Can you keep a secret? Why now is the time for a trade secrets audit
By John R. Bauer, Robinson & Cole LLP
A down economy presents an excellent opportunity to conduct an internal trade secrets audit. A trade secrets audit has two purposes. First, trade secrets audits identify company information that ought to be protected and that courts might recognize as legally enforceable trade secrets. Second, trade secrets audits assess whether the measures currently being employed to protect company information are effective.
One of the unique features of trade secret law is that courts only will protect information that companies employ reasonable measures to protect. In fact, in a trade secret misappropriation case, the plaintiff’s burden is to prove not only that the information used or disclosed by the defendant is secret and that it derives value from being kept secret but also that the plaintiff company has taken reasonable precautions to ensure that the information was kept secret. Trade secret audits are designed to make certain that if tested in court, a company’s confidential information would warrant protection as legally enforceable trade secrets.
Whether conducted by company personnel or outside counsel (often at minimal cost), trade secrets audits first focus on identifying information that the company has determined it should protect. Trade secrets can include technical or scientific information (including product designs, formulas and the like), product information (including product development plans), sales and marketing information, financial information (such as revenues, profits and profit margins) and even customer information. Massachusetts law defines a trade secret as “anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement.” M.G.L. c.226 §30. Obviously, a wide range of information can qualify as a “trade secret.” Trade secrets audits identify information that may qualify.
However, as noted above, to be entitled to legal protection of its confidential information, a company must demonstrate that it has employed measures to ensure that the information remains confidential. Massachusetts courts consider the following factors when deciding whether a company has taken sufficient steps to protect its confidential information; (1) the existence or absence of an express agreement restricting disclosure; (2) the nature and extent of security precautions taken by the possessor to prevent acquisition of the information by unauthorized third parties; (3) the circumstances under which the information has been disclosed to employees or third parties; and (4) the degree to which the information has been placed in the public domain or rendered readily ascertainable by third parties. Trade secrets audits assess whether company measures are sufficient.
For example, trade secrets audits review existing non-competition, non-solicitation and non-disclosure agreements with employees, independent contractors and vendors. Have the appropriate persons signed agreements? Are the agreements up-to-date? Are they legally enforceable?
Trade secrets audits also review who has—and who should have—access to confidential information. Is access limited to those with a “need to know”? What restrictions are in place to ensure that employees who do not have a need to know are prohibited from accessing confidential information? What security measures are in place to prevent third parties, including competitors, from accessing confidential information? Trade secrets audits review both physical and computer access, including virtual access, to company information.
Trade secrets audits consider whether companies have adequately or effectively informed employees what information should be considered and treated confidentially. Trade secrets audits review simple matters, such as the appropriate marking of confidential documents, as well as more complex matters, such as whether training procedures adequately teach the protection of confidential information. Trade secrets audits review company policies for maintaining secrecy.
There is no “off the shelf” manual for trade secrets audits. What is appropriate for one company may not be appropriate for another. Nonetheless, the relative quiet of a down economy is exactly the time that every company should decide whether if it is doing enough to keep its secrets secret.
John R. Bauer is a Counsel with Robinson & Cole LLP and practices in the business litigation section with a focus on intellectual property disputes. He can be reached at (617) 557-5936 or by e-mail at firstname.lastname@example.org.
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