As published in the June 26, 2013, issue of the Los Angeles Daily Journal by John St. Clair
Your business, Company Inc., has taken all reasonable actions to maintain the confidentiality of its trade secrets, has documented their value where appropriate, and requires other companies to which its trade secrets are disclosed to sign a confidentiality and nondisclosure agreement. Is Company protected against misuse or wrongful disclosure of the trade secrets? Not necessarily. Consider this example of an NDA not protecting Company’s trade secrets.
When Company entered into negotiations with Competitor Inc. about a potential joint venture, the companies entered into an NDA. The NDA included trade secrets in the definition of protected confidential information, so Company was protected against Competitor wrongfully using or disclosing Company’s trade secrets during the term of the NDA. While the term of the NDA is often heavily negotiated and is important, focusing attention on the term of the NDA may divert attention from an important related issue. In addition to ensuring that the NDA is not superseded by a subsequent agreement unless the NDA’s protections are included, Company should focus on what happens after termination or expiration of the NDA.
If Competitor waits until the NDA has expired to design and manufacture its competitive products using Company’s trade secrets, does Company have a legal remedy? In this instance, the NDA did not have a survival provision to extend the prohibition against Competitor’s use of trade secrets after expiration of the NDA, giving rise to the risk that Company does not have a remedy to block Competitor’s use of the trade secrets. Since Company voluntarily gave Competitor its trade secrets in reliance on the now-expired NDA, Competitor can assert that it was free to use the trade secrets. Although Company’s attorneys may consider other legal theories (for example, copyright, unfair competition or unjust enrichment) that might provide a basis for Company to stop Competitor’s marketing of its knock-off products or to recover a reasonable license fee from Competitor for use of Company’s trade secrets, protection of its confidential information as trade secrets is the remedy Company should expect will be available.
In general, a trade secret is information, including a formula, pattern, program, device, compilation, method, technique or process that: (i) derives independent actual or potential economic value from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. When Company transferred its trade secrets to Competitor under an NDA that expired at the end of its term without extending the protection of trade secrets after expiration, Company arguably failed to take reasonable measures to protect the confidentiality of the trade secret.
Another unfortunate consequence of the situation may occur. If other competitors having no nondisclosure obligation to Company learn the trade secrets from Competitor, they also may use the trade secret information and defend their use against Company’s assertion of trade secret rights by asserting Company failed to take reasonable measures to protect its trade secrets – that is, by transferring the trade secret to Competitor under an NDA that expired without extending the protection of the NDA to trade secrets post-termination, Company’s actions effectively allowed the trade secret to become public domain property.
How does Company counsel protect it from such loss of trade secret protection? Start by acting to protect intellectual property when the IP is created. Counsel and relevant Company personnel should be involved in making the business and legal judgments needed to determine how best to protect the IP. Consider these guidelines.
First, be wary of the oft-heard refrain, “Let’s not patent this. We will just keep it as a trade secret. If we patent it, the content will be in the public domain and competitors can just engineer around it, and the expenses of patent prosecution and maintenance are just not worth it.” The decision whether to hold valuable information as a trade secret or to patent it should be made after determining, among other things, the ease of engineering around a patent if the IP is patented and the likelihood of competitors reverse engineering the product if it is held as a trade secret. Input should be obtained from Company’s marketing division, to assess the value of the IP and its relation to present and future competitors. Advice should be sought from counsel familiar with the intricacies of laws and cases granting protection to patents and trade secrets before making the decision of how to protect the IP.
Even when IP can be patented and the cost and expense of obtaining the patent are justified, companies sometimes refrain from patenting IP that can also qualify as a trade secret. Patent protection lapses when the patent expires, and when the patent becomes public, it gives competitors a roadmap for engineering around the patent. Unlike patents, trade secrets have two important, valuable characteristics: First, the content and background research and data of trade secrets can remain confidential within the company, and when disclosure to another company is necessary in connection with the company’s business, the trade secret information can be protected by an NDA. Second, the protection of trade secrets can last in perpetuity, as long as their elements exist. Thus, the recipe for Coca-Cola, the secret of KFC’s 11 herbs and spices, and other “classic” trade secrets may continue in perpetuity.
Trade secrets, however, can be lost through disclosure into the public domain or by reverse engineering the product. How the IP will be used, how long it will be of commercial value, and its ease of being worked around or reverse engineered should all be considered in determining how best to protect the IP. It is risky to follow a simple template in determining whether to patent an invention or maintain it as a trade secret. Each situation involving IP should be analyzed by looking at all of its characteristics to determine which intellectual property structure will best protect its value over the life of the asset.
Second, if holding the asset as a trade secret is chosen as the legal protection structure, then each NDA under which the trade secret will be disclosed should:
use a definition of confidential information that will clearly include ways in which trade secrets may be represented or evidenced and how they may be communicated to the recipient;
specify narrowly the use that the recipient may make of the confidential information;
prohibit any direct or indirect use (e.g. by affiliates) and disclosure of the confidential information without the discloser’s authorization;
have a term only as long as is appropriate for the use to be made of the confidential information; and
provide that the nonuse and nondisclosure obligations survive the termination of the NDA for as long as any of the confidential information is legally protected as a trade secret.
To avoid recurrence of the situation described above, Company’s NDAs could contain a provision such as: “Notwithstanding any termination or expiration of this Agreement, both Parties’ obligations under this Agreement with respect to the other Party’s know-how, trade secrets and other legally protectable Confidential Information shall remain subject to this Agreement after such termination or expiration, until legal protection thereof as a trade secret is no longer applicable.”
While the above is not intended to be an exhaustive discussion of the subject, which is discussed in detail in numerous books and articles, keeping the above considerations in mind in dealing with trade secrets should assist counsel to avoid the unintentional loss of trade secret protection described at the start of this article.
This information is provided for general purposes only. Nothing in this article should be considered legal advice or legal opinion.
John A. St. Clair of The Law Office of John A. St. Clair, is founder of Your Legal Manager, a provider of in-house counsel services. He can be reached at firstname.lastname@example.org.
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