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A business must compete with other businesses for the customer’s dollar. Inherent in this scheme of competition in the marketplace is the need to establish that the products or services offered are the “best” for the customer’s needs. Inherent in this process is the need to maintain a competitive edge over competitors for the customer’s purchasing power. This is usually accomplished through a variety of techniques and devices that place a company at the forefront in the customer’s purchasing radar. Often times a company will find that achieving and maintaining its status as the leader in any given industry is based in part on maintaining control and secrecy over its business plan which likely is accessible to most employees of the company. Problem? How does a company maintain its competitive edge, while protecting its business plan sufficiently, such that, exiting employees or competitors may not benefit from such knowledge? The answer is not black and white and is based in part on the power of Trade Secret laws. Colorado has adopted a version of the Uniform Tract Secret Act. What is a Trade Secret? A trade secret is defined as any formula, pattern, device or compilation of information which is used in a business and which gives that business an opportunity to obtain an advantage over other competitors who do not possess such information or use such information in the operation of their business. One of the key elements in trade secret law is establishing that the information is a Trade Secret of the company. How is that accomplished? There are three basic elements: (1) secrecy; (2) value to the trade or business; and (3) novelty. Secrecy Information will be protected as a trade secret only if the company maintains the secrecy of the information. Disclosure is permitted if the party to whom the information is disclosed is on notice that the information is confidential and is subject to a contract that imposes nondisclosure and nonuse of such information or if the relationship between the company and the party to whom the information is disclosed is acting in a fiduciary relationship with the company. Thus, it is important if not crucial, that a company, especially high-tech companies, have in place confidentiality agreements with all employees and with independent contractors and any other party who will have access to information that the company may wish to keep from competitors. While an agreement is not the only means available to establish notice, it will enable the company to bring the breach party (the bad actor) to the bargaining table much sooner and will inevitably reduce the costs of any litigation that might arise from such disclosures. A trade secret may be protected from a breach of confidentiality even if the trade secret could have been obtained elsewhere or discovered by experimentation. What is important, is that the breaching party as a duty to maintain confidentiality. Value to the Trade or Business The second element establishing that information is a “trade secret” is the value of the information to the company. Value may be established if the information gives the owner of the information a competitive advantage over those competitors who do not know or have access to such information. Thus, the information must have economic value to the company. Novelty The third element is novelty or uniqueness and this element is generally not required to obtain trade secret protection, however, the information must be information that is not generally known in the industry. For high-tech clients, this is a very important element because most software will be treated as unique because it will involve numerous algorithms and programming decisions that vary with each program and programmer. (Note: it is imperative that all contract programmers sign confidentiality agreements and execute assignment of technology contracts for any and all code used in the final product including any later derivative products) Included in this list would be any unique combination of generally known information. Thus, a client list, although each individual client may be generally known throughout the industry, would be a trade secret because such list would be unique to the company to whom the list belongs. Examples of Trade Secrets
Independent Development Trade Secret law does not, however, provide protection to a company’s information if a competitor should develop or compile such information “independently.” If both companies maintain the secrecy of the information, the information will remain a trade secret, but, if either company should disclose the information publicly, including posting such information on the company’s website, such disclosure will destroy the secrecy of the information forever. Thus, neither company, whether under confidentiality agreements or not, may thereafter establish a claim against any party under trade secret law for disclosure. There may, however, be other claims, like copyright law, etc., which may allow a company to pursue a wrongdoer for use of such information. Reverse Engineering & Trade Secret Law Reverse engineering, defined as “starting with a known product and working backward to find the method by which it was developed,” may be employed to discover if a competitor’s product is in part based on another company’s trade secrets only if the product is obtained by a “fair and honest means.” Like many tenets of law, the rule is based on a facts and circumstances test as applied to a particular case. Of course, there are a variety of arguments that might be employed to both support and restrict such use. One argument in support might be that a purchase of a competitor’s software to determine if a company’s trade secrets have been misappropriated might be a fair and honest means. There are, however, arguments that might assert that that would be a violation of the copyright laws and that the reverse engineering may not proceed without notice to the company suspected of misappropriation. Reverse engineering may not be employed if the software license prohibits decompilation or disassembly that would provide access to the computer program’s object code. Thus, reverse engineering should be employed with great care and then only on advice of legal counsel or a court order. Trade Secret Law and the Internet Posting information on the Internet allows for immediate, worldwide dissemination of information. Thus, posting sensitive information on a company’s website could create problems for the company’s right to assert a violation of the trade secret laws. A company should review information that is to be posted on its website. For instance, many companies post their client lists on the Internet in an effort to impress visitors to the site of the company’s popularity and success. If a company thereafter should wish to restrict an exiting employee from using the client list in subsequent employment situations, the company may have lost their right to do so under the protection of the trade secret laws because of such disclosure. Another issue worth mentioning is the practice by some companies to use their internet website as an intranet, that is, posting sensitive information on “deep” pages that may not be directly linked via a navigation system but is nonetheless available to the public because of a lack of security on such deep pages. An example might be, where a group of developers, in remote locations to one another, have a “secret” page that they readily transfer program code to each other for use and testing in a joint developmental project. It could be argued, that a practice such as this is public disclosure. Thus, trade secret law would not protect any subsequent use and another avenue, such as copyright laws, must be employed. In a situation such as this, it would depend who disclosed and who had a duty to keep the information confidential. And, if the code that is otherwise disclosed does not belong to the company, but is a module of code that has been licensed to the company by a third party vendor, the company may have breached its license agreement and/or confidentiality agreement with such third party vendor and be liable for damages. The lesson to be learned from these examples, is that it is necessary to think through the issues of confidentiality and disclosure as it relates to trade secret law and a company’s use of its website, both internet and intranet. One final note, security, that is CGI scripts used to protect portions of a company’s website and the dissemination and management of any restricted passwords that allow access to any restricted area where sensitive information is placed, is of utmost importance and great care and management should be afforded such duties. Protecting A Company’s Trade Secrets
Employment & Contractual Confidentiality Agreements Any party who is granted access to proprietary company trade secret information should be required to sign a confidentiality agreement prior to any such disclosure. This rule should be applied to all employees, consultants, independent contractors, third party maintenance personnel (software maintenance and equipment repair), partners (whether individuals or other companies) involved in collaborative projects, product distributors who have access to company trade secret information, customers and licensees who have access to company trade secrets by virtue of the fact that they are using a company’s software or products, any investors who may conduct reviews of the company for investment purposes. The purpose is to protect the nature of the company’s secret. That is, trade secret laws ONLY protect a company that keeps its secrets private. Disclosure, even inadvertent disclosure, can completely destroy a company’s right to thereafter assert protection under the trade secret act. Thus, it is critical to any companies’ business plan to employ the use of confidentiality agreements with the abovementioned parties before any disclosures are made. Finally, an issue worth noting here, is that, memorization is not a defense to protection under trade secret laws. That is, an employee or independent contractor may not claim that he/she did not copy any trade secrets and that any code they wrote subsequently came from memory. If the code, is the same, or substantially the same as the company’s code, and that can be shown, and it can be reasonably shown that the employee or the independent contractor obtained such knowledge from the employment engagement with the company, then a court will afford protection to the company under trade secret law. Software Licenses and Trade Secret Law It is important to have a signed software license agreement (clickwrap and shrinkwrap licenses included) with any party using a company’s software product. An enforceable software license agreement allows the owner of the software (the company that produced the software) to protect the computer program, both the object and source code, as a company trade secret. Thus, even if, a company where later to disclose the source code to the end user, for maintenance or modification purposes, the company would remain protected by the trade secret laws. This is a critical aspect of computer software program protection under the trade secret laws. Specifically, if a company where to distribute “sample” copies to developers for testing without requiring a signed software license, case law supports the proposition that there has been a disclosure, such that, the disclosure was voluntary and intended and that the company may not thereafter preclude anyone from using the source code under the trade secret laws. Granted, there may be other ways to prevent such use, such as copyright law, this is an important distinction. Termination of Trade Secret Protection When does protecting under the trade secret laws terminate? Protection under the trade secret laws will terminate upon either disclosure or upon the expiration of a party’s duty under the terms of an agreement. Thus, in any confidentiality agreement, a party’s duty to keep confidential “trade secret” information should remain in full force and effect indefinitely, even after the contract ends. Remember, disclosure extinguishes forever, protection under trade secret laws. So, if a party were given confidential information, and by contract, allowed to cease from being required to keep such information confidential at some point in the future, it could be argued, that at such point in time in the future, if disclosure were made by such party, that the company would be forever barred from asserting confidentiality under the trade secret laws regardless of who used or disclosed such information. Conclusion Trade secret law, and specifically, the Colorado Trade Secret Act, is only one aspect to protecting a company’s proprietary, sensitive and secret information. There are other avenues for protection, like copyright law. It is important to remember that no law will protect you from a “bad actor” if that person or company wishes to violate the law or breach a contract. It is, however, important to provide the necessary documentation under the trade secret laws to assert that a company has been robbed of its sensitive information. The key, under trade secret law is disclosure. Any company that wishes to keep information (software code) confidential, MUST NOT DISCLOSE such information or allow such information to be disclosed. Remember, under the trade secret laws, disclosure destroys forever, the secret aspect for trade secret protection. The author recommends that any company wishing to keep its sensitive information protected, seek professional advice before entering into any employment agreement, independent contactor association, joint venture or investment discussions. Copyright © 2000, ScrantonPC.com |