transaction.  However, the agreement can be multilateral if more than one party is disclosing trade secrets.  Free NDA templates are available for download from the internet.


Summary

Unlike a patent, a trade secret does not protect you from someone independently duplicating what you have done and using it to their own advantage.  The important point is to avoid helping competitors figure this out.  Be careful with the type of information you put in your catalog, website, trade journals, professional association newsletters, press releases, and conference papers.

In the digital age, it’s more important than ever to protect your information.  Put systems and firewalls in place to secure your computer network, and make sure you have a secure data backup.  Industrial espionage is more prevalent than ever, so use caution in all your business endeavors.


Michael Sanibel (http://www.michaelsanibel.com/) is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis. He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.  Michael
wrote this feature article exclusively for Debbie May.com (www.DebbieMay.com), an organization dedicated to helping small businesses succeed.