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September 12, 2016

Legalese: The Value of Trade Secrets

This article originally ran in the September 2016 issue of AVN magazine. Click here to see the digital edition. This column in the past has addressed copyright, trademarks and, even occasionally, patents, three of the species of intellectual property. But a fourth, the trade secret, is equally important and valuable. The impetus for this focus is the recently enacted federal Defend Trade Secrets Act of 2016 (the “DTSA”), which catapults trade secret protections into federal court and increases protection. Overlooking the trade-secret rules can have your employees running off with your customer list. Want that? What follows includes legal issues involving trade secrets and a general cookbook as to how to protect them. Perspective and Background Federal protection of copyrights and patents arises from the clause in Article I of the Constitution, enumerating the powers of Congress to include the power “To promote the progress of science and useful arts” by giving for a limited time exclusive rights to artists and inventors. The idea is to encourage scientific and artistic endeavors. The tradeoff is the artist or inventor gets to use his/her artistic work or invention exclusively for a defined period of time in return for fully disclosing it. As an example, inventors of drugs can make or license them exclusively for 20 years; but after that, the world knows how to make them. That is why drug prices plummet when patents expire. Congress has elected to treat copyrights a little differently with respect to music, with compulsory licenses, but for the most part, artists get the same deal as inventors, except for way longer. Trademarks are a little different. Trademark infringement has been viewed for centuries as a species of unfair competition, causing confusion as to the source or origin of goods and services. Unlike patents and copyrights, protection of a trademark is not exclusively federal. Federal registration arises under the Commerce Power, another one of the enumerated powers of Congress. aWhat is a Trade Secret, Anyway? A trade secret is kind of the opposite of a patent. A patent trades off 20 years of exclusive use for disclosure; a trade secret is good as long as you are able to keep it close to the vest. Theft or unpermitted use of trade secrets has long been recognized in the common law, as has trademark infringement, as a species of unfair competition. Trade secret misappropriation is often overlooked—and overlooking it can be a disaster. If you think trade secrets are unimportant, think about this: The formula for Coca-Cola is a trade secret; so is the Kentucky Fried Chicken recipe, and also the formula for W-40 oil. As noted, so are most customer lists. Trade secrets are important. So, what is a trade secret? It’s just what it said. First, it must be a secret, generally kept from the world outside its owner. Then, it must be useful in a trade or business. How Do You Protect Your Trade Secrets? Trade secrets aren’t protected if they are not secret. Your company needs to take “efforts that are reasonable under the circumstances to maintain [the] secrecy” of a trade secret in order to keep it. What efforts are “reasonable” depends upon the circumstances; but here are some of the things you should do: (1) Allow access to trade secrets only on a “need to know” basis; (2) Prohibit those in the “need to know” category from disclosing the trade secrets to others; (3) Discipline employees for violating the rules about trade secrets; and (4) Require all employees to sign a trade secret agreement implementing those policies and any others you have place. And don’t forget about contract people who might have access to trade secrets. (Computer programmers come to mind.) Also, you need to enforce violations in court. Once the “cat is out of the bag,” you will have lost your trade secret. You also need to evaluate your company’s portfolio of trade secrets. Think about your business activities, and ask yourself what information you would withhold from competitors. It isn’t confined to customer lists. What about vendors, pricing and business procedures? You need to catalogue everything your company does. What Can You Do to Trade-Secret Thieves? Let’s take an example of the paradigm of the trade secret: your customer list. Suppose you have an interactive website. You have spent seemingly endless time and treasure generating signups. You have a database full of customers and their email addresses. So, you have a disgruntled employee who knows how to access your customer database—which isn’t difficult to copy. The employee applies for a job with your most fierce competitor, saying, “By the way, I have their customer list.” The competitor hires your disgruntled employee; and the competitor raids your customers. What can you do? How about having a non-compete agreement to prevent this job shift? Well, first, non-compete agreements are illegal in California and some other states; where they are enforceable, they are severely restricted. And whether a non-compete would stop the disgruntled employee from selling the list is doubtful. For that reason, the common law has recognized misappropriation of trade secrets as a tort. As commerce grew, the Uniform Law Commission—a group devoted to blurring state lines by drafting uniform laws—drafted the Uniform Trade Secrets Act in the late 1970s. By now, it has been adopted in 47 states and the District of Columbia. It outlines remedies for misappropriation and unpermitted use of trade secrets. The remedies are pretty drastic: damages, injunctions and, for all but innocent violations, attorneys’ fees. It is a pretty powerful weapon. In the customer list example, the victim could garner an injunction, damages and an attorneys’ fees award against both the misbehaving employee and the competitor. However, hacking and international theft of trade secrets has impelled Congress to do more, enacting the DTSA, an amendment to the Economic Espionage Act. Up until now, federal courts had jurisdiction over claims for trade secret misappropriation only if diversity of citizenship existed between the victim and everyone the victim wanted to sue. The DTSA gives jurisdiction over trade secret misappropriation involving interstate and international commerce to federal courts, which generally are regarded as having a much easier time nailing foreign bad buys. (By the way, almost all commerce is interstate; certainly all internet commerce.) Without getting into the mechanics of the DTSA, suffice it to say that it has drastic remedies. It is a supplement to state laws, not a replacement. But it extends the Uniform act, allowing seizures without notice and other drastic remedies, along with the remedies already in place in the 48 jurisdictions that have adopted the Uniform Trade Secrets Act. If your company policies do not already include policies for protection of your trade secrets, shame on you. (It should be in your employee manual; more shame if you don’t have one of those!) If you have such policies, the enactment of the DTSA should trigger you to be sure that your manuals are up to date and, while you are at it, also to be sure that all of the trade secrets identified and adequately protected. Clyde DeWitt is a Las Vegas and Los Angeles attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at ClydeDeWitt@earthlink.net. More information can be found at ClydeDeWitt.com. This column is not a substitute for personal legal advice. Rather, it is to alert readers to legal issues warranting advice from your personal attorney.

 
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