Trade Secrets: Critical Business Intellectual Property

Trade Secret Basics for

Small Business and Start-ups

Protecting Your Invisible Assets

UCEDC March 23, 2015

TRADE SECRETS •  “Studies regularly show that most businesses care

more about trade secrets than either copyrights or patents. In fact, trade secrets are (involved in) every aspect of a company’s operations, including dealings with employees, vendors and customers. And while there are millions of issued patents and registered copyrights, the total number of protectable trade secrets is nearly infinite.”

•  Eric Goldman, Forbes.com, Sept. 16, 2014

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Tonight’s Objectives •  Identify the trade secrets in your business •  Recognize the potential weak links in your

business that could lead to loss of your secrets •  Understand ways you can protect your secrets

o  Identify steps to secure legal protection for your business

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Brief Outline •  Defining what a trade secret is

•  Specific examples

•  Likely ways trade secrets are exposed

•  Applicable federal and state law

•  Steps to follow to “reasonably protect” your trade secrets

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Trade Secrets •  Any information which would give a business an

economic competitive advantage –AN EDGE •  What you don’t want your competitor to know •  Need not be novel, original or inventive •  A formula, pattern, compilation (such as a

customer list), program device, method, technique, or process

² Successful method for meeting a customer’s needs that could produce independent economic value

² Depends on the effort and time expended developing contact or customer lists

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Trade Secret Principles

• A trade secret is protected as long as it remains a secret

•  “Reasonable” efforts to maintain secrecy are required

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Trade Secret Examples •  Proprietary information •  Special discounts granted to some

customers •  Special vendor discounts •  Recipes •  Techniques •  Exclusive marketing studies •  Customer data

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Specific Trade Secret Examples •  Banking and Commercial Real Estate

•  TD Bank v. Kearny Federal Savings Bank

o  Term sheets o  Appraisals o  Environmental assessments o  Customer’s leases with tenants o  Personal tax returns of the owners of the corporate entity o  Analysis of rental income o  Cost estimates o  Site plans o  Pictures of related properties o  Credit approvals

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Specific Trade Secret Examples •  Biotech

•  GenScript USA of Piscataway v. Genewiz of South Plainfield

•  $10 Million verdict

o Technology (gene synthesis) o Standard Operating Procedures (SOP’s) o Training Materials

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Specific Trade Secret Examples •  Restaurants and Food Preparation

•  Mr. Holmes Bakehouse, San Francisco

o  Binders containing 230 recipes including the CRUFFIN™ muffin-croissant recipe stolen

o  Recipe did not describe the technique of making the dough on day 1 and buttering and folding the dough on day 2.

o  Recipe did not include that the butter must be from Isigny-sur-Mer France, but OOPS, owner told the reporter about it who then published it

o  Binders left out on the shelves and not secured at closing o  Rear door found unlocked when worker opened kitchen at 3 am

– inside job perhaps

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New Forms of Trade Secrets: Social Media

o Who owns the LinkedIn® account connecting to customers? The employee (Eagle v. Morgan) or the employer (Cellular Accessories for Less v. Trinitas)

o Who owns the followers on Twitter if postings are related to a business? Phonedog v. Kravitz

o Who owns the password to accounts? o Who owns the blog and its followers?

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EXPOSURE •  Intentional

ü  Employees •  Disgruntled •  Leaving the company

ü Competitors •  Espionage and intelligence gathering

« Hackers

•  Unintentional ü  Employees ü  3rd Party Contractors ü Customers and vendors

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Trade Secret Protection State Law

•  48 states have statutory laws including New Jersey based on UTSA (Uniform Trade Secrets Act)

•  New York, our neighbor, and Massachusetts use common law torts of conversion, breach of duty, tortious interference in employment, misappropriation and unjust enrichment as well as contract law

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New Jersey Statute 1/9/12 •  Title 56 Chapter 15. New Jersey Trade Secrets

Act §§1-9 - C.56:15-1 to 56:15-9 §10 – Note •  "Trade secret" means information, held by one or more

people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process, that:

•  (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

•  (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

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Federal Law •  Federal Economic Espionage Act of 1996

o  Generally protects against 3rd party theft of trade secrets, but not as relevant for internal breaches whether intentional or inadvertent

•  Computer Fraud & Abuse Act o  Trade secrets and misuse of computer assets

•  The Defend Trade Secrets Act of 2014 in the Senate and The Trade Secrets Protection Act of 2014 in the House are o  Designed to create federal criminal and civil charges, especially

against foreign hackers

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10 Steps to Reasonably Protect Your Trade Secrets

• Step 0: Identify your trade secrets and group them o Electronic o Physical

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• Step 1: Update your IT policies

o Policies need to define what is acceptable, what are the limits in clear language

o Company owned electronics: •  Monitoring •  Acceptable use •  Expectation of privacy for email (personal,

business) •  Internet access •  Removable Media (thumb drives, DVD’s, etc.)

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• Step 1: Update your IT policies

o BYOD (Bring your own device) •  Require lockout if lost or stolen •  Allow remote wiping •  Require use of strong passwords to unlock •  Define ownership of applications and data

o Remember, every time a call to a customer is made on a personal cell phone, the information is in the cell phone records for access without accessing your database

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• Step 2: Get your agreements in place

• Confidentiality with employees • Nondisclosure with employees and vendors • Non-compete

o NJ law – must be “reasonable” as to time and geographic limitation

• Non-solicitation of current customers

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• Step 3: Create a culture o  Training on do’s and don’t’s o Establish consequences: discipline, termination, legal

action including criminal prosecution o  Treating confidential information properly – physical or

electronic •  Secure location – lock it up! •  Limited access (physical or passwords) •  Encryption •  Labels and watermarks •  Access logs

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• Step 4: Track the hardware

o Make sure all company owned devices are returned

o Make sure that the SIM card is in the phone o Require password protection on BYOD o Require reporting of any lost or stolen devices

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• Step 5: Establish Social Media Policy

o Have clear policy who owns the social media accounts that are created for and by the company

o Clarify what type of postings are acceptable and what are not

o Cannot interfere with employees’ rights to organize

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• Step 6: Telecommuting – out of sight – not out of mind o Telecommuting agreement

•  protecting sensitive and confidential information •  define electronic resources •  company vs. personal equipment •  physical security •  retrieval upon termination

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• Step 7: Identify red flags o Greed or vulnerability to blackmail o  Feelings of anger/revenge against the organization o Divided loyalty – allegiance to another person,

company, or country. o Compulsive or destructive behavior, or family

problems: drug or alcohol abuse o Employees who are laid off, subject to a reduction in

force, passed over for a promotion, terminated, demoted, or required to follow a performance improvement plan.

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• Step 8: EXIT Interviews

•  Ask where the employee is going to work next and in what capacity.

•  Ask the employee for all passwords for work-related computers, devices, accounts and files, keys, access cards, badges, company credit cards, and other property.

•  Change all passwords or disable accounts

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• Step 8: EXIT Interviews

•  Have the employee sign an acknowledgment that all company property and information has been returned.

•  If the employee is subject to confidentiality agreements, employers should remind the employee of their ongoing obligations. Send follow-up letter.

•  Make this standard practice.

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• Step 9: Preserve the evidence o Analyze the risk: if the employee resigns

without notice, refuses an exit interview or is vague about their future employment plans, be aware that these are all red flag behaviors.

o Check to see if any unusual email activity, server activity, electronic copying, printing of files, photocopying prior to the employee leaving

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• Step 10: Be a good example o Clean desk top o Destroy outdated documents o Wipe devices o Lock it up

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Contact Information

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For Further Information Patricia P. Werschulz, Esq.

Of Counsel Chipperson Law Group, P.C.

Morristown Location 163 Madison Ave, Suite 220-40 Morristown, New Jersey 07960

Phone: (973) 845-9071 Fax: (973) 845-6176

http://www.chippersonlaw.com/

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Trade Secrets: Critical Business Intellectual Property

Law

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