Academic journal article Journal of Small Business Management

Trade Secrets and Covenants Not to Compete: Beware of Winning the Battle but Losing the War

Academic journal article Journal of Small Business Management

Trade Secrets and Covenants Not to Compete: Beware of Winning the Battle but Losing the War

Article excerpt

Trade Secrets and Covenants Not to Compete: Beware of Winning the Battle But Losing the War

Success in the business world often rests upon innovative techniques or inspired know-how. That competitive edge may quickly become dulled if employees or suppliers share such important information with others. Maintaining the integrity of proprietary information is, therefore, a significant managerial challenge. This discussion briefly explores the laws governing trade secrets and then evaluates the technique of using covenants not to compete to keep a hard-earned competitive edge sharp.

Identifying a Trade Secret

The first step in protecting business information is to understand exactly what qualifies for trade secret status. This may be a difficult task, for even those charged with legal responsibility for identifying a trade secret seem to do so almost by instinct. Part of the problem may lie in the fact that the generally accepted definition of a trade secret is very broad. Most judges declare a trade secret to be any formula, pattern, or compilation of information that is not generally known to the industry and that has been developed at some expense by the owner who intended that it be kept confidential.(1) Obviously, these factors leave a great deal to individual discretion.

Approximately twenty states have adopted the Uniform Trade Secrets Act, which was developed in part to minimize judicial confusion and to offer a more specific definition. The Act accomplishes that goal, however, by merely expanding the common law rule to include methods, techniques and other "know-how."(2) It is still too soon to determine whether the Act will substantially affect judicial treatment of proprietary information.

In general, courts seem to approve the existence of a secret so long as the information is the product of its owner's efforts or capital and is not widely used in the industry. A business secret does not have to be the novel, useful, and non-obvious idea that patent law requires for its grant of exclusive use. Technical drawings, mechanical devices, formulae, and processes are equally likely to be recognized as proprietary information, as are financial accounting software and customer lists of many descriptions. Even information that is clearly in the public domain, such as lists culled from the telephone book, may be accorded trade secret status if they are personalized or annotated to make them particularly useful to the enterprise.

There is a limit, however, to this tendency of judicial leniency. If a secret can be discovered by taking a product apart or in some other way "reverse engineering" it, then any claim to legal protection is lost. In simple terms, a secret is not a secret if it is easily discoverable. This does not mean, however, that anything goes. Courts agree that such discovery must be accomplished through "proper means" and not by subterfuge, trespass, or the like.

Perhaps it is not surprising to learn that courts tend to scrutinize the interaction and conduct of the parties far more than the nature of the secret in deciding trade secret issues (Wiesner and Cava 1988). Assuming that the information is not already widely known to the industry, the real trick in gaining judicial protection for a claimed trade secret is vigilance. The enterprise must treat the information as proprietary in all facets of the business.

Keeping the Secret

Trade secret cases often pit the alleged owner/developer of business information against someone who claims the right to exploit the information for his or her own advantage. Perhaps the employee developed the idea or in some other respect believes the claimant has no proprietary rights to it. Required to strike a balance between protecting genuine trade secrets and encouraging the entrepreneurial spirit, courts look for manifestations that a business claims ownership of a specific and particular trade secret. …

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