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Protecting Trade Secrets and Proprietary Information

October 2000 (reprinted from the Ventura County Star)
By Jonathan Fraser Light

The information in this article is provided only as general information, which may or may not reflect the most current legal developments. Therefore, the information is not provided in the course of the attorney-client relationship and is not intended to constitute legal advice or to substitute for obtaining legal advice from a licensed attorney.

What is a trade secret or proprietary information and how does a company protect such information?

A trade secret or proprietary information is, for example, a list of customers and their individual pricing or other specialized requirements, a manufacturing process or chemical formula, or a software program. Such information must 1) derive commercial value to the owner from not being widely known in the industry and 2) be the subject of efforts by the owner to maintain its confidentiality.

Companies are increasingly concerned about losing their trade secrets and proprietary information to competitors. This often occurs when an employee departs the company and takes information to his or her new employer. This has become a hot issue with the proliferation of high-tech companies and the rapid turnover of employees, but it is highly relevant to any business.

If a flower grower has customers with special pricing, shipping or other requirements, or the grower has little-known vendors with specialized products, that grower has confidential information which constitutes a protectable trade secret. If a manufacturer has a specialized formula or process used on its assembly line, that company also has a protectable trade secret. Even a Rolodex or Palm Pilot can contain proprietary customer information.

It is important for companies to maintain the secrecy of such information in order to sustain their competitive advantage. In addition, to prove a case of unfair competition or trade secret theft, a company must first establish that such information was truly kept secret by the company, or at least that reasonable steps were taken to do so.

Companies can do several things to help ensure the secrecy of such information and to prevent former employees or other companies from unlawfully using such information to their competitive advantage. Companies should have new and existing employees sign non-competition and proprietary information agreements. These agreements protect against employees acting unlawfully both during and after their employment with the company. The agreement should be separate from the company's Employee Handbook and should be separately signed by the employee.

Other practical steps are available to employers. They should store confidential information in locked or other secure areas. If the information is contained in a computer system, the company should have the information password-protected and should restrict the number of people who can access the information. If the information can be downloaded to a disk, there should be controls placed on who can take the information, where it goes, and who sees it. Companies should try to implement a "check-in/check-out" system for such information by using a logbook or other appropriate control. More sophisticated systems can track when a software program or document is printed or downloaded to a disk.

Companies can protect against their own unintentional copyright infringement or unfair competition by ensuring that no software or other documents are loaded onto the system without clearance from a designated manager. This is especially important when hiring employees from a competitor. Inventories should be conducted of the software used by the company to determine if any licensing or other restrictions have been placed on the company's use of such materials.

Companies should consider appointing a security compliance officer (often the Information Technology manager) to monitor security issues. That person should periodically conduct compliance audits to ensure that procedures are being followed. The procedures should be disseminated to all personnel in writing and should be contained in the employee handbook. Annual reviews of managers should include an evaluation of their efforts to ensure compliance with these procedures. Employees should be reminded periodically that they have an obligation to protect such information and that such information belongs to the company and not to the employee.

Companies should try to ensure that employees do not download such information to their home computers, or at least should require employees to receive company approval. It will be difficult to track such occurrences after the fact. If controls are not in place, employees can more easily take critical information when they leave the company.

If a vendor or customer needs to see confidential information, it should be clearly marked as such and the company should ensure that the information is returned or destroyed when it is no longer needed.

Confidential information should not be left out in manufacturing or other common areas, especially if vendors, customers or other third parties are present. Visitor access should be restricted in a reasonable fashion, such as using sign-in procedures, badges and escorts.

If a company implements these protections, it will have a far better chance of protecting its proprietary information and of successfully prosecuting an action for unfair competition if the need arises.

For more information on confidentiality agreements and protecting proprietary information, Jon Light, a senior partner at Nordman Cormany Hair & Compton LLP, may be reached at 805.988.8305 or jlight@nchc.com.