Whenever I introduce myself to a company owner as an attorney who handles trade secret cases, most company owners tell me that their company does not have any trade secrets. They assume that trade secrets consist only of secret formulas, such as the COKE formula or a diagram of a new, high-tech product that has yet to be developed. While the COKE formula and diagrams are trade secrets, chances are that your company does have trade secrets which are very valuable to the company and which require protection. It is also very likely that at least 30% or more of the value of your business is based on information held within your company’s own information systems.
What is a Trade Secret under California Law?
California Civil Code Section 3426.1 defines a trade secret as information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
- Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and;
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Company Owned Data which Might Be a Trade Secret
Some of the most common forms of trade secrets a company owns are “compilations” of data. Most businesses involved in sales and/or customer service have databases of compiled information that is used on a daily basis to conduct company business. Examples of this include customer lists, supply lists, pricing information, business strategies of the company, future marketing plans, and other valuable financial data of the company.
Twenty years ago, a client database might have consisted of a Roladex or even a handwritten list of names of the top 20 customers by gross revenue. Currently, with smart phones, Excel, and cloud based sales management programs such as Sales Force available, many of us are keeping customer information in electronic form and cross-referencing customer contact information with other important information. For instance, many companies have a database which not only provides the names, emails and cell phone numbers for customer contact persons, but which also tracks the products purchased by the customer, the dates products were purchased, the sales volume generated by the customer, the company’s net profit by customer, etc. With the touch of a button, we now have the technology to sort our clients by net sales volume, regional area, frequency of purchase, and any variety of different search terms. Chances are if you are the top salesperson in a national sales company, you probably can access this information without even leaving your house using a cloud based program or using remote access to view your own desktop at work.
There has been much litigation over whether data taken by competitors or ex-employees is or is not a “trade secret” protected by California law. The first issue the court will examine is whether the data has “independent economic value” and whether the data is “not generally known to the public”. Do you have company information or data known or available only to your employees that would be helpful to your competitors? If so, you probably have a trade secret that disgruntled employees and ex-employees working for other companies would love to get their hands on. A simple list of customer names may or may not have independent economic value to a competitor, depending on how available the data is through the internet, trade journals, your own website, etc. However, the more time and effort your company spends in keeping a database, including the addition of personal contact, cell phones, pricing information, etc., the more valuable the database is. Even information which is available in the telephone book and on the internet can be a trade secret, depending on how it is compiled.
Customer information and sales data are not the only common data companies keep that is a trade secret. Now that the internet and social media sites are so popular, many companies are hiring marketing consultants to create targeted advertising campaigns, product development campaigns, media plans, pricing plans and other ways to undercut their competition. Imagine if you spent thousands of dollars deciding on your price points and marketing campaign, only to have someone share your information with the competitor before your marketing plan was even instituted. The competitor could beat you to the market, undercut your pricing and ruin any chance you have of making a serious impact on the market.
What about employee information such as salaries, raises, and commissions based on sales? This information, which is sometimes known to the human resource director and other upper management, is information which usually has value to any competitor who wants to hire your entire sales team. If a disgruntled employee were to decide to start a new company and hire your sales team, wouldn’t it be helpful to know exactly how much to offer them in terms of salary and bonuses, so that they could be easily lured away?
When evaluating your company’s “trade secrets” make sure to look at all the data your company holds which might help your competitors compete against you and start compiling a list of all the data that has value. With this in mind, you can take the next step, protecting your data.
Making Sure Your Trade Secrets remain Trade Secrets
The most important thing you need to know if you want to protect your trade secrets is that the California Uniform Trade Secret Act only protects information when you make a reasonable attempt to keep the information secret. Keeping information secret involves some planning on your part. Keep the following guidelines in mind:
- Restrict employee access to confidential data through the use of passwords.
- Only allow access of confidential data to those persons who absolutely need to access the data.
- Draft company manuals and any employment agreements necessary to protect company information.
Our next article will discuss in more detail how to implement a trade secret protection plan for your company.