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Protecting Trade Secrets Is Part of Maintaining a Competitive Edge

June 28, 2021, 8:01 AM

Companies need to continually protect the information that drives their business success. In the face of a global pandemic and employees working remotely in varying degrees, the protection of trade secrets has taken on an increased importance.

Additionally, with communication taking place largely in a virtual world across a variety of new technological media, new challenges have emerged for companies endeavoring to protect their confidential competitive information. As workforces with access to confidential and proprietary information remain increasingly remote, the necessity for businesses to protect their confidential information is magnified.

Trade secrets are often core to a business’ financial viability, if not its success, and rank among a company’s most valuable assets. Well-known examples include the formula for Coca-Cola, Google’s search algorithm, and McDonalds’ secret sauce recipe. Each of these examples does not enjoy patent, copyright, or trademark protection. Rather, each is a protected trade secret.

A trade secret enjoys significant advantages over other forms of IP protections in that disclosure is not required and the “secret” can be protected forever. Think Coca-Cola formula.

Despite the pandemic, claims alleging a misappropriation of trade secrets have increased in recent years with the past year being no exception. Last year brought robust litigation in the trade secret space across a wide swath of industries ranging from cannabis to fashion and retail, e-commerce and consumer products.

While historically trade secret claims were brought in state courts, since the 2016 passage of the federal Defend Trade Secrets Act (DTSA), which created a federal cause of action for trade secret theft, claims are now routinely brought in the federal courts. The past two years have seen nearly 2,000 new cases alleging trade secret misappropriation filed in federal court.

On the recovery side, successful plaintiffs in trade secret cases have continued to see courts award substantial damage awards. If nothing else, the past year has proven damages that can and are being awarded for trade secret claims remain staggering.

Proactive Measures to Protect Confidential Information

Companies need to make smart decisions to protect confidential information from day one. The DTSA and various state statutes require that a trade secret owner take “reasonable measures” to protect its trade secret information. What constitutes “reasonable measures” is not defined, and the actions that a company takes to protect its trade secret information up front can impact the likelihood of a successful trade secret claim years later.

Coca-Cola is widely known for its efforts to maintain secrecy of its formula for its popular soft drink, but this is not the benchmark for what is required.

Numerous courts have dismissed trade secret claims based on the failure of the plaintiff to enact “reasonable measures” to protect its trade secrets. In some cases, the party seeking trade secret protection did not adequately mark the information as confidential.

Other indicia of reasonable measures include storing the information in a password-protected, limited-access server, and having employees sign written acknowledgments of their obligation to keep sensitive business information confidential.

In today’s world where companies use cloud applications allowing employees to work more flexibly, the inquiry becomes more difficult. The ease with which data can be transferred in a cloud-centric world significantly changes a company’s ability to maintain the secrecy of its information. For example, when an employee downloads information from the cloud to a personal device outside of the company’s control, the company may lose track of its data and the ability to maintain the secrecy or confidentiality it thought it had.

Whether or not a company has undertaken “reasonable measures” to protect its confidential information is a fact-based inquiry; in all likelihood, this will continue to be a hotly litigated issue in trade secret litigation.

Noncompete Agreements

At all levels, there is a growing legislative focus on noncompete agreements, which impacts the protection of trade secrets. President Biden announced his intention to eliminate noncompete and no-poaching agreements that restrict employees from freely moving between employers. Soon thereafter, Washington, D.C., enacted a law that serves as a near-total ban on the use of noncompetes in District of Columbia.

Many states are contemplating similar statutes precluding the enforceability of employee noncompete agreements and non-solicitation agreements. As a result, trade secret claims are likely to increase as employee mobility remains high as companies attempt to protect their assets.

Trade secrets remain essential to the competitive success and financial viability of many businesses. Claims alleging trade secret misappropriation are likely to continue to rise. Companies need to examine their policies and procedures regarding their confidential information and the protections in place to maintain that information in confidence. Looking at these issues on the front end can lead to increased success on the back end if a claim needs to be pursued.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Steve Blonder is a member of the Much Shelist’s Management Committee who focuses on complex business litigation. He represents clients before state and federal court in regarding disputes in trade secrets, action defense, corporate governance and control, securities, insurance, real estate, regulatory compliance and other business issues.