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Steps to Upgrade Internal Controls to Protect Corporate Trade Secrets

May 1, 1997


With burgeoning use of computers in the workplace and employee mobility a fact of business life, misappropriation of corporate trade secrets has increased substantially, at least as suggested by the rising number of court decisions in this area. In some of these cases, courts have found that, notwithstanding the impropriety of the employee's removal and use of the employer's proprietary information, that information is not entitled to protection because inadequate steps were taken to preserve its confidentiality. The purpose of this ALERT is to remind our clients that it may be necessary to update their internal controls to keep pace with rapid changes in both technology and employment practices, as a condition to being afforded trade secret protection.

Requirements for Trade Secret Protection

The Uniform Trade Secrets Act, which has been adopted in 40 states, provides for injunctive relief, compensatory and punitive damages, and possible recovery of attorneys' fees in the event of trade secret misappropriation. Injunctive relief is perhaps the most important remedy afforded by the Act, because it offers the victim the ability to stop misuse of a trade secret and prevent or terminate unfair competition before the damage is irreparable.

These protections are available only to information that qualifies under the statutory definition of "trade secret." Trade secrets broadly include formulae, patterns, compilations, programs, devices, methods, techniques and processes that derive independent economic value from not being generally known or ascertainable by others. The definition also requires, however, that such material is "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." If this latter requirement is not satisfied, protection is unavailable under the Act, notwithstanding that the employer considers the information proprietary and confidential. Because the Act expressly supersedes almost all other remedies for trade secret misappropriation, the victim may be left without recourse if it is unable to convince the court that reasonable steps were taken to maintain secrecy.

Internal Steps to Preserve Confidentiality

A number of safeguards can be implemented to protect trade secrets. Some are computer-based and others take the form of company policies and employment practices. While the combination of steps necessary to meet the Act's standard of reasonableness will necessarily vary with the circumstances of particular businesses, many recent cases suggest that a simple confidentiality agreement, by itself, is insufficient. A combination of some or all of the following procedures is advisable:

  • Trade secret acknowledgment and non-disclosure agreements signed by all new employees when hired. Such agreements should refer to specific categories of trade secrets rather than to confidential information generally.
  • Non-competition covenants and Assignment of Inventions agreements signed by employees.
  • Preparation of a Statement of Trade Secret Security Program and circulation to all employees, with written acknowledgment of receipt.
  • Requirement of preservation and non-disclosure of trade secrets in employee manual or handbook.
  • Creation and regular updating of a trade secret register.
  • Access to trade secrets given only on a need-to-know basis.
  • Labelling of all materials containing trade secrets.
  • Internal transmission of confidential materials only in sealed envelope marked "Confidential," or in properly labeled envelope within another envelope bearing no special legend.
  • External transmission in envelope that is addressed and sealed but not marked "Confidential" in any way.
  • Electronic transmission, internally or externally, only across secure pathways.
  • Issuance of computer passwords or identification codes to restrict access by unauthorized personnel, and prohibition on leaving computer terminal or desktop computer unattended while signed on to any data base or program.
  • Storage of confidential data and materials in suitable locked cabinets, desks or rooms; nighttime security checks for material left unsecured.
  • Where appropriate, use of identification badges, security guards or closed circuit television monitors.
  • Document or computer tape/disk destruction policy, including prohibition on discarding confidential material in open waste containers.
  • Exit interviews with terminating employees to emphasize non-disclosure of confidential information, and signing of additional non-disclosure form.

Protection of Trade Secret Information Made Available to Outside Parties

Although, as one court has commented, the greatest exposure to trade secret misappropriation is generally internal, steps should also be taken to protect information or products containing or incorporating trade secrets which are provided to third parties. These steps include confidentiality or licensing agreements with appropriate provisions restricting use or disclosure of the information; for computer applications, provision of object code and not source code to clients or customers, and provision of read-only or copy protected programs; requirement of executive-level approval prior to distribution or disclosure of manuals or other materials; proprietary notices on programs, products and manuals; limitation on outside access to sensitive office or plant locations; and, where copyright is an issue, registration as an unpublished work containing trade secrets under special provisions of the Copyright Act.

Although absolute secrecy is not required, the recommended scope of measures necessary to protect trade secrets has increased as information has become progressively more accessible through advances in technological capabilities. At the same time, the laws governing employment practices have changed and become more of a focal point in business and in litigation. Employers may wish to consult their advisors regarding the preparation or updating of a Trade Secret Security Program, achievement of non-disclosure and related agreements without entry into formal employment agreements where the latter are not warranted or desired, and the current status of non-competition provisions, among other matters .


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.