Trade Secret

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 PART 1

WHAT ARE TRADE

SECRETS ?

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 What are trade secrets?
Confidential information not
generally known
Derives independent economic
value, actual or potential
Gives the holder competitive
edge
Involves reasonable efforts to
maintain its secrecy

can qualify as a trade secret

 entitled to legal protection
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Cotton Dyeing Technique

• 5th century BC: Greek historian

Herodotus marveled at quality of Indian
cotton.

• Textile trade: cotton, silk, woven textiles.

The beauty, brilliance, color range and
fastness of Indian fabrics was held in
high esteem.

• India managed to keep the technique of

cotton dyeing a secret from the world
until the 17th century.
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 A trade secret can relate to
different types of
information

T e c h n ic a l a n d S c ie n tific In fo r m a tio n

F in a n c ia l In fo r m a tio n
Trade Secret
C o m m e r c ia l In fo r m a tio n

N e g a tiv e In fo r m a tio n
in s o m e la w s
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• Technical and scientific information:

– Product information
• technical composition of a product (e.g. paint)
• technical data about product performance
• product design information

– Manufacture information
• manufacturing methods and processes (e.g. weaving technique,
technology for new fiber having significant tensile properties)
• production costs, refinery processes, raw materials
• specialized machinery

– Know-how necessary to perform a

particular operation (e.g. how to dye with natural dyes) 6
• Technical and scientific info (contd.):

– Designs, drawings, patterns, motifs

– Test data, laboratory notebooks

– Computer codes

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• Commercial information:

– Customer list
– Business plan
– Marketing strategy
– Supplier arrangements
– Customer buying preferences and
requirements
– Consumer profiles
– Sales methods
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• Financial information:

– Internal cost structure

– Pricing information

– Salary and compensation plans

– Price lists

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• Negative information:

– Details of failed efforts to remedy

problems in the manufacture of certain
products

– Dead-ends in research (e.g. waterproof)

– Unsuccessful attempts to interest

customers in purchasing a product

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 Example no. 1
• Decades ago, Coca-Cola decided to
keep its soft drink formula a secret
• The formula is only known to a few
people within the company

• Kept in the vault of a bank in Atlanta

• Those who know the secret formula
have signed non-disclosure
agreements
• It is rumored that they are not allowed
to travel together
• If it had patented its formula, the whole
world would be making Coca-Cola

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 Example no. 2

• Patent for stud and tube

coupling system (the way
bricks hold together)

• But: Today the patents

have long expired and the
company tries hard to keep
out competitors by using
designs, trademarks and
copyright
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 Legal requirements:
What can be protected as a
trade secret?

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• Three essential legal requirements:

1.The information must be secret

2.It must have commercial value because it’s

secret

3.Owner must have taken reasonable steps

to keep it secret

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1. The information must be secret

• “Not generally known among or readily

accessible to persons within the circles that
normally deal with this kind of information”

• Price list on your website is no trade secret

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2. It must have commercial value because it’s
secret

• Confers some economic benefit to the holder

• Not easy to know exact value of trade secret

because it is a secret

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3. Owner must have taken reasonable
steps to keep it secret

• Under most trade secret regimes: trade secret is

not deemed to exist unless its holder takes
reasonable steps to maintain its secrecy

• ‘Reasonable’  case by case

• Importance of proper TS management program

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 Legal rights:
• Only protection against improperly
acquiring, disclosing or using:
– People who are automatically bound by duty
of confidentiality (incl. employees)

– People who have signed non-disclosure

agreement

– People who acquire a trade secret through

improper means (such as theft, industrial espionage,
bribery)

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• Some people cannot be stopped
from using information under
trade secret law:

– People who discover the secret

independently, without using
illegal means or violating
agreements or state law

– People who discover through

reverse engineering

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Reverse Engineering :

Taking apart an object

to see how it works
in order to duplicate or
enhance the object

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Examples

Lycra

Zipper
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22
 Enforcement:
What can you do if someone
steals or improperly discloses
your trade secret?

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Trade secret protection may be based on...

– Contract law
• When there is an agreement to protect the TS
– NDA/CA
• Where a confidential relationship exists
– Attorney, employee

– Principle of tort / unfair competition

• Misappropriation by competitors who have no
contractual relationship
– Theft, espionage, subversion of employees

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– Criminal laws
» e.g. for an employee to steal trade secrets from a
company
• theft, electronic espionage, invasion of privacy, etc.
• circumvention of technical protection systems

– Specific trade secret laws

• USA: Uniform Trade Secrets Act; Economic
Espionage Act

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 Remedies

1. Order to stop the misuse

2. Monetary damages
• actual damages caused as a result of the misuse (lost profits)
• amount by which defendant unjustly benefited from the
misappropriation (unjust enrichment)

3. Seizure order
• can be obtained in civil actions to search the defendant's
premises in order to obtain the evidence to establish the theft of
trade secrets at trial

4. Precautionary impoundment
• of the articles that include misused trade secrets, or the products
based on the misuse

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To establish violation, the owner
must be able to show :

– Infringement provides competitive

advantage

– Reasonable steps to maintain secret

– Information obtained, used or

disclosed in violation of the honest
commercial practices (misuse)
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 Protection in India
• Under Indian common law and British precedents,
there is protection for trade secrets

• All remedies are available:

– injunctive relief, damages, accounting of profits, and the
return of all property containing the TS information
– A seizure order can be obtained in civil actions to search
the defendant's premises in order to obtain the evidence
to establish the theft of trade secrets at trial.

• Apart from the common law, India has not

adopted any civil or criminal statutes or laws
relating to trade secrets.
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 PART 2

BUSINESS STRATEGIES
TO HANDLE & PROTECT
TRADE SECRETS

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 Loss of trade secrets -
a growing problem (1)

• Why is this occurring?

– Way we do business today (increased use of
contractors, temporary workers, out-sourcing)

– Declining employee loyalty, more job changes

– Organized crime : discovered money to be
made in stealing high-tech IP
– Storage facilities (CD-ROM, floppies, etc)
– Expanding use of wireless technology
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 Loss of trade secrets -
a growing problem (2)

• Examples of outside threats

– Burglaries by professional criminals targeting
specific technology

– Attempted network attacks (hacks)

– Laptop computer theft: source code, product

designs, marketing plans, customer lists

– Inducing employees to reveal TS (Apple case)

– Corporate spies
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 Loss of trade secrets -
a growing problem (3)

• Examples of inside threats

– 80% of information crimes < employees,
contractors, trusted insiders!
– Malicious destruction/erasure of R&D data by
disgruntled employee
– Theft by departing employee (e.g. of business
plans)
– Ignorance
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• With sufficient effort or through illegal acts,
competitors can usually obtain your trade
secrets.

• So long as you demonstrate reasonable

efforts  information remains a trade secret
and is legally protected as such.

• Conversely, if no reasonable effort  risk

losing the trade secret, even if the
information is obtained by competitors
illegally.

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 What can be done?

10 basic protection strategies

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1. Identify trade secrets

Considerations in determining
whether information is a TS:
– Is it known outside the company?

– Is it widely known by employees and

others involved within the company?
– Have measures been taken to guard its
secrecy?

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Prioritize:

– What is the value of the information for your

company?
– What is the potential value for your
competitors?
– How much effort/money spent in collecting
or developing it?
– How difficult would it be for others to
acquire, collect or duplicate it?
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2. Develop a protection policy

Advantages of a written policy:

– Clarity (how to identify and protect)

– How to reveal (in-house or to outsiders)

– Demonstrates commitment to protection

 important in litigation

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 3. Educate employees
– Prevent inadvertent disclosure
(ignorance)

– New employees :
• Brief on protection expectations early
• NDA/NCA/non-solicitation clauses
• Obligations towards former employer!

– Departing employees :
• Exit interview, letter to new employer, treat
fairly & compensate reasonably for patent
work, further limit access to data

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– Educate and train:
• Copy of policy, intranet, periodic training & audit,
etc. Make known that disclosure of a TS may
result in termination and/or legal action
• Clear communication + repetition

– TS protection must be part of the enterprise

culture
• Every employee must contribute to maintain the
security environment (e.g. anonymous security hotline)

– Monitor compliance, prosecute violators (in a

consistent manner)

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 4. Restrict access

to only those persons having a

need to know
the information

 Both paper and computer

 Computer system should limit each
employee’s access to information actually
required for his job 40
 5. Mark documents

– Help employees recognize

trade secrets  prevents
inadvertent disclosure
l
it a
e n

on fid – Uniform system of marking

c
documents
• paper based
• electronic (e.g. ‘confidential’ button on
standard email screen)

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 WARNING
WARNING::
This
This document
document contains
contains trade
trade
secret
secret information
information of of Lien
Lien
Verbauwhede.
Verbauwhede. Unauthorized
Unauthorized
disclosure
disclosure isis strictly
strictly prohibited
prohibited
and
and may
may result
result in
in serious
serious legal
legal
consequences.
consequences.
 Put markers

Top secret Confidential

Password

Use proprietary notices

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6. Physically isolate and protect

– Separate locked depository

– Access control
• authorization
• log of access: person, document reviewed
• biometric palm readers

– Surveillance of depository/company
premises
• guards, surveillance cameras

– Shredding
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7. Maintain computer secrecy

– Secure online transactions, intranet, website

– Authorization (password), access control
– Mark confidential or secret (legend pop, or before and
after access to sensitive information)

– Physically isolate and lock: computer tapes,

discs, other storage media
– No external drives and USB ports
– Monitor remote access to servers
– Firewalls, anti-virus software,encryption
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8. Restrict public access to
facilities
– Log and visitor’s pass
– Accompany visitor
– Sometimes NDA/CA
– Visible to anyone walking through a
company’s premises
• type of machinery, layout, physical handling of work
in progress, etc
– Overheard conversations
– Documents left in plain view
– Unattended waste baskets
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 9. Third parties
– Sharing for exploitation

– Consultants, financial advisors, computer

programmers, website host, designers,
subcontractors, joint ventures, etc.

Know the recipient

Disclose least amount of info necessary
Confidentiality agreement, non-disclosure
agreement

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10. Unsolicited submissions
– Unsolicited suggestions, inventions, ideas
– Beware, esp. if relate to ideas/inventions that
your company is presently developing
– Often: claim that unsolicited information was
stolen

Notify submitter that your company will not

enter into confidentiality relationship
Request submitter to sign acknowledgement
that your company is not obligated to use the
information and owes no duty of
confidentiality
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 PART 3

PROTECTING INVENTIONS:

TRADE SECRETS
OR PATENTS?

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 Introduction

• Certain types of inventions may be

protectable under patent + trade secret
law.

• However, not under both.

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Choice between patent protection and
trade secret protection is a

LEGAL and BUSINESS

decision

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Legal Considerations

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 T ra d e S e c re ts P a te n ts

n o r e g is t r a t io n c o s t s fe e s
b u t: c o s ts to k e e p s e c r e t r e g is tr a tio n + m a in te n a n c e

c a n la s t lo n g e r lim it e d in t im e
- b u t: lim ite d to e c o n o m ic life - g e n e r a lly : m a x 2 0 y
- u n c e r ta in life s p a n : le a k o u t is ir re m e d ia b le - b u t : c a n b e in v a lid e d

n o d is c lo s u r e d is c lo s u r e
- b u t: p r a c tic a l n e e d to d is c lo s e - p u b lic a tio n 1 8 m a fte r filin g
- if le a k o u t: T S lo s t - if P n o t a llo w e d : n o T S
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 T ra d e S e c re ts P a te n ts

L a r g e s u b je c t m a t t e r S u b j e c t m a t t e r li m i t e d :
P r o t e c t io n o f v ir t u a lly a n y t h in g - R e q u ir e m e n t s : n e w , n o n o b v io u s , u s e f u l
m a in t a in e d in s e c r e t b y a b u s in e s s - S c o p e : p a te n t c la im
t h a t g iv e s c o m p e t it iv e a d v a n t a g e

O n ly p r o t e c t i o n a g a in s t R ig h t t o e x c lu d e
im p r o p e r a c q u ir e m e n t /u s e m o n o p o ly t o p r e v e n t o th e r s f r o m
e x p lo it in g t h e in v e n t io n

M o r e d if f ic u lt t o e n f o r c e " P o w e r t o o l"
- s o m e c o u n t r ie s : n o la w s
- a b ilit y t o s a f e g u a r d T S d u r in g lit ig a t io n

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Business and Marketplace
Considerations

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1. Market life of the subject matter

Some products have commercial life of only a

few months

Patent typically takes 25m to be issued 

Patent protection may not exist until after
market life of the product has expired

 TS allows immediate commercial use

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 2. Difficulty of maintaining the
subject matter secret

– Time, willingness and funds to:

• Develop internal policies
• Implement protection program
• Initiate immediate legal action to protect trade secrets from
disclosure (preliminary injunction)

– Risk of disclosure  number of persons needing

access to the TS
• Employees
• Need for investors
• External contractors
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 3. Likelihood of subject matter
being reverse engineered

• Easy to control RE?

– Products widely sold to consumers  difficult to prevent RE
P
– Products sold to limited number of persons  control, e.g.
license agreement which forbids RE and requires licensee to
maintain the technology secret  TS

• Difficult/expensive to do RE?
– Secret  manufacturing method or formula  difficult  TS
– Secret embodied in product  easy (e.g. raw material)  P
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 Example no. 1
• Decades ago, Coca-Cola decided to keep
its soft drink formula a secret
• The formula is only know to a few
people within the company

• Kept in the vault of a bank in Atlanta

• Those who know the secret formula have
signed non-disclosure agreements
• It is rumored that they are not allowed to
travel together
• If it had patented its formula, the whole
world would be making Coca-Cola

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• In the past, you could not buy Coca-Cola
in India, because Indian law required that
trade secret information be disclosed

• In 1991, India changed its laws, and Coca-

Cola can now be sold in the country

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 Examples no. 2
• Secret technique for
jeans washing

• Secret textile weaving

techniques for saris

• Content of dye
mixtures

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 4. Likelihood of subject matter
being independently developed

• Complexity of invention

• Number of competitors working in the field

• Potential payoff for achieving market success

– e.g. drug that cures cancer

• Alternative option: defensive publication

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 5. Type of subject matter

– New basic technology

• “pioneer patent”
• many licensees: allows to set low licensing fees 
competitors have no incentive to risk patent litigation

– Minor improvement in well-developed field

• P will be narrowly construed
• easy to invent around
• or: competitors likely to use preexisting technology

– Protectable in all countries?

• in some countries not patentable?
• too costly to protect in all countries? 63
Example - Invention for putting
a permanent image on a piece of
apparel

• Condé System Inc. produces • The fabric remains soft and

DyeTrans Wearables™ by absorbent with less pile than
using a patented process to cotton or cotton blends and
treat fabric so it captures resists wrinkling and
shrinkage.
photographic-quality
artwork and text in the
fabric rather than on the
surface of the fabric.

Source:
http://www.corporatelogo.com/articles/031feat3.html 64
• Potential long market life
• Potential many licensees
• Would be difficult to keep secret
– many licensees
– risk for reverse engineering

Patent: only 20y,

but exclusive rights
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 TS v Patent - Conclusions

• The choice between trade secret and

patent protection for an invention is
irrevocable.

• Therefore: carefully consider all relevant

advantages and disadvantages from each
choice both from legal and business
viewpoint.
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 Cont…

• Patent and trade secrets are often

complementary to each other:
– Patent applicants generally keep inventions secret until the
patent application is published by the patent office.

– A lot of valuable know-how on how to exploit a patented

invention successfully is often kept as a trade secret.

– Some businesses disclose their trade secret to ensure that no one

else is able to patent it (defensive publication).

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 Remember...

TS: No registration, but 3 requirements for

legal protection

No need for absolute secrecy, but

‘reasonable measures’

Developing and maintaining TS program

< good business practice to prevent
< legal requirement to enforce TS protection

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Only legal protection against dishonest
acquisition/disclosure/use

Consider alternative protection

Get legal advice, whenever useful

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 Case Studies
• The Story of the Bridgport Loom.
• The story of NRB Textiles & Johnston
Industries.
• Motorola vs integrated circuit systems (
ICS )
• Walmart vs Amazon.com
• Color span vs sentinel imaging

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 Case Study 1 -- The Story of
the Bridgport Loom...
• 1811: James Lowell vacation in Scotland
• In fact, Lowell was a spy
• Water powered weaving machine.
Performed work done by hundreds of
artisans. Allowed British to command
world textile trade. American cotton had to
be shipped to England where it was woven
into cloth, and then resold to American
merchants.

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 Case study 2 -- The story of NRB
Textiles & Johnston Industries…
• NRB + Johnston lawsuit: Competitor paid 2 consultants (posing
as research student + Swiss investor) $500,000 for info on
customers, suppliers, and manufacturing operations of 9 textile
companies.

• Used stolen information to lure customers away after first

reducing prices.

• Also introduced a fabric very similar to one manufactured by

Johnston and then marketed it to Johnston's customers.

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 Case study 3 - Motorola vs
Integrated Circuit System
• Motorola in July 1999 , filed a lawsuit against ICS
and several managers who left Motorola while
working in its Timing solutions operation to set up a
new ICS operation.

• Motorola’s complaint was that ICS did this to gain

access to Motorola’s business and technical trade
secrets and that the managers who left had breached
duties and misappropriated trade secrets .
• Though ICS and the former motorola managers
denied allegations , a settlement was reached on
march 2000.
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As per the settlement:
• Motorola agreed to dismiss the lawsuit
in exchange for defendants agreement
to make an undisclosed monetary
payment .
• ICS Refrain from using or disclosing
motorola confidential information and
for limited time periods to refrain from
using certain design technologies .
• Restrict further hiring and solicitation
of motorola employees
• Grant motorola certain rights to use
certain ICS intellectual property . 74
 Case study 4 - Walmart vs
Amazon .com
• Walmart had filed a suit in a US court
against Amazon.com claiming that
Amazon was attracting executives and
employees of Walmart , together with
their consultants , to access the trade
secrets of walmart .
• The case was settled in 1999 .

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As per the settlement:
• Amazon agreed to re-assign some of its
employees where their knowledge of
walmart operations would not be
used .
• Limits were also placed on the projetcs
to which walmart workers are involved
in amazon’s operations .

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 Case study 5 - Colorspan
vs Sentinel Imaging
• This dealt with a case on infringement of
trade secrets , in which color span was
awarded $ 2.2 million in damages in a 1997
judgement .
• Colorspan alleged that Sentinel had stolen
part of its market of consumables for its wide
format inkjet printers by hiring two former
colorspan employees who imparted trade
secrets and customer information.

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