WHAT IS A TRADE SECRET?

TRADE SECRET AUDITS: PART ONE

R. Mark Halligan, Esq.

First, under the Restatement of Torts, §757 (1939), "a trade secret may consist of any 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 material, a pattern for a machine or other device, or a list of customers."

Second, trade secrets are defined under the Uniform Trade Secrets Act:
"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique or process that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being easily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under circumstances to maintain its secrecy.

Third, the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (West 1993), provides that trade secrets are "information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that:
(a) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and
(b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

Fourth, the New Restatement of the Law Third, Unfair Competition defines a trade secret in Section 39 as follows:

§ 39. Definition of Trade Secret. A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

In addition, it is well established that "a trade secret can exist in a combination of characteristics and components, each process, design and operation of which, in unique combination, affords a competitive advantage and is a protectable secret." Also, "a trade secret need not be essentially new, novel, or unique; .... The idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret, unless it is common knowledge and, therefore, within the public domain."

Evaluating Trade Secrets

Important factors a business owner should consider in determining whether information owned and used by his/her business is a trade secret include:
(1) the extent to which the information is known outside the owner's business;
(2) the extent to which it is known by those involved in the owner's business;
(3) measures taken to guard the secrecy of the information;
(4) the value of the information to the owner or to his/her competitors;
(5) the information; and
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
The principal idea to remember is that a protectable trade secret may not be "within the realm of general skills and knowledge" in one's field of business and may not be "readily duplicated without involving considerable time, effort or expense."
Upon examining these factors in comparison to the confidential business information of the company, it may be prudent to conduct an intellectual property audit to identify the protectable business information and assess the value to the company of that information, i.e. the value of the trade secrets.

THE TRADE SECRET AUDIT

Every company needs to identify its protectable trade secrets and confidential business information on a regular, ongoing basis. Many companies set up a trade secrets program and then forget about it. Employee manuals contain policies that become outdated or are simply not followed. Company definitions of "sensitive, proprietary information" may bear no reasonable relationship to the types of information that the company now considers to be "trade secrets." Enforcement of company policies may be lax or nonexistent. The company's trade secrets may be in jeopardy in litigation.
The identification and protection of trade secrets and confidential business information is a dynamic process, not a static one. A company's portfolio of trade secrets is constantly changing: some information becomes obsolete and is no longer commercially valuable; new information is created which is extremely valuable but may not be properly protected.
Therefore, the starting point for the development of a trade secrets protection program is an intellectual property audit to identify the company's protectable trade secrets. If possible, the intellectual property audit should be done in conjunction with counsel so the results of the audit can be protected from discovery through the attorney-client privilege. Moreover, this audit should be conducted at least once every year, if possible. Once the audit is completed, policies and procedures can then be employed or modified, where necessary, to protect the various items of information identified in the audit as trade secrets.

CHECKLIST

The following is a checklist for the identification of potential trade secrets owned by a typical manufacturing company; however, this list is by no means exhaustive:

Technical Information/Research & Development

Proprietary Technology Information

Proprietary Information Concerning Research and Development

Formulas

Compounds

Prototypes

Processes

Laboratory Notebooks

Experiments and Experimental Data

Analytical Data

Calculations

Drawings - All Types

Diagrams - All Types

Design Data and Design Manuals

Vendor/Supplier Information

R & D Reports - All Types

R & D Know-How and Negative Know-How (i.e., what does not work)

Production/Process Information

Cost/Price Data

Proprietary Information Concerning Production/Processes

Special Production Machinery

Process/Manufacturing Technology

Specifications for Production Processes and Machinery

Production Know-How & Negative Know-How

Vendor/Supplier Information

Vendor/Supplier Information

Cost/Price Data

Quality Control Information

Information Concerning Quality Control

Quality Control Procedures

Quality Control Manuals

Quality Control Records

Maintenance Know-How & Negative Know-How

Sales & Marketing Information

Proprietary Information Concerning Sales & Marketing

Sales Forecasts

Marketing And Sales Promotion Plans

Sales Call Reports

Competitive Intelligence Information

Proprietary Information Concerning Customers

Proprietary Customer Lists

Customer Needs And Buying Habits

Know-How Concerning The Management Of Customer Confidence

Proprietary Sales And Marketing Studies And Reports

Internal Financial Information

Proprietary Financial Information

Internal Financial Documents

Budgets

Forecasts

Computer Printouts

Product Margins

Product Costs

Operating Reports

Profit And Loss Statements

Proprietary Administrative Information

Internal Administrative Information

Internal Organization

Key Decision Makers

Strategic Business Plans

Internal Computer Software