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Company valuables include often hard to define trade secrets

Company valuables include often hard to define trade secrets

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gavel-3575414_1920Corporate trade secrets are an important part of a company’s intellectual property, but they can often be overlooked, says Jeffrey Allen.

“Trade secrets are like the little brothers at the kids table at Thanksgiving,” says Allen, a member at Bond, Schoeneck & King PLLC.

But Allen believes shoring up a firm’s trade secrets should be a company’s top priority.

“They are absolutely vital to a company’s value,” he says.

A trade secret is a type of intellectual property in the form of a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information that is not generally known or reasonably ascertainable by others, and by which a person or company can obtain an economic advantage over competitors.

But unlike its other intellectual property counterparts – patents, copyrights and trademarks – trade secrets do not require a registration and can be harder to protect, area experts say.

Local attorneys who are well versed in intellectual property say it is important for businesses to determine if they have trade secrets – which can range from an assembly line process to a client list – and then put safeguards in place to protect them.

Laws have arisen recently to help companies shield their trade secrets.

The Defend Trade Secrets Act of 2016 is a federal law that allows an owner of a trade secret to sue in federal court when its trade secrets have been misappropriated. Since the federal law was put in place, most states have adopted a statute of their own governing trade secrets law, modeled after the federal Uniform Trade Secrets Act.

New York, however, does not have a statute governing trade secrets law. Instead, it is based solely on the common law, which is the compilation of prior court decisions in the state.

allen_jeffrey_prAllen says the laws provide consistency when it comes to determining what is, and is not, a trade secret.

“Consistency in the law is better for business,” Allen says.

Allen has litigated a number of cases involving trade secrets, whether he was advocating for a firm which claims trade secret infringement or defending a person, or business, accused of misappropriating one.

One case involved a software company which claimed its customer pricing list was a trade secret. The pricing was individualized based on the customer and that price structure, along with maintaining its confidentiality, was valuable to the company, Allen notes.

When proving a trade secret, courts look at certain factors, including the steps a company takes to protect that information, as well as the monetary value that comes from it.

“Just because something is confidential it doesn’t necessarily qualify as a trade secret,” Allen says.

The software company, for example, was able to show the effort it took to protect is property, such as implementing internal and external controls to protect its information.

Allen saw more cases related to trade secrets when he was working in California, particularly with clients in the Silicon Valley, but with the rise of high-tech companies in the Rochester area it becomes an important issue, he says.

Trade secrets can hold a lot of a company’s value and are often listed as assets for the company, Allen says.

When determining what is a trade secret, it is beneficial to work with an attorney who can help build the necessary safeguards to protect trade secrets.

Areas that need to be reviewed include who needs to know the information, should it be encrypted, who needs to sign non-disclosure agreements or memorandums of understanding both inside and outside of the company. Also important is a record of how much money a company invested in developing this trade secret, Allen says.

Having that documentation in place up front can help offset future challenges, he adds.

“An ounce of prevention really is worth it,” Allen says.

Katherine McGuire
Katherine McGuire

Katherine McGuire, a partner at Woods Oviatt Gilman LLP and chair of its Intellectual Property practice group, says trade secrets are not as common as patents.

“It can be hard to establish a trade secret,” she says.

However, unlike a patent which has a shelf life of 20 years, a trade secret can be in place for an indefinite amount of time, she notes.

“Trade secrets can provide a long-lasting value to a company as long as that secret remains protected,” she says.

Since something cannot be both a patent and a trade secret, McGuire works with clients to determine which would be the best fit.

McGuire also notes that companies often have assets that could be considered trade secrets, most notably proprietary customers lists or even the company’s business plans.

It is important for a company to have a checklist of items it needs to keep confidential, she says.

“If it is a trade secret, companies need to make sure they do the things the law says they need to do to establish it,” McGuire says.

Jeffrey Wadsworth
Jeffrey Wadsworth

Jeffrey Wadsworth, a partner at Harter Secrest & Emery LLP, also litigates a number of cases around the country related to trade secrets. Wadsworth leads the firm’s Antitrust and Commercial & Intellectual Property Litigation practice groups.

Among his cases, Wadsworth has litigated against Chinese telecom giant Huawei, which was found guilty earlier this year on numerous charges related to trade secret misappropriation.

His firm also works with clients to advise them on what constitutes a trade secret and how to create policies and procedures to protect them.

Perhaps the most famous trade secret is the recipe for Coca-Cola, which remains closely guarded, Wadsworth explains, but adds a trade secret need not be the cornerstone of a business. It could, for example, pertain to a company’s marketing or pricing strategies.

Questions about trade secret misappropriation can often arise when an employee leaves one business and goes to work for a competitor. The question that follows is did that former employee share information that previous employer considered a trade secret, Wadsworth says.

It is important to take precautions to protect such trade secrets and almost every company has potential trade secrets, he notes.

He has seen a marked increase in the number of cases involving trade secret misappropriation and believes an increased awareness of them has led to the higher number.

“More people are understanding valid intellectual property rights and are taking steps to make sure they are protected,” Wadsworth says.

It also makes sense for a company to sit down with an attorney who can conduct an audit to determine what its trade secrets may be and how to protect them.

“It’s about creating a culture of awareness and protection within your business,” Wadsworth says.

Andrea Deckert is a Rochester-area freelance writer.