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The Secret Sauce: What is a Trade Secret and How Can You Protect It?

The Secret Sauce: What is a Trade Secret and How Can You Protect It?

Coca-Cola famously guards its signature formula with layers of protection that sound like material for a spy movie. It is kept in a vault that can only be opened by a resolution of the board of directors. Supposedly only two people in the company are permitted to know it at one time, and they are forbidden from riding in the same airplane together.

There is a reason for the cloak-and-dagger routine. The best way for Coca-Cola to protect the formula, the cornerstone of an entire $190 billion business empire, is to ensure it appears unquestionably valuable. As a result, if it were ever actually stolen, courts would likely award gigantic damages, and the thief could be prosecuted criminally.

Most businesses don’t protect their intellectual property nearly as ferociously as Coca-Cola, but every company has special business knowledge, whether it is its strategy, methods for building or distributing a product, formulas or customer lists. While some of those forms of information could become patented, others fit into a more ambiguous category known as trade secrets.

Trade secrets are protected under the law. You can claim damages for theft of trade secrets by a competitor or a former employee, and he or she can even face jail time for stealing them. But you cannot register a trade secret with a government agency like you can with a patent or trademark. The only way to allege that something is a “trade secret” is to show that it is, in fact, a secret and vitally important to your business.

More specifically, here are some commonly stolen trade secrets and what companies must do to protect them.

Computer code

We live in an information age. Technology is at the center of how many companies do business. And it can be extremely valuable. Businesses invest substantial resources into developing proprietary software that enables them to have a competitive edge in everything from real estate, to health care, to retail sales, to banking and investments. Sometimes the software solution is the business, such in the case of SalesForce, which provides technology solutions to other companies.

One area that has been prone to theft by employees, because there is big money involved, is high-frequency trading. Much of the trading today on Wall Street is done not by individuals but by complex trading algorithms. The trend, illuminated by writer Michael Lewis in his book Flash Boys, led to a rise of a class of programmers on Wall Street who could make a killing with their code. As banks hired programmers to develop proprietary systems, they had to contend with renegade employees taking the code they created to other shops or launching competing businesses.   

All that has mostly died down, though, thanks to a high-profile case involving a former Goldman Sachs programmer named Sergey Aleynikov. It was a years-long legal battle which played out in both federal and state courts and appeals courts. Aleynikov had an aggressive defense lawyer. But thanks to Goldman’s carefully written policies and procedures which established the value and ownership of the code, prosecutors were ultimately able to prove, after multiple appeals, that Aleynikov stole intellectual property from the investment bank.

Customer lists

The foundation of any business is its customers (or clients in service industries). It is unfortunately extremely common (and easy) for high-level employees to access this kind of data, walk off with it and start a competing practice or business.  

Every day, lawsuits are filed by employers facing this exact scenario. In one such situation, a more than century-old Baltimore-area jeweler alleged that a group of former executives brazenly downloaded business plans and a customer list from their employer’s files. They then sought to launch a new fine jewelry store just a mile down the road.

The trade secrets were taken from a DropBox account created for managing and storing the company’s information. As part of the heist, the rogue executives changed passwords and locked their former employer out of its own account, according to the jeweler’s lawsuit.

The leader of the group of turncoats, a former COO, was motivated to commit the theft even though he was paid handsomely during his time at the Baltimore shop. He received a base salary of $600,000 per year, with regular raises, according to the lawsuit.

This turn of events could probably have been avoided, however, if the Baltimore jeweler followed more rigorous protocols for protecting the information. Cloud-based systems like DropBox might be easy to use, but they may not offer enough security for the most important business secrets.

Experts advise keeping sensitive information on dedicated servers, encrypting important files, allowing access on only a “need to know” basis, and having a containment plan in place in the event of a breach.

Technical specifications

The theft of manufacturing designs and other technical information has been a significant topic in the news lately, especially in the context of economic espionage. As business becomes increasingly global, many companies have to take care to avoid having their sensitive information stolen by trained spies. That means having processes and procedures in place both for employees accessing files over computers and for their interpersonal interactions with business partners, consultants, suppliers, and other outside contacts.

In October, a Chinese operative was criminally charged in the US with attempting to steal design secrets from several US aviation companies, including GE Aviation. The company supplies airplane parts to businesses such as Boeing, Airbus, and the US military. The spy lured experts from the aerospace companies to China on the premise of serving as experts in presentations before universities, and paid trip expenses, according to the Justice Department.

Other US companies that have been targeted by spies posing as ordinary outside contacts include microelectronics firms, drug companies, and the renewable energy industry. US law enforcement estimates that corporate espionage costs businesses in the country as much as $400 billion a year in lost profits from technologies, inventions, and other intellectual property. It behooves businesses great and small to be on the lookout for those risks.

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Steve Hochfelsen is an Orange County, California business litigation lawyer and author.
To connect with Steve: [hidden email] or 714-907-1519.



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