Proprietary information, also known as a trade secret, is information a company wishes to keep confidential.
Proprietary information can include secret formulas, processes, and methods used in production. It can also include a company’s business and marketing plans, salary structure, customer lists, contracts, and details of its computer systems. In some cases, the special knowledge and skills that an employee has learned on the job are considered to be a company’s proprietary information.
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Federal legislation came into effect in 1996 with the enactment of The Economic Espionage Act of 1996 (EEA).
The EEA was in part modeled on The Uniform Trade Secrets Act (UTSA), a model law drafted by the National Conference of Commissioners on Uniform State Laws but expands UTSA’s definition. The EEA definition of trade secret follows from Section 1838, paragraph (3): “[T]he term ‘trade secret’ means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if— “(A) the owner therefore has taken reasonable measures to keep such information secret, and “(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public[.]” With the passage of EEA, trade secrets now enjoy protection under federal law as do inventions through patents, creative works through copyright, and unique names and symbols through trademark legislation. In addition, 39 U.S. laws also define trade secrets in various ways and define the conditions under which theft has taken place. Based on such laws a significant body of case law covers proprietary information and trade secrets. This legal framework recognizes a company’s right to have proprietary information and provides the company with remedies when its trade secrets have been misused or illegally appropriated.
Protecting Trade Secrets
In general, for information to be considered proprietary, companies must treat it as confidential. Courts will not treat information readily available in public sources as proprietary. In addition, proprietary information must give the firm some sort of competitive advantage and should generally be unknown outside of the firm. A company must be able to demonstrate that it has taken every reasonable step to keep the information private if it hopes to obtain court assistance in protecting its rights.
Courts require that trade secret holders take ‘reasonable’ steps to maintain the secrecy of their trade secrets, Randy Kay wrote in the San Diego Business Journal.
Courts do not require that companies take all measures conceivable to maintain the secrecy, nor do courts require absolute secrecy. Rather, the confidentiality measures must be ‘reasonable under the circumstances.’ A company has several options to keep its information proprietary. Key employees with access to such information may be required to sign restrictive covenants—also called confidentiality, nondisclosure, or noncompete agreements—that prohibit them from revealing that information to outsiders or using it to compete with their employer for a certain period of time after leaving the company. Restrictive covenants are usually enforced by the courts if they are reasonable with respect to time and place and do not unreasonably restrict the former employee’s right to employment. In some cases the covenants are enforced only if the employee has gained proprietary information during the course of his or her employment.
In addition, the courts generally consider it unfair competition for one company to induce people who have acquired unique technical skills and secret knowledge at another company to terminate their employment and use their skills and knowledge for the benefit of the competing firm. In such a case the plaintiff can seek an injunction to prevent its former employees and its competitor from using the proprietary information.
Companies may also develop security systems to protect their proprietary information from being stolen by foreign or domestic competitors. Business and industrial espionage is an ongoing activity that clandestinely seeks to obtain trade secrets by illegal methods. A corporate system for protecting proprietary information would include a comprehensive plan ranging from restricting employee access, to data protection, to securing phone lines and meeting rooms. In some cases a chief information officer (CIO) would be responsible for implementing such a plan.
As Kay noted, other means of demonstrating reasonable efforts at secrecy include marking documents as “confidential,” prohibiting people from making photo copies of trade secret documents or removing them from company premises, limiting the access of employees to sensitive materials, creating a written trade secret protection plan, and bringing suit for the theft of trade secrets as required.
On the other hand, small businesses are unlikely to prevail in cases involving trade secret protection if they sell a product or publish technical literature that discloses the trade secret, expose the secret to employees or colleagues who haven’t signed confidentiality agreements, publish information about the secret in professional journals or on the Internet, or disclose the trade secret in public documents such as court records and government filings.