Keep Your (Trade) Secrets: An Explainer for Large and Small Businesses Alike
by Karlo Goronja, Esq.
Many people are familiar with the term “trade secrets.” Perhaps the most common understanding is that a trade secret is something unique to a company that it does not want its competitors or the public to know. Well-known examples include Coca-Cola’s recipe or Google’s search algorithm. This common understanding is generally correct. However, there are legal definitions and obligations that set the scope of trade secret law that businesses might understand to varying degrees. Although Coca-Cola’s recipe is a great example of a trade secret, litigation oftentimes arises in grey areas that are not so straightforward.
What exactly is a trade secret? The United States and Virginia Codes both define “trade secret” as information that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information,” and is the subject of reasonable efforts to maintain its secrecy. (18 U.S.C. § 1839; Va. Code § 59.1-336). This covers a broad range of information, including items such as a ride-sharing company’s pricing schemes, or maybe something less obvious, like compilations of public data expertly arranged for use in conducting airline ticket price audits. Importantly, the information must have independent economic value. If the information is merely useful to your company, that is likely not enough. It must be economically valuable to other individuals or entities.
What are “reasonable efforts” to maintain secrecy? Seemingly, the entire legal field revolves around the word “reasonable.” Perhaps unsurprisingly, this is the key point of contention for a significant number of trade secret lawsuits. In many cases, companies must disclose their trade secret information to other parties in the regular course of business, and the measures they take—or do not take—play a critical role in the trade secret analysis. Imagine a scenario in which a cookie company contracts with an outside facility to mass produce its cookies. This requires the cookie company to share its recipe with the facility. Put simply, to protect the trade secret status of its recipe, the cookie company must treat it like a secret. This can include confidentiality agreements, limiting the number of employees (both its own employees and the outside facility’s) who have access to the recipe, advising on the existence of trade secrets, and providing secure measures in the case of termination of the business relationship. The company must take steps to actively protect this information or risk losing potential trade secret status.
Additionally, what is considered “reasonable” depends on the circumstances. Typically, if a competitor could easily and legitimately discover the information, then it is unlikely to be a trade secret. Companies with information that is more easily accessible must take more stringent measures to protect their information. Last month, the Second Circuit Court of Appeals affirmed Turret Labs USA, Inc. v. CargoSprint, LLC, 2022 U.S. App. LEXIS 6070 (2d Cir. Mar. 9, 2022). This case involved software used to coordinate shipping and storage of air cargo. Turret alleged that CargoSprint improperly “reverse engineered” the software’s technical information. The court stated that the alleged trade secret was “made apparent to all users of the program,” and that every customer who used the software would be “privy to the functions that Turret calls a trade secret[.]” The court emphasized that Turret did not take reasonable measures to keep its information secret. Despite having secured physical servers, Turret did not take additional steps such as a contractual obligation for all customers to keep the information confidential. Because of this, the court determined that Turret could not show an enforceable trade secret.
This case highlights the importance of developing steps to protect confidential or proprietary information based on the form or nature of the information. It also serves as a reminder to entities in possession of another company’s trade secrets to remain aware of potential issues arising from their agreement and use of the information. To further complicate matters, trade secrets claims can involve multiple other areas of the law, including breach of contract and preemption issues involving the Federal Copyright Act. The attorneys at Moran Reeves Conn have experience litigating trade secret cases and navigating through the complex web of federal and state issues this type of litigation presents. MRC can provide efficient and thorough representation regardless of which side of litigation a business may find itself.