When many entrepreneurs think of trade secrets, they think of high-tech companies or large manufacturers. For example, software architecture and source code are generally protected using trade secrets. Another example of businesses that have many trade secrets is legacy manufacturers which need to protect how products are made, what products are made out of, etc. Famous examples of trade secrets from these industries range from Google’s® search algorithms to KFC’s® “11 secret herbs and spices.”
But all businesses – even the most “simple” – have trade secrets. At the very least, all businesses have customer lists, vendor lists, profitability/pricing information, etc. – with many businesses having much more. The best way to evaluate whether certain information might be a trade secret is to think about real-world business consequences. I often ask my clients,
If one of your best employees left for a competitor and took certain business information with them, would that be upsetting?”
If the answer is “yes,” then that information needs to be evaluated for potential trade secret protection. That can run the gamut from customer lists to the “secret sauce” that makes a business successful.
Whether your business is large or small, below are five important tools that can be used to protect trade secrets.
Legal Tools to Maintain Secrecy
There are several legal tools that small businesses can use to protect trade secrets during the beginning, middle and end of the business relationship with an employee or contractor using non-disclosure agreements, employee handbooks and exit interviews.
- Non-Disclosure Agreements
A non-disclosure agreement (commonly called an “NDA”) is a contract between two or more parties agreeing that certain information exchanged between them will be kept confidential. In a small-business context, non-disclosure agreements can be used to help maintain the secrecy of important business information shared with employees or independent contractors.
NDAs are critical tools for all businesses. By using an NDA, you can contractually obligate associates to maintain the confidentiality of certain information. This is an especially important tool for outside contractors who may have active relationships with your competitors.
- Employee Handbooks
An employee handbook is an important part of smoothly managing employees, setting employee expectations and protecting a small business from various employment-related legal issues. Employee handbooks can also be useful legal tools for maintaining confidential information during the scope of an employee’s relationship with a small business.
Small businesses should consider having an attorney prepare confidentiality-related language in their employee handbooks. Among other reasons, it is a good, ongoing reminder to employees of what they can and cannot divulge to third parties.
- Mandatory Exit Interviews
Gone are the days when employees spend their entire career at a single company. Today, multiple career transitions are the norm, and small businesses should anticipate this in their dealings with employees and contractors. Employment and independent contractor agreements can include a provision requiring an exit interview.
During the exit interview, the business can remind those exiting of their confidentiality obligations (and even ask them to sign a simple, one-page letter acknowledging their confidentiality obligations). This can go a long way in both preventing departing personnel from making an honest mistake by not realizing the scope of his or her confidentiality obligations and in strengthening the business’ legal position if trade secret litigation ever arises.
Practical Tools to Maintain Secrecy
There are also several practical tools that small businesses can use to protect trade secrets; including fragmenting and restricting access to confidential material.
- Fragment Confidential Material
One practical tool for maintaining trade secrets is fragmenting confidential material. Fragmenting trade secrets means dividing confidential information amongst various employees or contractors so that none of them have access to the whole. In other words, no one in the business other than a select group – usually the owners – know all the “ingredients” in the “secret sauce” that makes the business work.
Perhaps one of the best examples of this is the formula for COCA-COLA® brand beverages. While thousands of people work for Coca-Cola, only a small handful have access to the full recipe. Everyone else only knows their small piece of the puzzle.
Small businesses should evaluate their operating methods to see whether such fragmentation might be possible, e.g., whether an employee could still perform his or her job while only having access to a portion of the businesses’ confidential information related to such job.
- Restrict Access to Confidential Material
Another practical tool for maintaining trade secrets is restricting access to confidential material on a need-to-know basis. One of the best examples of this is the division between sales and manufacturing.
Often, the sales team does not need full access to confidential information about how a product is manufactured, who supplies raw material, etc. Rather, salespersons only need enough information to sell the product. Conversely, those who manufacture a product rarely need to know information about customer lists, profit margin, etc.
Small businesses should review the job duties of employees and contractors and seek to restrict access to any confidential information which falls outside those duties. By restricting access to confidential information based on job descriptions, small businesses can help ensure that any disgruntled former employees never had access to the full scope of the business’ confidential information.
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