- posted: Apr. 21, 2010
When you visit a jewelry store, it is easy to see a lot of security - cameras, electronic access cards for employees, sturdy, locked cabinets that display the jewels behind solid plastic. There is no doubt there is even more security that is not visible, especially at night. Much of this security is at the insistence of insurance companies, who understand that a little prevention is much cheaper that efforts to recover what is lost.
But many businesses have assets more valuable than such baubles, which the businesses treat as if the assets were apples on a cart. The assets are often in plain sight and available to everyone working there without accountability, or disposed of in a way that begs dumpster divers to practice their craft. Is your company one of these businesses?
Jewels of a Company - Trade Secrets. In an age where an idea can be worth far more than the largest diamond, a company's most valuable assets are not their physical assets, but their intangible assets. Patents, trademarks, and copyrights are protected as a government-granted monopolies, and require interaction with the government in order to obtain their particular advantages. However, trade secrets are also a form of a government-granted monopoly, which are by definition not disclosed to anyone - even the government.
Step One: Finding the Diamonds. Too many businesses fail to recognize their trade secrets until someone has already taken them. Every business should conduct a periodic audit of the information that, in the hands of a competitor, would do the company great damage.
The first question is: what information, process, formula, recipe, method, etc. brings the company an economic advantage by not being generally known in the industry? A special, unpatented method of making a product is an obvious example of a trade secret; so too is the secret recipe for cookies that has people lining up all the way out the store. However, many trade secrets are not so obvious. Lists of regular customers can be gold - would you like a list of everyone who bought your product from your fiercest competitor? Even non-customer lists count - competitor breathe easier if she knows the 97% of the eligible population that would not buy your product, that you found by paying for thousands of expensive cold calls. Focusing on the 3% that do use your product can be a huge economic advantage.
But other trade secrets may not be so obvious. Does your inventory system provide you with an advantage? For Walmart, its ability to track every item from initial order to checkout allows its to take advantage of economies of scale, and to move quickly when unusual events happen. Other trade secrets can be:
- supplier lists,
- the way an order is taken, or information taken during the order
- information on an intranet,
- employee pay rates (valuable when someone is hiring your employees away), or even
- employee identities.
If a competitor can use it to your disadvantage, and its not generally known in the industry, then it is likely to be a trade secret.
Step Two: Reasonable Efforts to Keep It Secret. The second requirement to qualify for trade secret protection is to use reasonable efforts to keep the information secret. This will depend upon the nature of the secret.
If you have a secret recipe, be sure the cook and his assistants have promised in writing to protect the secrecy before giving them the recipe. Anyone not directly involved in the production of the actual product should not have access to the secret.
Some secrets, however, need to be used more broadly. A customer list may not have much value if only one marketing or sales person has access to it - customer information also has to be shared with billing and shipping, too. In that instance, all employees should sign a confidentiality agreement. The best way to do this is to try to be as specific as possible in a confidentiality agreement that before the employee starts. If the prospective employee does not want to sign, then you do not want to hire them. The same is true for independent contractors, either hired directly or through a temporary agency.
Some company owners defend their lack of measures by saying that they trust their employees. If that were true, do all employees have keys to the supply room, or the front door? Would you trust them to guard your company's most valuable assets, especially when such assets can be copied and given to competitors with a minimum of effort?
Current Employees. What should you do if a current employee has been exposed to a trade secret without any written agreement as to protecting the company's trade secrets? This can be tricky. It would be best if the employee signs an acknowledgment that they have been orally warned about the need to protect the trade secret, but alert employees may figure out that the barn door is not closed from the attempt to close it. Consulting counsel experienced in this area, and well-versed in the practicalities of business, is invaluable.
Covenants Not to Compete? One solution common elsewhere is generally not available in California. Covenants not to compete are void in California except in a few instances. Cal. Bus. & Prof. Code §§ 17200 - 17203. California employees who sign covenants not to compete can ignore them when they leave employment, comfortable that California courts will not enforce them. In fact, legally invalid covenants not to compete can give rise to actions for unfair competition against the company requiring their signature.
The Costs of Nonprotection. Most companies do not realize the value of their secrets until they are already stolen, and by then it is too late. Inadequate measures to protect the secrets may give a company the chance to prove its case in court, but that is a risky and very expensive course. A few hours devoted to protecting the company's trade secrets are far cheaper than to use the courts later on.
Just as no jewelry store would leave its valuables in unlocked cases, no company should leave their most valuable possessions unprotected. It is one of the most cost-efficient projects a company can take.