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Trade Secrets: Policies and Procedures and the Reasonable Steps Requirement

September 9, 2015
Categories: Intellectual Property, Intellectual Property Protection, IP Protection, Trade Secret Theft

By their very nature, trade secrets are ‘secret’ and are not protected in the same way as traditional forms of intellectual property.  When the worst does happen and trade secrets are compromised, most countries’ laws require companies to take “reasonable steps” to protect trade secrets. The term “reasonable steps” derived from model legislation created by the Uniform Trade Secrets Act (UTSA) drafted in the 1970s.

Determining the “reasonable steps” that are required can be challenging since courts have been vague about the term’s definition. To guide companies on this front, the Center for Responsible Enterprise and Trade (CREATe.org) has developed eight categories of leading practices as part of its systematic and comprehensive approach for evaluating the businesses processes needed to protect valuable trade secrets. The first category of effective trade secret protection is ‘policies, procedures and records’ – which in short, offers guidelines (policies), ways to follow those directives (procedures) and a method to document compliance (records).

Complying with “Reasonable Steps”: Policies, Procedures and Records

When policies, procedures and records have been implemented adequately or followed consistently, courts have generally held that a company has engaged in “reasonable steps” sufficient to treat the information as trade secret.

The policies that a company has in place for protecting its trade secrets, including rules and processes for designating, managing and disclosing trade secrets, are vital. Company-wide policies for maintaining confidentiality have been considered as “reasonable steps” for protecting such diverse information as automotive tire designs,[i] customer lists,[ii] and pharmaceutical formulas.[iii] Moreover, courts have recognized the adoption of procedures to implement aspects of company confidentiality policies, such as procedures for marking sensitive documents as confidential,[iv] for conducting exit interviews and seeking return of sensitive materials when employees leave the company,[v] or for dividing a collection of confidential information or a confidential process into discrete parts in such a way that no one employee or vendor has access to the whole, as evidence of “reasonable measures” for protecting trade secrets.[vi]

The contracts and other documentation that a company uses to implement trade secret protection in legally binding ways on employees, third parties and others are also among the most important ways that companies seek to protect their trade secrets. Nondisclosure and other agreements have been regularly examined in court cases as evidence of “reasonable measures” to protect trade secrets.  In fact, one of the few statistical studies done on trade secrets litigation in the U.S. has found that a court is almost 25 times more likely to find that a trade secret owner has engaged in “reasonable efforts” if it has such agreements with employees that ultimately become the target of trade secret litigation, than if it does not.[vii]

Smaller companies do not necessarily need to implement as extensive or costly policies, procedures and records as large companies. Courts have recognized that what efforts are “reasonable” may look different at a smaller company. For example, one court found that a small family-run cheese production business had taken sufficient efforts to protect the secrecy of its formula, methods of production, sales to selected customers and other business-related information by limiting access to information to the family itself and its outside accountant.[viii]

Leading Practices for Policies, Procedures and Records

It is vital for companies to understand what “reasonable steps” are and what best practices need to be implemented as global consensus converges around “reasonable steps” for trade secret protection.  These may include steps in the following areas:

  • Company, Staff and Third-Party Policies: Develop an overall set of company-wide policies for protection of trade secrets internally and with key third parties, such as the company’s supply chain.
  • Trade Secrets Procedures: Develop procedures for how trade secrets are to be managed in areas relevant to the company. These may include procedures in such areas as employee hiring and termination, trade secrets handling and disclosure, and company computer and personal device usage.
  • Marking and Segregation Procedures: Develop procedures for marking, segregation, and storage of trade secrets.
  • Standard Confidentiality and Usage Provisions: Develop and use standard confidentiality clauses in all employee, contractor, and supplier and other relevant third-party agreements.
  • Standard NDA: Develop a standard nondisclosure agreement and use it when disclosure of trade secrets is authorized.
  • Inventory and Other Documentation: Keep written records of all trade secret related activity, including usage, disclosure, and management.

Trade secrets represent the “crown jewels” for companies. To preserve these assets and fully benefit from this confidential and technical information, companies need to take steps to protect trade secrets with employees and third parties. To learn more and download CREATe’s whitepaper—“Reasonable Steps” to Protect Trade Secrets: Leading Practices in an Evolving Legal Landscape, click here.

[i] In re Cooper Tire & Rubber Co., 306 S.W.3d 875 (Tex. App. 2010).

[ii] Paramount Tax & Accounting, LLC v. H & R Block Eastern Enters., 683 S.E.2d 141, 148 (Ga. App. 2009).

[iii] Wyeth v. Natural Biologics, Inc., 2003 U.S. Dist. LEXIS 17713 (D. Minn. 2003), aff’d, 395 F.3d 897 (8th Cir. 2005).

[iv] The Maryland Court of Appeals mentioned the company’s marking “confidential” on its pricing and strategic-plan data as one significant factor in its finding that the company had exercised “reasonable efforts”, in LeTeune v. Coin Acceptors, Inc., 849 A.2d 451 (Md. 2004).

[v] Agilent Techs. v. Kirkland, 2010 Del. Ch. LEXIS 34, ** 10-12 (Feb. 18, 2010); Schalk v. State, 823 S.W.2d 633, 637-640 (Tex. Crim. App. 1991).

[vi] See, e.g., Otis Elevator Co. v. Intelligent Sys., Inc., 17 U.S.P.Q.2d 1773, 1775 (Conn. Super. 1990) (plaintiff did not provide third party manufacturer critical data (including computer source) about its proprietary tooling).

[vii] D. Almeling et al., A Statistical Analysis of Trade Secret Litigation in Federal Courts, 45 Gonz. L. Rev. 291, 322 n. 128 (2010), http://www.omm.com/files/upload/AlmelingGonzagaLawReviewArticle.pdf.

[viii] Elm City Cheese Co. v. Federico, 251 Conn. 59, 78-86, 752 A.2d 1037, 1049-1053 (1999).

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