Protecting Trade Secrets
by Anthony L. Barthel, Esq.
Trade secrets are the lifeblood of many businesses. In many cases, trade secrets separate businesses from their competition. Protecting trade secrets is difficult. A leak of a trade secret or misappropriation of a trade secret by a competitor can mean the migration of customers from one business to another or allow a competitor to establish a market presence without the cost of developing the valuable information. As such, it is important to identify what constitutes a trade secret and what protective measures must be taken by businesses to ensure their value is maintained. The Minnesota Uniform Trade Secrets Act defines a “trade secret” as:
Information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
- derives independent economic value, actual or potential, from not being generally known to, and not being 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.
Simply stated, Minnesota Trade Secrets law can be boiled down to three essential elements: (1) that the information is not readily known or readily ascertainable; (2) that the information derives independent economic value from secrecy; and (3) reasonable measures have been taken to maintain the information’s secrecy.
Information Not Readily Known or Readily Ascertainable
Information that is readily known to the public is not given trade secret protection. For example, a list of names and addresses compiled from a phone book by a business, without more, will not rise to the level of a trade secret. While a customer list having names and addresses may not be trade secret, a highly detailed customer list also containing bidding information timing of purchases and sales strategy information would more likely be afforded trade secret status depending upon the factors and skill that went into creating the information as a piece of property.
Reverse engineering is perhaps the most obvious way for a person to “unlock” the secret of the information, thus rendering the information public. The degree of difficulty in the reverse engineering can often be the determining factor of whether or not something is determined to be “readily known or readily ascertainable.” The issue of determining whether or not information is readily known or readily ascertainable is an issue of fact depending on a number of matters including the skill of the engineering or development, the complexity of the information, or the investment that a business may have put into creating the information.
Information Derives Independent Economic Value from Secrecy
A party asserting a trade secret must show that the trade secret provides a competitive advantage. The competitive advantage is not required to be realized, but there must be some forecast for some amount of success or economic value from the information. Old or obsolete information is not provided trade secret protection if it no longer can be reasonably calculated to provide actual or potential value. Again, this is a fact intensive situation with a greater weight of authority placed on sales data and other information showing actual economic value versus potential economic value.
Reasonable Efforts to Maintain Secrecy
The level of care taken with information is often the determinative factor and most difficult hurdle for a business to overcome when asserting a trade secret. While the law requires “reasonable efforts,” cases have shown that the standard appears to be slightly more than “reasonable” and tends to require “reasonable prudence,” when looking at all of the circumstances involved. Nonetheless, complete or absolute secrecy is not required. Aside from maintaining legal status of information as a trade secret, it is also good practice to follow the following suggestions to promote healthy and predictable outcomes with sensitive business information:
- Warnings to employees in employment agreements, handbooks and memoranda regarding trade secrets and confidential information of the business.
- Storing sensitive information in a safe place, for example, in a safe or manager’s drawer or filing system under lock and key.
- Limiting information to employees and other persons on a “need to know” basis.
- Sharing information with vendors and other persons associated with the business through well-crafted nondisclosure agreements.
- Stamping or marking documents or other information as “Confidential.”
- Creating and instituting password or passcode entry to physical spaces or to computer files containing sensitive information.
Businesses that maintain their trade secrets avoid litigation merely by the measures they institute. However, in situations where reasonable efforts are taken and the trade secrets are misappropriated, Minnesota Statutes provides for the payment actual damages incurred and in certain cases may provide for royalties on improperly used trade secrets. In cases where trade secrets are misappropriated willfully or maliciously, Minnesota law allows for exemplary damages equal to two times the amount of actual damages, plus attorneys’ fees and costs incurred in prosecuting the action.