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August 01, 2013 (Vol. 33, No. 14)

Rethinking Trade Secret Protection

Given Recent Rulings on Biotech Patents, Firms Ought to Fully Protect Their Proprietary Info

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    Judy M. Mohr, Ph.D.

    The traditional approach of patents to protect proprietary information in biotechnology, personalized medicine, and diagnostics has gradually weakened over the last few years in view of several court decisions.

    One of these decisions was on June 13, in which the Supreme Court ruled that naturally occurring DNA sequences are not eligible for patenting—a marked departure from decades of the U.S. Patent and Trademark Office issuance of patents to gene sequences.

    With the option to protect newly identified gene sequences with a patent no longer possible, companies should rethink the role of trade secrets to protect proprietary information.

    One part of trade secret protection is implementing an internal trade secret program or policy. Often, a company relies on a nondisclosure provision or a confidentiality clause in its employee agreement or in confidentiality agreements to create a duty of confidentiality with the employee or third party for protection of its trade secrets.

    This article discusses how a trade secret is different from confidential information and identifies active steps a company should take to implement a trade secret program so that it can enjoy the benefits of state and federal laws if a trade secret is misappropriated.

    Factors to consider in deciding whether to apply for patent protection of an idea or to maintain the idea as part of a trade secret program are also discussed.

    Let’s first consider how a trade secret differs from confidential information. Both, of course, encompass a company’s business, technical, and commercial information that is generally not known by others outside the company. Trade secrets, however, are a subset of confidential information, and not all confidential information qualifies as such. Trade secrets are limited to that confidential information that affords a company a demonstrable competitive or economic advantage and is subject to efforts that are reasonable under the circumstances to maintain its secrecy.

    An example of confidential information that may not qualify for trade secret protection is that a company uses a certain standard written test to vet candidates for employment. While it may be confidential that the company routinely uses this test to screen candidates, the test itself is not confidential information and every candidate who takes the test for potential employment results in an ever increasing pool of persons who possess the information nonconfidentially. Moreover, it may be hard to connect use of the test to select employees with a competitive or economic advantage it provides to the company.

    Confidential information that qualifies for trade secret status potentially enjoys the benefit of legal protections beyond that provided for confidential information. For this reason, a company is wise to implement internal steps to ensure its confidential information that qualifies as a trade secret will be viewed as such by a court and awarded full legal protection. What are the internal steps that should be taken?

    Implementation of internal steps to ensure legal protection of confidential information as a trade secret begins with a threshold inquiry to identify that information which derives “independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons” to whom it might be valuable. This can be done by interviewing key scientists and engineers at the company, and compiling a list of information they view as confidential and valuable. This listing of secrets, referred to as a trade secret register, is appended to a written policy that outlines the view of the company on its confidential information and the internal steps implemented to maintain secrecy.

    Once a company has identified its trade secrets, it is necessary to subject the secrets to “efforts that are reasonable under the circumstances to maintain ‘their’ secrecy” in order for a court to protect them as trade secrets. Steps a company can take to satisfy this requirement include: First, informing employees about the policy, register, and consequences of its breach, and requiring each employee to sign an acknowledgement. Second, the company should conduct a yearly or semi-yearly audit of its listing of trade secrets to keep it up to date with changes. Third, access to the trade secrets identified on the listing is ideally restricted to select personnel who have need to know or use the trade secret in their job performance. Fourth, any physical area where a trade secret is utilized has appropriate signage (e.g., “Restricted Access” or “Confidential”) and/or access to the area is restricted to select personnel.

    These internal steps ensure that a company can satisfy the requirement that the information was subject to efforts that are reasonable under the circumstances to maintain its secrecy.

    In preparing a trade secret register the question often arises whether to pursue patent protection for an idea or to maintain it as a trade secret. The answer is based on balance of business and legal factors that merit a fuller discussion than can be provided here.

    A simple guide is to consider if the idea can be easily reverse engineered from the product; if it can be, then a trade secret is of no use to protect the idea. On the other hand, if from inspection of a competitor product on the market it is impossible to know if the idea is present in the product or was utilized to make the product, then a patent has little value. In addition, some ideas do not qualify for patent protection, such as customer lists or business strategies, and so a trade secret is the only option.

    With a formal trade secret program implemented by a company, the legal protections available to it in the unfortunate event of a trade secret misappropriation include both civil and criminal charges.

    The Uniform Trade Secrets Act has been adopted in most states, and prohibits the misappropriation of a company’s trade secrets and provides a number of potential remedies for actual or threatened misappropriations of trade secrets. This act provides for a civil cause of action for the misappropriation of a trade secret and specifically empowers a court to issue a preliminary injunction. The damages available to the employer who prevails on a trade secret claim includes the recovery of “reasonable attorney fees” and can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.

    The Federal Economic Espionage Act criminalizes the theft of trade secrets from an employer. In addition to providing criminal penalties, this act also authorizes the Attorney General to institute a civil action to seek immediate injunctive relief to protect those employers whose trade secrets have been stolen or misappropriated. The Federal Computer Fraud and Abuse Act provides for both criminal and civil remedies for its violation. This act prohibits not only the theft of trade secrets from computer-based programs, but also the malicious destruction of computer-based information and systems.

    A company invests significant resources, time, and talent to develop and commercialize its products, and this investment inevitably generates confidential information, some of which can qualify as a trade secret. Like other intellectual property rights, trade secrets can be extremely valuable to a company’s growth and overall valuation. Implementing a trade secret program is a simple internal act that can be done to ensure full legal protection of its most valued confidential information.

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