August 1, 2002
Subject: Trade Secret Records Retention

Almost any notion giving a company a competitive advantage can be a trade secret. Trade secrets are governed by state law and the definitions of a trade secret vary. Most states use some version of the Uniform Trade Secrets Act (UTSA). Under UTSA, a trade secret is any information not commonly known and that could give a company an advantage over its competitors. Additionally, a company must take reasonable steps to protect the secrecy of the information. Secret formulas used for many consumer products including cola and candy are examples of well-known trade secrets. Other common trade secrets include customer lists, corporate financial information, marketing data, and technical and organizational information.

Maintaining a trade secret requires complete and accurate records of confidential information and the protection procedures taken to safeguard it from disclosure.

Records Used to Identify Elements of a Trade Secret

Maintaining adequate documentation establishing the existence of the trade secret's elements is critical for a trade secrets records retention system. The UTSA says a trade secret is:

• information;
• that derives independent actual or potential economic value
• from not being generally known to, and not readily
• ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and
• is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
  Information

Information can be a trade secret whatever its form. New products, pricing, income, corporate objectives, internal discussions about future markets, conceptual product designs, prototypes, competitive analyses, sales data, product profile data, and marketing themes have all been ruled to be trade secrets.

Information from public sources or gained through experience is usually not eligible for protection. Because matters of public or general trade knowledge can never be trade secrets, it is critical to maintain records with detailed descriptions of information considered trade secrets. It is helpful to list all confidential information with references to more detailed descriptions in separate documents. A particular customer list could be noted on a comprehensive list of trade secrets with a reference to another report with the actual customer names, the measures used to protect the list, confidentiality agreements for that particular list, the time and effort expended to develop the list, and other applicable information.

Economic Value

UTSA recognizes the secret must have economic value to be protectable. It does not require proving competitive advantage. Most courts consider the usefulness of the information in a particular business to decide whether alleged confidential information is protectable. Courts have ruled that spending considerable amounts of time, money, and effort in producing the information were strong evidence of economic value.

Records documenting the resources dedicated to creating and maintaining the confidential information, help establish that the information has economic value. Records showing other companies have licensed, or have been interested in licensing the information, prove the information has economic value.

Secrecy

The key question in trade secret misappropriation trials is whether the company took sufficient steps to protect its information. Without good records documenting protection efforts, a company might not prove the stolen information was a trade secret.

There is no such thing as trade secret information in the abstract. Absolute secrecy is not required to protect a trade secret. The trade secret holder must use reasonable efforts to maintain secrecy, but may release the secret to those also pledged to secrecy.

Courts generally look at these elements to decide whether the secrecy element has been met:

• the extent to which the information is known outside the company;
• the extent to which it is known by employees and others in the company;
• the extent of the measures taken to guard the secrecy of the information;
• the value of the information to the company and its competitors;
• the amount of effort or money spent developing the information; and
• how easily the information could be properly gotten or duplicated by others.

Documenting Trade Secret Protection Measures

Research and Development

When developing something that may eventually become a patent, trade secret protection is available during the invention process, assuming the elements of a trade secret exist. Detailed record keeping is critical to the invention process because independent creation is a defense against trade secret misappropriation claims. Records documenting ideas, concepts, theories, experiments, and test results need to be kept. These records prove the date an idea was conceived and its independent creation.

Organizations doing R & D need to maintain close ties to external technical communities. There are constant informal technical exchanges and formal joint ventures. Administration and oversight of these exchanges has to be centralized to control their number, the areas of technology discussed, and counseling the people involved so that proprietary information is not improperly revealed. The control point should be responsible for the maintaining records of technical exchanges with outsiders.

Formal joint ventures require contracts that define the joint work, the protections for proprietary information, publication procedures, and the rights in any created trade secrets. In some companies, information is prepared specifically for release to scientific and technical communities and the public. Procedures governing the review and approvals for release of papers and talks should be established and records of all ownership issues, press releases, and presentations should be maintained and organized centrally. Access to records on these potential trade secrets should be safeguarded by procedures that limit access to authorized users.

Physical Security

Physical security is very important. Without some physical security procedures, a company will generally fail to prove it took reasonable measures to protect trade secrets.

The amount of security needed depends on the value of the trade secrets. Every company with trade secrets should maintain records on the security measures it uses to protect its confidential information. Depending on the extent of a company's trade secret assets, physical security measures that need to be considered include:

• Access to Grounds
• Building Access
• Access by Repair and Service People
• Access to Areas in the Plant or Office

In all situations, access to trade secret information should be on a need-to-know basis. All employees do not need access to all information. Passwords can protect information from unauthorized personnel. They should be changed periodically and every time a key employee with access leaves the company. Company records should show which employees are authorized to know which trade secrets. Documents showing access to these secrets should be maintained for each authorized employee.

Documents containing trade secrets should be clearly labeled. There should be clear procedures for having access to them. Someone should be in charge of them; they should be signed out by people who are allowed to access them; no copies should be made; they should never be taken home by anyone; and they should be returned and accounted for.

Employee technical publications should be screened and documented. Many trade secrets are innocently given away through publications or delivery of papers to professional associations.

Plant tours should be controlled and documented so visitors do not see trade secret operations. Make sure that sales staffs do not take customers to areas where confidential information may be seen. Make sure purchasers do not allow vendors to come into restricted areas unless appropriate contracts have been signed. A record of tours conducted, for whom, with dates and times should be kept along with instances where requests for tours were denied. These records are useful to prove that measures were taken to protect secrecy.

Employees

Ninety percent of the loss of trade secrets problem comes from employees who leave to work for a competitor or leave to form a competing company. Proprietary information can be lost by inadvertent disclosure besides theft.

Here are some things that should be done to reduce the risk of employees taking your trade secrets with them. All these should be documented and kept in a secure records retention system.

Employment Agreements

Employers use employment agreements to prevent trade secret and other confidential information disclosure by requiring an employee to promise not to reveal particular confidential information or to work for a competitor. Whether they are enforceable requires courts to balance between free trade and the protection of valuable trade secrets.

An employee is free to quit a job and join a competitor or start a business, unless

• there is a valid contract in which the employee has agreed not to do so; or
• the employee takes the employer's trade secrets and uses them to compete with it.

The noncompetition agreement and the nonuse of trade secrets agreements are the two most common types of restrictive covenants.

Records of employment agreements should be maintained in personnel files. They provide concrete, written evidence of a trade secret's existence and company efforts at protecting them.

Nondisclosure Agreements

The purpose of a nondisclosure agreement is to protect trade secrets. The agreement says an employee will not reveal trade secrets to a future employer. Nondisclosure agreements can prohibit employees from revealing trade secret information forever, any place, to anyone.

Noncompetition Agreements

A noncompetition agreement forbids the employee from working for a competitor. The agreement generally includes limits like time periods, geographic restrictions, and defined restricted activity. These limits must be reasonable for the agreement to be enforced. The company must have a legitimate interest for the agreement, it must be supported by valid consideration, and its terms must be reasonable.

An advantage of a signed nondisclosure agreement is it allows the company to monitor its trade secrets. If the employee goes to work for a competitor, the company can make the employee and the competitor focus on the trade secret issue and perhaps get sufficient protection to assure the employee will not reveal trade secrets to the competitor. If there is a noncompetition agreement, it can prevent the employee from working for the competitor in an atmosphere likely to involve trade secret disclosure by virtue of the environment the employee works in. Because these agreements may be used to protect confidential information even after an employee has left the company, it is critical that records of these agreements are maintained well after an employee is gone.

The Initial Interview

Protecting trade secrets should start at the interview. Applicants should be told the company has trade secrets and they should be asked if they will agree to keep it secret. They should be asked to sign a statement to this effect. All employees, in whatever capacity, should be asked to sign this kind of form. All this does is ask for nondisclosure of trade secrets. You are entitled to prohibit employees from revealing trade secrets to anyone any time, anywhere. A record of the initial interview should be maintained in the personnel file.

The Exit Interview

The exit interview is very important. Now that the employee is leaving your risk of loss of information is highest. Make sure the employee re-acknowledges and resigns the document signed at hire promising nondisclosure of trade secrets. Now that the employee has had access to the information, you can be specific. You should identify what information the employee has access to that you want him or her to promise not to disclose. You should make sure you get all documents, including information stored on computer disks, back from the employee with a signed statement saying that all such documents have been returned, no copies were made, no documents or copies went home, and no documents or copies have been given to anyone else.

If the employee is going to a competitor, consider a letter to the competitor saying the former employee had access to trade secrets, and that there is an obligation not to divulge any confidential information to the new employer. This will prove the new employer had knowledge that its new employee was privy to trade secret information of a competitor. Even without an express agreement protecting trade secrets, confidential information may still be protected by virtue of the employment relationship.

Non-employees

When non-employees perform services, they may see secret information. If trade secrets are not adequately protected, it is possible an independent contractor will take confidential information and use it for his or her own benefit or for a competitor.

The business must have procedures and standard agreement forms to protect from loss of proprietary information through these routes. There must be service contracts with the employers of these people, but the business should also get a signed commitment from each individual with respect to proprietary information. Records of all these agreements should be maintained and updated.

Idea Submissions

Companies often get unsolicited ideas. An idea submitter will claim they have a great idea to present to the company. Standard company procedure should require anyone submitting an unsolicited idea to waive, in writing, any confidential relationship and limit their rights to whatever trade secret protection they may have.

Another way a company can receive unrequested ideas is in negotiations. Many companies do not have standard forms on disclosure of ideas or confidential information during negotiations. The law says that if a company negotiates with a party and subsequently uses information received in the negotiations to its benefit, the company might be liable for misappropriating the information.

It is essential to develop some type of record to document idea submissions and store them in a centralized location. The fact that an Idea Submission Form to be completed was sent, that the department in charge of unsolicited ideas was separate from the rest of the company, and ideas sent to the company are kept under lock and key help proves the affirmative defense of independent creation later.

Additionally, product development people should keep sufficient records so that, if necessary, they can show the dates of their work, their progress on new products, and any other information that would go to the basic point of showing that your company knew of the idea or suggestion being submitted before the submission by the outsider.

Internet Use

Companies must protect their trade secrets from on-line exposure. More company information is now being posted on company Web pages. A company must maintain reasonable safeguards to protect proprietary information on the Internet as it would in any other location.

Information posted on a company Web site should be documented, with times and dates, and any Web site audits should be recorded and archived. One way to prevent trade secrets from being disclosed on-line is to have a complete and timely record of all information contained on a Web site. In case of an accidental posting of confidential information or intentional posting by a disgruntled employee, a company could quickly identify this material and remove it. While an argument can be made that once a trade secret is posted, its secrecy is lost, courts have ruled that timely removal of confidential information may save its trade secret status.

Government Submissions

Another place where trade secret information leaks out is in submission to the federal government. Almost all businesses of any size are required to submit extensive information to many different government agencies under many different laws. This information is of great value to competitors seeking to strengthen their competitive position. Some laws provide for a certain amount of protection against the exposure of trade secrets upon submission to the government. The Freedom of Information Act (FOIA) has an exemption that allows an agency to withhold trade secrets and commercial or financial information from disclosure pursuant to an FOIA request.

It is important to monitor and record all information submitted to the government. This is obvious, but it is sometimes overlooked simply because there are so many agencies requesting so much information.

Even if an express written agreement from the government to protect identified information cannot be obtained, the company can mark trade secret and confidential information it submits to the government. When the clerk is going through it to satisfy an FOIA request, they will at least have that information pointed out, and may not give it to the requester.

Economic Espionage Act

The Economic Espionage Act (EEA) is a federal criminal statute on stealing proprietary commercial information. The EEA creates the crime of wrongfully copying or otherwise controlling trade secrets. The act must be committed with intent to benefit another person or a foreign government or entity, or to disadvantage the rightful owner of the information.

Companies get EEA protection from acts of piracy by those who steal trade secrets for profit or revenge. The EEA is intended to deter trade secret crimes, and help their investigation and prosecution.

In an EEA case, companies can help prosecutors by supplying records relating to the trade secret. The EEA has its own definition of a trade secret that is an element of the crime. Records establishing the existence of these secrets are essential to successfully prosecuting an EEA case. An EEA case defendant must be shown to have intentionally stolen the secret. Providing prosecutors with records that show access by the defendant and records showing the person was aware of the information's trade secret status is also critical.

Trade Secrets Record Audit

The audit should review all documents that identify a company's trade secrets, who has access to them, and the security measures taken to protect them. The audit should confirm that records are being maintained according to policy and that their access is limited to authorized personnel.