Understanding Trade Secret Laws and Assets

For companies, maintaining a competitive advantage over the market is necessary for long-term growth. In many cases, this competitive advantage takes the form of a federal- or state-protected trade secret, such as a proprietary algorithm, product formula, or customer list. But if companies fail to implement internal policies required by federal and state law, federal and state trade secret protection may quickly be lost, along with the advantage it confers.

Here's a brief overview of the current trade secret laws, their legal requirements, and some recommendations to help enterprises ensure trade secret protection.

Federal and State Trade Secret Protections

Trade secrets are protected at the federal level under the Defend Trade Secrets Act (DTSA). Meanwhile, at the state level, protection derives from the respective state versions of the Uniform Trade Secrets Act (UTSA), which has been adopted by 48 states. Because the DTSA was passed in 2016 and largely borrows from the UTSA in terms of important provisions and definitions, the requirements to bring a private action under either federal or state law are similar. But for protection under the DTSA, the trade secret must also be related to a product or service used in interstate or international commerce.

Trade Secret Definition

Broadly, the definition of a trade secret encompasses all forms of financial, business, scientific, technical, economic, or engineering information that is:

• Secret
• Derives independent economic value from not being generally known or readily ascertainable by proper means
• Subject to reasonable efforts to maintain its secrecy

Economically Valuable and Not Readily Ascertainable

For trade secret protection, information must retain "economic value" and not be "readily ascertainable" by others. Courts determine whether information satisfies this standard on a case-by-case basis, depending on the unique facts and circumstances. But in making their determination, courts generally consider whether

• The information has actual or potential commercial value to a company or provides a company with a competitive advantage in the market
• The company devoted significant time, money, and other resources to develop the information
• The information is not generally known to the public, or to other persons or businesses outside of the company who can obtain economic value from its disclosure

With the above in mind, companies should keep adequate records detailing any expenditures related to acquiring or developing the trade secret. In addition, maintaining reasonable protective measures not only assists in combating a finding that the information is not readily accessible, but also that the company acted reasonably in maintaining secrecy, another requirement under trade secret law.

Reasonable Efforts to Maintain Secrecy

To satisfy the reasonable security measures requirement under the laws, businesses should implement technical, administrative, and physical safeguards appropriately tailored to the day-to-day business of the enterprise, the type of confidential information sought to be protected, and the individual participants to whom access to the information may be granted.

And as a first step, each company should assess what safeguards are most compatible with the practicalities and efficiencies of its unique workplace. This assessment should produce fitting security measures that a company may then implement (i.e., those that will not unduly interfere with business operations). Specifically, a company should consider the following during its assessment:

• Technical safeguards: Whether and how it is leveraging data encryption technologies, instituting technical access restrictions, and/or deploying antivirus software
• Administrative safeguards: Whether and how it is compartmentalizing information, auditing security protocols, and/or providing employee training
• Physical safeguards: Whether and how it uses surveillance systems, hires security personnel, and/or restricts visitor access

Efforts to satisfy the reasonableness standard under trade secret laws are entirely within the control of the company seeking trade secret protection. So, companies should look internally and adjust the relevant policies and practices accordingly.

If you need assistance in assessing, auditing, or implementing security measures to better ensure IP protection or have general questions on trade secrets, please contact A.J. Zottola or Ben Myers.