Outsider Contracts and Trade Secrets

Sometimes, an individual may want to share trade secret information with another party outside the company. For example, an individual may want to present information to potential licenses, or they may want to give a presentation to a visitor about what their company does.

No matter the situation, the individual is going to want to be able to protect their trade secrets as best they can.

What are Trade Secrets?

Generally, trade secrets include valuable information that gives businesses a competitive edge over others. Information that is considered to be a trade secret may include:

• Formulas;
• Patterns;
• Compilations;
• Programs;
• Devices;
• Methods;
• Techniques; or
• Processes.

Trade secrets may, more specifically, include the following three elements:

• Members of the public cannot access the information;
  • In many situations, the employees of a company may not have access to the trade secret;
• The information is economically beneficial to the owner, providing the owner with a significant advantage in the marketplace; and
• The information owner makes reasonable efforts to maintain its secrecy.

Trade secrets are a subcategory of intellectual property, which also includes:

• Trademarks;
• Copyrights; and
• Patents.

Some of the most well-known products on the market today are based on carefully guarded trade secrets, for example:

• The Colonel’s famous Kentucky fried chicken recipe: Only the Colonel knew the recipe when it originated. The recipe is now shared, but only with very select employees of the company;
• The formula for Coca-Cola: An employee and two other individuals stole the formula for Coca-Cola and tried to sell it to Pepsi in 2006. Pepsi informed management at Coke and the offenders were arrested;
• The New York Times bestseller list: The formula used by the New York Times to compose its bestseller list has never been made public. People may think they know the secret and that the list is based on sales volume, but this is not the case;
• Krispy Kreme doughnuts: Reportedly, the secret is not in the recipe but in the process used to make the doughnuts;
• Twinkies: Some say that the manufacturer of Twinkies does not want to reveal the ingredients because the names of chemicals used would discourage people from feeding them to their children;
• Google’s search algorithm: Google reportedly modifies its secret algorithm to keep other individuals from gaming the system and figuring out its secret; and
• The special sauce for MacDonald’s big mac: This recipe was kept secret so well that no employee could find it for some time. Fortunately for lovers of the Big Mac, it was eventually located.

Companies that own these types of secrets maintain confidentiality by keeping them locked in vaults and only sharing them with as many individuals as necessary. These trade secrets are also often protected by monitoring access to the information.

Typically, the company will respond with legal action if the trade secret is compromised. In some situations, a company may decide not to patent its trade secret, so it will not be required to reveal it.

How Do Businesses Protect Their Trade Secrets?

A business can legally protect its trade secrets by including terms in its employment contracts. One straightforward example of a protection that may be used is a non-disclosure agreement (NDA).

NDAs require that employees keep company information confidential. Companies may also use non-compete covenants to prevent ex-employees from disclosing their trade secrets to a competitor.

Companies can develop policies and procedures for the employee’s use of trade secrets and any communications related to that trade secret.

Companies may address policies related to trade secrets during training or in orientation as soon as employees are hired. The company should convey its need to maintain the confidentiality of its trade secrets.

How Can I Use Outsider Contracts to Protect My Trade Secrets?

Individuals can use outsider contracts to protect their trade secrets in several ways. Common ways to use outsider contracts include:

• Non-disclosure agreements: An individual can create a duty to not disclose through a contract. It may, however, be difficult to convince the outside party to agree to sign the non-disclosure agreement because they will want to know more about the information before they promise not to disclose it;
• Cross licenses: An individual may be able to exchange their trade secret information for the use of another party’s trade secret or patent information. By cross-licensing with an outside party, an individual may be able to increase the value of both of the trade secrets;
  • By cross-licensing, an individual not only increases the value of their trade secret but also gains protection by obtaining access to the outside party’s trade secrets; and
• Grant-back clauses: If an individual wants to license their trade secret to an outside party, they can use a grant-back clause to ensure that if improvements are made, the licensee will grant back rights to the trade secret.

Are All These Contractual Obligations Legal?

Normally, a non-disclosure agreement, a cross-license, and a grant back clause are all legal, contractual obligations. There are, however, certain issues that an individual should be on the lookout for, including:

• Contract issues: When negotiating a contract with an outside party, an individual will want to be sure that their trade secret is, in fact, a trade secret. If a trade secret is available from other sources, or if it becomes public knowledge, and an individual attempts to license it or bargain with an outside party over it, they may be in violation of contract law; and
• Antitrust issues: If an individual and an outside party use a contract to exclude competitors or use a grant back clause to try to force a competitor to turn over competing technology to them, they may be guilty of violating antitrust laws

What are the Difficulties Surrounding Trade Secret Lawsuits?

Most trade secret lawsuits arise between an alleged trade secret holder and a competitor or former employee. In many cases, in a lawsuit against a competitor, that competitor will claim that they created the trade secret first.

Because of this, companies need to maintain records of the dates when trade secrets are first created. As noted above, a company can use an NDA and a non-compete agreement to prevent former employees from disclosing the company’s trade secrets to competitors.

Another possible strategy for a company is to develop policies and procedures that govern the use of the trade secret by the employees, in addition to policies and procedures that outline the procedures for internal communications regarding the trade secret.

If the company does not have these types of policies in place, the company should communicate its intent to maintain the confidentiality of the trade secret so that all of the employees are aware of the necessity of keeping the trade secret confidential.

Do I Need a Trade Secret Lawyer?

If you want to use an outsider contract to protect or license your company’s trade secrets, consulting with a contract lawyer in your area may be helpful.

Your lawyer can advise you of your rights related to your trade secrets and help you draft a contract that meets your company’s needs as well as the needs of the outside party. They can also keep you updated regarding your options in case there are changes to the law.