Trade secrets are an underappreciated tool in protection of intellectual assets of high technology startups. And it is surprisingly easy – just keep it a secret. Of course, there is a bit more to it, but that’s the concept in a nutshell. For a new company without the financial resources to build a substantial patent portfolio, trade secrets may be an important tool for your company as it grows.

Why should every entrepreneur care about trade secrets? Because using trade secrets may allow you to hold off on filing a patent or limit your need to file so many patents.  Of course it won’t work in every situation, but I’ve seen too many new startups sent $20,000 to $30,000 out the door on a patent filing, when they may have been able to save those funds until a later point.  For most startups, it won’t be your only strategy, but should be part of your overall strategy (and it sounds good in a pitch when you inform investors that certain assets are protected as trade secrets).

In most cases, the owner of the trade secret has expended some costs to develop or exploit this trade secret. The scope of what qualifies for a trade secret is quite broad, even including negative information (where your efforts show that something is not possible and shouldn’t be researched or exploited further). The key for most startup companies is the information provides you a distinct competitive advantage – and therefore you take steps to protect this information.

Examples of Trade Secrets Customer Lists Software Code Supplier Lists Blueprints Maps Design Drawings Business Plans Company Records (ex. Personnel, Financial, Sales) Chemical compounds Business processes Survey results Prototypes Research results Sales and marketing plans

Trade secret rights are, for the most part, governed by state law. California courts have generally considered the following factors in deciding whether information constitutes protectible trade secrets of a company: (1) whether the information has economic value due to its relative anonymity in the industry; (2) the company’s efforts to keep the information secret, both outside the company and within the company; (3) the time and money spent by the company in developing the information; (4) the relative commercial value of the information; and (5) the ease or difficulty with which the information could be independently obtained by outsiders. The nature of the “reasonable efforts” necessary to protect a trade secret varies depending on the nature of the trade secret. They include non-disclosure agreements with employees (and other companies to whom the trade secrets are disclosed), marking any lab books and other materials as confidential, and restricting access to trade secrets on a “need‑to‑know” basis. Trade secrets can range from computer programs to customer lists to the formula for Coca Cola.

Trade secret law protects owners from the wrongful appropriation of their trade secrets, but, unlike the patent law, not from independent development of the same information by other parties. Trade secrets are protected in most foreign countries, but the statutory protection is generally much weaker than in the United States. This weakness of the statutory scheme makes the use of contracts much more important in foreign countries.

Why Utilize Trade Secrets Laws and Rights? · You are considering applying for a patent or have already applied for a patent, but have not yet received the patent · You have a trade secret that can be kept confidential over an extended period of time without unusual effort (which can remain a trade secret longer than the information can be protected by a patent) · You have information that can’t be patented · You have a unique process, procedure, operating manner, etc. that differentiates the way you produce a product · You have valuable information, but it is not the “crown jewel” of the company

In addition to protecting its own trade secrets, a company should be careful not to misappropriate the secrets of others. This is particularly important when a company hires a competitor’s employee.

Not Keeping Secrets What could happen… Your management team has agreed that while you are considering obtaining other formal I.P. protections, you’ll keep your production process a secret. Is that enough? What to expect… No. High tech companies’ most valuable assets may be their technical knowledge. To protect this knowledge and know-how, companies can rely on protections offered by trade secrets. In order to receive protection for your trade secrets (1) your confidential information must have restricted availability, (2) the information receives economic value because of the limitations on its availability, and (3) you must make “reasonable precautions” to keep the information secret and confidential. It isn’t enough to decide to keep your technical process a secret – you also need to take “reasonable precautions” to keep the information a secret. While there isn’t any absolute understanding of what would be seen as “reasonable precautions,” high tech start-up companies should create and operate under a formal trade secret protection policy. Companies should follow proper protocol set forth in their policies and should provide these policies to each employee, independent contractor or consultant. TIP: Just because information is “confidential” doesn’t mean it is a legally protected trade secret.