Trade Secrets-Basics

©1996 Philip R. Green

With litigation over trade secrets on the rise, and with judgements reaching into the tens of millions, it may be good to know something about this legal animal.

A trade secret is defined as "a formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."

"It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers." (Milgrim on Trade Secrets, Sec. 759, ©, 1996 Matthew Bender & Co.). By these definitions one can see that these are the "stuff" of which a company operates on a continuous basis. Not merely for a single project, though these secrets can be for a project, they are what makes or can break a company.

Most if not all of the litigation evolves this way: Employee "A" works for Company. She then leaves for more lucrative position in Firm and does basically the same work for Firm as she did for Company. If the Firm is smart, they will have "A" sign an employment agreement that states, among other things, that she warrants to Firm that she has not brought with her, and that what she knows, she will not use, for Firm. This includes, for example, that she will not give Firm a copy of Company's customer list or the source code from which Company derives a good part of their business.

These materials are also commonly called "proprietary" in nature. If "A" in fact does use the trade secrets at Firm, Firm could get sued for "stealing" and "infringing" trade secrets. Firm could indemnify itself against (sue) "A" for breach of her warranty in the employment agreement.

How can Company prove that these materials are its trade secrets. This is the scope of another article on keeping trade secrets secret. One rule of legal thumb is that trade secrets are NOT made so by only a written or oral agreement. They are made so because of the procedures that Firm and Company and others practice.