How to Protect Your Trade Secrets [e146]

February 2, 2015

Nasir and Mattenter Groundhog’s Day by discussing the importance of trade secrets and how to best protect your intellectual property.

Full Podcast Transcript

NASIR: Welcome to our podcast where we cover business legal news. And my name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: What are we doing today? A podcast again? Another episode?

MATT: Yeah, we can something different if you want.

NASIR: No, that’s fine. That’s cool. Podcast is cool.

MATT: A lot of people think today should be a national holiday but it hasn’t really gained too much traction.

NASIR: Because of Groundhog Day? Is that February 2nd?

MATT: Is it Groundhog’s Day? Oh, maybe it is. Oh, no, I was thinking the day after the Superbowl.

NASIR: I was thinking, yeah, February 2nd is Groundhog Day, I believe.

MATT: Is it?

NASIR: I recall.

MATT: Oh.

NASIR: Oh, yeah, you’re saying because of the Superbowl.

MATT: Well, this is the day after. So, this is the day that everyone thinks should be a national holiday. I never really understood that because I don’t see how it’s different. It’s just one football game and, on a lot of Sundays, I mean, I guess it’s the biggest game of the year but, still, it’s one game. All you have to do is watch it and then that’s it.

NASIR: I was hoping maybe Groundhog Day would be a national holiday. So, that may be technically it would be the case, but it doesn’t look like it’s a… I don’t know what the definition is – at least banks aren’t closed, I don’t believe.

MATT: So, wait, is today Groundhog’s Day?

NASIR: Yeah, February 2nd.

MATT: Okay. We should just do the intro, like, ten times in a row and have that be the episode. Just loop it.

NASIR: I love that movie. It’s a great, great cult classic. I guess it would be a cult classic because I don’t think it was like, when it came out in the theatre, it wasn’t that great of a movie or it didn’t do that well.

MATT: Yeah, I mean, you’ve got a big star in his prime.

NASIR: True.

MATT: But there was a lot of movies. It was a weird time for movies where you could get a lot of big names and they might not translate into big movies. I don’t know. Like, today, if Will Smith opens a movie, it’s just like a blockbuster no matter what it is.

NASIR: Automatic.

MATT: Well, you know, I have a secret for you and I don’t know how to protect it. It’s a trade secret, actually.

NASIR: Nice.

MATT: Bad intro but that’s what we’re going to talk about today – protecting your trade secrets – and I think we’ve talked about this before to some extent, haven’t we?

NASIR: Yeah, definitely. It seems to come up quite a bit.

MATT: The reason – I mean, well, there’s a few reasons – why we’re talking about it today but there was a recent case. We might have actually talked about this business before, too. So, it’s nClosures, and that’s obviously a lower case “n” with a capital “C” as most people would think. Well, anyways, I’m not going to bore people with the details too much of the case but, essentially, it came down to there was a breach of their, or at least nClosures believed there was a breach, of their proprietary information and it was kind of tied into their trade secrets that they have and they had this other company who is part of the lawsuit. They had a confidentiality agreement with them but the court actually determined that nClosures did not take reasonable steps to protect its information and, thus, it kind of left its trade secrets out there in the open and its confidentiality agreement was not enforceable as a result of that. nClosures did not require other employees or engineers to sign additional agreements, and this is with the other party that’s part of the lawsuit. So, basically, what it’s saying is it didn’t take the right steps to protect its trade secrets as it should have. And, even though it had this confidentiality agreement, we haven’t seen what that actually says so who knows how good or bad it was. But, despite this confidentiality agreement, it’s not valid because it didn’t take the right steps to protect their trade secrets.

NASIR: So, let’s talk about trade secrets in general for a second. Trade secrets are actually a really cool encompassing protecting that businesses can utilize to keep their confidential information secret. This goes beyond just protecting intellectual property under a patent or a copyright or a trademark; it’s actual information that you can keep from being disclosed by the public by those that are familiar with the actual secret. There’s a federal version and then states also have their own local versions of the same Trade Secrets Uniform Act. And so, it’s definitely a great tool. But the problem is that most companies don’t really know exactly how to utilize this – at least small businesses definitely do not – in the way that it’s designed in the sense that sometimes people think that everything’s a trade secret and, because they call it a “trade secret” now all of a sudden it is a trade secret. But, like, we learned with this nClosures case, a trade secret, in order for it to have those kind of protections, requires certain elements and, like I said, there’s different laws and different states and different kind of subtleties to it. But, in general, you can divide it into three parts. First, it has to be an actual secret. Okay, I’m going to make this very simple for you. It has to be an actual secret. And then, second, it actually has to have some kind of economic benefit or value. And then, you have to go through some secret measure to actually maintain it as a secret. Those seem kind of basic but take a look at it this way – for the nClosures case, they may have had some secret information that had some economic benefit, but they didn’t do anything to actually protect it to such an extent that it actually lost its trade secret designation. And so, the question is, what kind of measures do you put into effect to actually keep it a trade secret?

MATT: Getting to your three points, I mean, one and two, I think they’d covered, but it’s the third one where they took some sort of measures to protect that secret, that was the issue. I mean, in the case, they didn’t even mark what was confidential. The classic example is Coca-Cola.

NASIR: Yeah.

MATT: They have their recipe and I think it’s two people that know it and that’s that. They can’t fly on the same plane together, blah blah blah. You know, if Coca-Cola just posted that online, you know, if one of the two guys just took a picture and put it on his Instagram, it’s a secret and it has economic benefit, but that’s not really taking measures to protect that trade secret anymore. So, I think it’s the third one that really might get to people or might get to companies a lot of times. Like you said, for smaller businesses, it’s tough because who do you disclose it to in an age where so many people seem to be jumping from company to company in short periods of time? I can see why executives or owners are hesitant to disclose this information to employees because they might just take it and move onto the next job. I mean, I’m sure there are precautions you can put in place to stop that but, kind of at the same time, it just depends what it is. Like, if it’s a restaurant, a pizza place and they have this trade secret for the best crust in town because the sauce is irrelevant, they move to another pizza place and there’s this trade secret that was there in the first spot but how do the businesses know that they’re not just taking the same information and plugging it into the second location?

NASIR: That’s right. So, what are some ways that you can actually protect these trade secrets from being disseminated and actually going through that third step of implementing some security measures? First is – this seems basic but even this is lost – you literally do have to have an agreement with your employees or whoever else that they’re going to keep this confidential. There has to be a promise there. After that, it has to be clear what information is actually being kept a secret. If that’s the case, only the people that actually have a need to have some kind of use or utility of the secret should be exposed to it. So, if you just give it to everyone in the company, is this really a secret or is this just kind of a public policy that you guys do and you’re calling it a trade secret or not? And so, those are some things to keep in mind. And then, lastly, labelling items or documents or data or information as confidential or trade secret goes to that next step of making sure that this is an adequate measure to keep the secret secret, so to speak.

MATT: Yeah, and that’s one of the problems that nClosures had. They just didn’t make some information as confidential and didn’t really even take any precautions to lock it up or protect it by any means. Basically, they kind of just did everything wrong in terms of putting those protective measures in place. So, that’s a lesson learned for them but, I guess, for smaller businesses, too. It’s the same thing. This is something that can relate to big business or small business – just the bigger business more people and that’s more people you have to deal with.

NASIR: Another tip is, when your employees leave, it’s a good time in your exit interview to remind them what exactly they’ve signed as far as what they are supposed to keep confidential because – keep in mind – if you actually do have a secret, right? Let’s say you work for Coca-Cola and you know the secret formula and you’re leaving, other prospective employers are going to want that information and though it may be misappropriated if you disclose those trade secrets incorrectly but, once the trade secrets are given or exposed or made public, it’s very hard to reverse that. So, reminding your employees exactly what they’ve signed, what their promises are, and that goes along with other post-employment promises – whether it’s an enforceable non-compete or a confidentiality agreement. How many times do we see, let’s say we have a Texas employee that a not compete may be enforceable, we’ll send off a cease and desist, and the employee would be like, “Oh, yeah, I didn’t realize I signed a non-compete.” That’s actually pretty common. Don’t let them use that kind of ignorance as an excuse when they’re exiting.

MATT: What’s the one trade secret that you want to know?

NASIR: Gosh. That’s a good question. Actually, I think the most sought secret online is the Google algorithm for search engine optimization because I think everyone tries to figure out what works and I think, to this day, they have a pretty good idea of how it all works and they do change it, and even Google releases exactly how they determine it, and I think they change it every time spammers or whoever starts to game the system and reverse engineer it. But I think that’s a pretty well-kept secret as far as the algorithm goes.

MATT: That’s a nice nerdy answer. I wonder, how many people do you think know that? I bet it’s actually quite a few.

NASIR: Know what? That they have one?

MATT: No, how many people know, are privy to that algorithm.

NASIR: Oh, that’s a good question. Yeah, it’s definitely a very few because that’s definitely very valuable information. But, unfortunate for us, even if we knew everything, right? And, like I said, I think a lot of people know a lot of the major factors, there are some things that you can’t gain either. From what I understand, from a simplistic perspective, it’s a list of like a hundred-plus different factors that have different weight. What exactly those weights are and what exactly those factors are can somewhat be a mystery.

MATT: Thought you’d go with something more exciting like Twinkies – something cool.

NASIR: Even ingredients, like, reverse engineering is not necessarily a violation of trade secrets. There may be some other issues that go along with that, but reverse engineering happens all the time.

MATT: Yeah. Actually, I had a book as a kid where, like, we had to take all these popular restaurants and reverse engineer all the, like, their main ingredients. I think Coca-Cola was even in there, too. It’s like, “This is how you can make Coca-Cola at home,” and we’ve come about as close as you can with how to create it.

NASIR: Yeah.

MATT: It’s still not the same – not that I drink Coke but if I did. So, let’s see. Our takeaway for today is, if you have trade secrets, you need to take every measure to protect them. I think that’s a pretty easy takeaway.

NASIR: Definitely, and we didn’t focus on this too much but identifying what trade secrets actually are. I think sometimes people think that, you know, a customer list is automatically a trade secret or even their ingredients are automatically a trade secret but, if you list your ingredients in the packaging as required, then that might not be a trade secret. So, it’s more the process and certain things that go with it that may be the actual trade secret. With client lists, it may not actually be the names of the clients but actually maybe the specific contact information or the likes or dislikes of the secretary of the CEO, right? Those are more trade secrets rather than just a customer list – not to say that a customer list can’t be a trade secret; I’m just saying that’s typically more difficult to maintain that kind of protection for something like that.

MATT: Yeah, everything you have isn’t a trade secret.

NASIR: Exactly. This podcast is a trade secret.

MATT: It’s a trade secret. We don’t tell people our ingenious way of recording. If anyone was watching me, the setup I have to record, I don’t think anyone would want to steal this.

NASIR: No, it’s horrible. He’s literally using two laptops, iPad, your cellphone, and a microphone.

MATT: Terrible. I can probably condense this down a little bit.

NASIR: People are probably wondering why we’re doing that but there’s an explanation for each of those things but next time. That’s a trade secret.

MATT: Yeah, next time.

NASIR: All right. Thanks for joining us, guys!

MATT: Yup! Keep it sound and keep it smart.

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Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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