According to the Uniform Trade Secrets Act (UTSA), adopted in California and many other states, a “trade secret” is “information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, 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.”
Let me try to simplify. Two factors must be present.
- Taking the second first: The company or person claiming ownership of the trade secret must have made reasonable efforts to protect it. In a very general sense, this means both (a) having virtual (for electronic) and physical (for touchable) safeguards for files containing information, and (b) obtaining promises (usually in the form of agreements and/or company policies) from those who have access (generally employees and sometimes independent contractors/freelancers) to the trade secrets that they will not disclose them to anyone outside the company. And if someone breaks that promise, the owner of the trade secret needs to take some action (not necessarily a lawsuit, but something) to enforce that promise.
- Turning now to the first, and more complicated, factor: To be a trade secret, something can’t be easily “reverse engineered.” One classic (and frequently litigated) trade secret example is the customer list. Let’s consider two examples…
- Consider first a business that delivers coffee and fresh fruit to offices around town – Coffee & Fruit Delivery Co. That business, if it has been around for a few years, has likely built a unique customer base – companies that provide a coffee or fresh fruit delivery service to their employees. One cannot simply look in the phone book to figure out who these customers are. One also cannot easily figure out who to call at these companies to discuss buying needs and pricing. That customer list took time and significant effort to create. You can imagine that, if a former employee of Coffee & Fruit Delivery Co. took off with the list, opened a competing businesses, and solicited those customers, she might be able to do some damage. I like the company’s case a lot better than the ex-employee’s in this situation. In other words, assuming Coffee & Fruit Delivery Co. made reasonable efforts to protect its list, I’d call that list a trade secret.
- Consider next a local beer distributor. It’s no secret who in town needs beer – the pubs, bars, restaurants, cafes, etc. In most U.S. cities, you can also likely obtain public records showing who has a license to sell beer. And it’s probably not that hard to figure out who to talk to at the pub, bar or restaurant about their beer needs. In my view, it would be a lot harder to prove that the beer distributor’s customer list is a trade secret. That said, if the “list” goes beyond mere contact information, and contains customer needs, pricing guidelines, and other useful information that is not readily available to the public, it starts to look a lot more like a trade secret.
Right… So, what if something is a trade secret? What’s that mean?
Well, in very basic terms, it means that one cannot use the information for the benefit of anyone other than the owner. For example, one cannot solicit (either directly or for someone else, e.g., a new employer) his/her customers from a prior job if the identify of those customers are part of a trade secret customer list. This can have significant impact for salespeople in particular, and has important implications in states like California, where non-competition provisions are (with very limited exception) unenforceable. If a customer list is a trade secret and the company’s employees agree not to solicit those customers, those employees are, to perhaps a significant degree, hamstrung in their ability to compete post-employment.You've very likely agreed not to misappropriate other parties' trade secrets... But what are they? Click To Tweet
Ok… So, what should I do?
If you’re an employer or company that uses freelancers/independent contractors, you need to be sure that you protect your trade secrets, including your customer’s identities and any other confidential information, by obtaining an agreement from your employees and/or contractors that they will not disclose or use those trade secrets other than for your benefit, and that they will not solicit those customers for a period of time (typically a year) after employment, or engagement/project end.
If you’re an employee or freelancer, you need to (1) understand what you’re agreeing to at the outset, and (2) be very careful when you leave a job or engagement that you do not “misappropriate” your former employer’s or client’s trade secrets, by, for example, soliciting customers directly.
I’ve litigated a number of trade secret cases, and the truth is (no matter which side I’m on), they typically seem to result in nothing more than a lot of money for the lawyers. That said, if real harm to a business is threatened or done as a result of trade secret misappropriation, acting swiftly to assert your rights is often the best course of action.