Trade secrets run the gamut from formulas, recipes, client lists, software code, market analysis, research and development, blueprints, projections, business plans, and many more. Once you have expended the time, effort, and money to obtain trade secrets, you would do well to expend the time, effort, and money to protect them. In this article, I discuss various methods of protecting your trade secrets in the context of your employees and in the context of business deals. Some trade secrets can be protected with patents. However, obtaining patents requires steep costs and not everything can be patented. For these reasons, I recommend to many clients the following more affordable alternatives.
If you hire employees, you always run the risk that an employee will run off one day with your sensitive trade secrets. To protect yourself from that risk, I recommend including a non-disclosure clause and a non-compete clause in their employment agreements. A non-disclosure agreement prevents an employee from improperly using information for the benefit of a third party. A non-complete agreement prevents an employee from improperly using information for the benefit of themselves. Because the line between confidential and nonconfidential can sometimes be blurry, I recommend eliminating any ambiguity by labeling sensitive documents with the word “CONFIDENTIAL.” However, the most common breach of sensitive information does not come from nefarious adversaries, but through inadvertence. To prevent such accidental breaches, business owners should have a well-drafted employee manual and regular employee trainings. Access within the company to sensitive documents should be on a need-to-know basis; sensitive documents should be password protected; employees’ access to sensitive information should be monitored.
Numerous business transactions expose your trade secrets are at risk. A common one is a licensing agreement. Potential licensees usually require various disclosures before they will agree to enter into a license agreement. For example, before agreeing to use your chemical compound, a company may require the disclosure of its composition. Another example is in soliciting an investor. Before investing in your motion picture, the investor will probably want to read the script. However, before disclosing anything to anyone, it is important to come to an agreement that protects your trade secrets. The agreement should, among other things, explain exactly what is being protected, how long the agreement remains in force, the physical proximity of the restrictions, and the permitted uses of the information. Of course, hopefully the deal will go through and you will have an on-going business relationship. This relationship too needs to be governed by an agreement that protects your trade secrets.
Agreements that prohibit the above-described disclosures are not enough, however. The second step is to make sure any agreement will actually act as a deterrent against improper conduct. I recommend the inclusion of the right to elect a “liquidated damages” provision in any one of these contracts. Liquidated damages are a pre-determined automatic penalty for violation of an agreement. For example, a liquidating damages clause may require payment of $5,000 for each breach of the nondisclosure agreement. Without a liquidated damages provision, a court would require you to prove not only the amount of damages you sustained as a result of an improper disclosure, but also that the breach was the cause of the damages. Because proving both of these can be difficult, I recommend a liquidated damages clause in most transactions. Some liquidated damages clauses are unenforceable, so it is important to consult with an experienced business law attorney before signing any agreement with such a clause.