Trade Secrets

“Sshh” by Deborah Azzopradi

Consider trade secrets, especially when your commercially important secrets are unsuitable for patent or copyright protection.

Consider the formula for Coca-Cola and its “natural flavorings”, which dates back over 100 years.  Even if the formula could have been patented (unlikely), the patent would be long expired.  The formula might not be even eligible for copyright since it is a list.  In any event, a copyright by now would be both expired and useless since a copyright is only for the printed words.  However as a closely guarded trade secret, the formula remains valuable (the trademark, of course, is almost priceless).

In addition to recipes, trade secrets can include production methods, marketing methods, computer software, and the like. Pretty much any information that gives a business competitive advantage, and is not generally known, is a potential trade secret.

Trade secret protection is very narrow – unless you can prove to a court that you carefully guarded the secret, and someone with access to the secret then misappropriated the secret, you are out of luck. If someone figures out the secret by other means (e.g. reverse engineering), there is no protection, even for Coca-Cola.

However if you can convince the court that trade secret theft occurred, you can request injunctions (e.g. block disclosure), damages (your economic harm caused by the theft), and possibly even seizure of materials and/or attorney fees.

Until recently, trade secrets were only handled at the state level.  However in May 2016, the federal Defend Trade Secrets Act of 2016 (DTSA) was signed into law.  Trade secret theft can now be handled in either state or federal court. Trade secret theft can now be charged under both civil and even criminal law.

So if you are doing a startup, think about which of your non-commonly known information gives you a competitive edge. Where appropriate, apply for patents and trademarks, and register copyrights to prove copyright ownership.  For the rest, although some disclosure may be required for marketing and fund-raising, try to limit this disclosure, and take positive steps (e.g. restriction of access, nondisclosure agreements) to preserve not-generally-known information that is competitively important.

Startup IP due diligence

Maat – goddess of truth

Startup investors know that they are mostly investing in just your IP.  So get your IP ownership situation under control before due diligence starts.

What does a startup investor get for his money? Startup companies are really just a bundle of information (usually ideas), people (founders, contractors, consultants), and things (tangible property, cash). A startup’s “things” will usually have minimal value. The people can walk out the door at any minute. So all that an investor may actually get for his money is some sort of ownership option in the information – the startup’s intellectual property (IP).  Prudent startup investors thus often conduct a fair amount of due diligence on this “IP”.

A startup’s IP can be viewed as being a mixture of alleged inventions (e.g. actual or potential patents), alleged copyrights, alleged trademarks, and alleged trade secrets.  At least some of this information may still only exist in the minds of the founders, contractors, and consultants. What is potentially real here, and what is not?

Sophisticated investors also know that according to our IP laws, unless actions are taken to protect the IP, the IP may either still belong to the individual that created it; or it may have become public domain.  Investors also know that startups often don’t fully understand IP law.  Has that intriguing startup already accidentally lost its key IP?  Was it missing essential IP to begin with?  This is why investors want IP due diligence studies.

Some ways that IP can be missing or lost include failure to obtain written IP assignment contracts, inadvertently placing IP into the public domain, and reliance on IP owned by someone else.

Failure to obtain written IP assignment contracts: IP assignment agreements should be obtained from anyone who has materially contributed to the company’s IP. Don’t assume that just because you paid for something, your company owns that IP — you often don’t. Try to do these IP assignments up front, because the longer you wait, the more leverage the other party has. For example, they could make unreasonable demands, or deny assignment altogether.

Inadvertently placing IP in the public domain: For patents, assume that anything you publish before a patent application is filed can be used against you, and be careful to update your patent filings as your technology advances. For trade secrets (i.e. important, not-generally known information which is often not patentable), take active steps to restrict access, require confidentiality agreements, and of course never publish this at all.

Reliance on IP owned by someone else: For patents, consider prior art searches to reduce the chances that you are infringing on other patents. For copyrights, check the status of your software licenses, and that you and your contractors are not copying other work. Avoid using names that might confuse customers from related companies, since this may cause trademark problems. For trade secrets, stay away from inside knowledge (not generally known in your field) that you or your contractors may have obtained from other companies.

Remember that from an IP due diligence perspective, if you can’t prove you did things right, the assumption will probably be that you didn’t.  So keep your documentation on file.