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Trade secret protection: the (too often) missing crown jewel of a start up’s intellectual property protection

As an experienced Intellectual Property attorney, I honestly can’t remember the number of “elevator pitches” by Startup Companies that I have attended seeking investors. Whether the focus of the company is for a new smart phone application based on an algorithm which will produce a delicious set of weekly menus based on your input of health, allergy and food preference information, ergonomic furniture which promises to banish back pain to the dust bin of history, or a new treatment for the dreaded gout, these pitches often end with the same bold statement: we have “patents pending”. As U.S. patents provide a government-sanctioned monopoly for up to twenty years, they are definitely worth a hard look. However, I have yet to hear one elevator pitch in which the Startup added, “and we have tremendous Trade Secret protection as well”.

Harley BlosserMaking that statement about your Trade Secrets in a room open to anyone is probably not usually the best way of letting the right people know of your strong Trade Secret position. However, it also is probably frequently not stated by Startups for another, more problematic reason – too often, the typical Startup has given no concrete thought to their possible value and how to achieve and maximize them.

The simple truth is that nearly every Startup has, or can have, “Trade Secrets” – i.e., confidential information that is valuable to its owner because it is not generally known in the industry or readily ascertainable, and its owner has taken reasonable steps to maintain the information in confidence. Mo. Stat. §§ 417.450 et seq. This can be anything from lists of actual or potential key customers or distributors, to private marketing and business development game plans, to a secret software algorithm (see above), to the, if yet undisclosed, basis for the “treatment for gout”, also mentioned above. Thus, the potential reach of what can be a Trade Secret can be far indeed. The key for most Startups, however, is that they must show that they have taken “reasonable steps” to protect their Trade Secrets from misappropriation. See below.

Why can Trade Secrets be so valuable? I asked my colleague at Sandberg Phoenix, Mac Moore, the principal author of the current Missouri Trade Secrets Act, what stood out to him about their value. According to Mac, “three things in particular stand out to me about Trade Secrets. First, unlike patents or even copyrights, they can arise automatically. That is, you do not need to apply for them and there is no “waiting period”. Second, they are not subject to a time limit. Just look at Coke’s “secret recipe” for the classic Coke syrup, which has been under Trade Secret protection for over 100 years. And third, it is relatively inexpensive to implement and oversee a Trade Secret plan as part of a business’s ongoing operations.”

Trade Secrets are protected by both state (see above for MO) and lately, Federal, law. While the Trade Secret laws used to vary somewhat more than currently among the fifty states, the great majority of legislatures around the country have now adopted some version of what is known as the Uniform Trade Secrets Act. And, as the value of Trade Secrets has risen, and cyber theft and other forms of Trade Secret thievery recently has become even more prevalent, in 2016, the Federal Defend Trade Secrets Act , 18 USC §1836 et seq., was enacted by Congress to add tough new Federal remedies for their protection.

However, not all “not well known information of commercial value” fits neatly into the Trade Secret war chest for a Startup. Further, there are some disadvantages to Trade Secret protection that should be considered. First, while Trade Secret law protects against “misappropriation”, it does not protect against every form of loss. Importantly, if a competitor independently develops the same information without wrongfully obtaining your Trade Secret information, no protection is provided, unlike with patents. As importantly, Trade Secret protection does not protect against a competitor simply reverse engineering your product. Thus, products should constantly be evaluated as to the risk that Trade Secret aspects may possibly be reverse engineered. And, once legitimately departed, Trade Secrets cannot be regained.

Bear in mind that Trade Secrets should be looked at as planks in a well-constructed wall made up of a variety of possible Intellectual Property protections. While patents, and even patent applications, get published, the USPTO typically holds all applications in confidence for eighteen months from their earliest filing date. A Startup should thus consider extending Trade Secret protection up through that full period. Also, while some aspects can more readily be reverse engineered (e.g., the product sold itself), other aspects (e.g., some methods involved in internal production under certain circumstances), may be more readily retained as a Trade Secret. Trade Secrets can also be coordinated with Copyright protection. You may want to consider filing for copyright protection for some code while retaining other code as a Trade Secret. Further, the Copyright Act has provisions for confidential submission of portions of specimens for Copyright protection that you may want to look into with the help of an experienced Intellectual Property attorney.

As stated above, to maintain confidential information as a Trade Secret, “reasonable steps” must be taken to ensure that happens. Consider having an actual Trade Secret Strategy Plan for that purpose. Think about what are your Trade Secrets. In terms of your physical plant, how do you protect them? How do you monitor sign-ins and sign outs, and who and what are your “gate keepers”? Are the locations or files where the most sensitive information or work occurs, wellsecured from prying eyes and do you have adequate password, codes or other forms of protection in place? As the most common form of Trade Secret loss is due to the information walking out the door in the heads or notebooks of former employees, independent contractors or business partners, are your Employment, NDA, and Non-Compete Agreements up to snuff? If you have doubts about any of these in terms of whether you have taken reasonable steps in constructing your Trade Secret plan, you should consult an experienced Intellectual Property attorney. While the benefits of Trade Secret protection can be great, you do not want to lose them through lack of information or carelessness. Take the valuable sword and shield of Trade Secret protection and use it to your Startup’s maximum benefit. There are few better “bangs for your bucks” available.

Harley Blosser is a licensed patent attorney in the Clayton, Missouri, office of Sandberg Phoenix & von Gontard P.C. is a licensed patent attorney specializing in all aspects of intellectual property, emerging technology and business law. As an intellectual property attorney, Harley’s technical specialties include biotechnology, chemistry, clean energy and pharmaceutical patents; trademarks; copyrights; intellectual property portfolio strategic management; licensing and enforcement. He holds a law degree and a Bachelor of Arts in Chemistry, both from the University of Missouri Kansas City. Harley can be reached at 314-425-4906 or hblosser@sandbergphoenix.com 

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