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Trade Secret

In: Business and Management

Submitted By bajukumar
Words 3633
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Trade secret
In regards of Schlossberger’s suggestion that the duty to respect trade secrets has limit and is overridden, it seem more emphasizing in whistle blowing aspect. So the question rises that under what conditions is whistle blowing moral justified? In my opinion, it does not matter what one’s obligations or confidentiality agreements, one is never exempt from the general obligations we have to our fellow human beings. One of the most fundamental of these obligations is not to cause harm to others. In particular, obligations of confidentiality and loyalty cannot take precedence over the fundamental duty to act in ways that prevent unnecessary harm to others. Agreements to keep something secret should have no moral standing unless that secret is morally justifiable itself. Such agreements should be morally void if the organization is engaged in illegal or immoral activities. In that case, one’s obligation to the public overrides one’s obligation to maintain secrecy. For example, one cannot have an obligation to keep secret a conspiracy to murder someone, because murder is an immoral act. It is for this reason also that employees have a legal obligation to report an employer who has committed or is about to commit a felony. For the same reason, an employee cannot justify participation in an illegal or immoral activity by arguing that one was merely following orders.
Some people have argued that whistle blowing is never justified because employees have absolute obligations of confidentiality and loyalty to the organization for which they work. People who argue this way see no difference between employees who reveal trade secret by selling information to competitors and whistleblower who disclose activities harmful to others. They nullify the principle that one ought to refrain from whistle blowing because speaking out would cause harm to the organization.
In conclusion with respect to engineers, though engineers are members of a profession that hold public safety paramount, we cannot reasonably expect engineers to be willing to sacrifice their jobs each day for principle. Engineers only have the obligation to do their jobs as best they can. This includes reporting concerns about safety of products to management, but does not include the obligation to insist that their perception or standards should be accepted. It is absolute unethical to violate a patent, however, by making a few minor modifications to the patented, an engineer often may legally duplicate a product or process. Hence is it unethical to make a minor change in a patented product or process to avoid copyright infringement? Creators and innovators should deserve to enjoy the fruits of their labors. The fairness argument says that it is unfair for someone to free ride on the work of another. If some company invests time and money in developing a product, then it should have a protected period of time in which it can try to recoup its investment and make a profit. For any other party to copy that product immediately upon its appearance and sell it more cheaply because it has no development costs to recoup is unfair. Moreover, to deprive benefic of their innovations would be unjust and socially harmful. With patents violating, the incentive to innovate would be lessen and resulting in fewer innovations. Creators or innovators would have to depend on secrecy hence undermining the knowledge sharing and cooperation necessary to achieve progress.
However, engineer profession in particular or society in general always has an interest in improvement of innovations in order to benefic technologies. The ethics of copyrights and patents tried to balance fairness to innovators and improving technology to advance human welfare.
According to Schlossberger’s article, the following factors engineers should consider. First, has the patent holder had a chance to benefit from it? Some patents yield immediate profits, while others may take a long time. It is less troubling to market a modified patented product if the patent holder has had a reasonable chance to profit already. Second, if the modification a real improvement or was it developed only to get around patent laws? If the modification makes the product safer, more precise, more useful, or less environmentally harmful, then the modification is generally justifiable. Third, how significant is the modification? Changing a few unimportant details is more trouble than making major alterations. Finally, is there any doubt about the legality of the modification? Engineers should never engage in illegal practices.


Student: Emin Gurbanov




1. Importance of Trade Secrets it today's business world

2. Nondisclosure Agreement as effective tool to protect Trade Secrets

3. Elements and definition of Trade Secrets

4. Requirements for qualifications of secrets and Trade Secrets

5. Legislative definitions and protections of Trade Secrets

6. Limitations of Nondisclosure Agreement

7. Protection of Trade Secrets

As the world moves rapidly toward an international marketplace, the protection of trade secrets becomes a task of high importance for industrial nations. Industrial espionage and theft of trade secrets have been known to civilization since ancient times. For example, the technique of making a silk in ancient China was a seriously kept secret. The law of the country permitted death by torture as penalty for revealing the secret of silk-making to outsiders. Today, the penalty for theft of trade secrets, if the perpetrator gets caught, is usually solely financial, though sometimes it can eventually become a subject of criminal charges. The necessity to protect business, intellectual and other tangible and intangible property led to the creation of the Nondisclosure Agreement (NDA) terminology in today's business lexicon. The FBI and American Society of Industrial Security estimate that U.S businesses lose at least $24 billion every year because of stolen trade secrets, mostly from sales by employees to competitors.

A nondisclosure agreement in most business environments is an inalienable element in the employee hiring process. Almost every business has some valuable confidential information that it wants to keep under wraps. It could be a sales plan, a list of customers, a manufacturing process or a formula for a soft drink. This confidential information is a form of property whose value would drop to zero if competitors obtain it. Trade secrets are the only kind of information that can be protected by an NDA. In order for an NDA to be effective it has to be tailored according to the legislative acts, otherwise an employee who breaches the contract could be freed of any charges, and continue to share trade secret to the satisfaction of the competitor.

The NDA is an important means to protect business' confidential information. The party who is in violation of an NDA agreement could be sued for the wrongful act and require compensating the plaintiff financially for all the damages done. In addition, the court usually issues an order that prohibits further disclosure of secrets. The NDA is not only serving as a protective tool, but it also encapsulates other benefits:

• It conveys to the party receiving the information notice that all information is sought to be treated as confidential.
• It clearly highlights what information is treated as confidential in order to avoid any misunderstanding and disputes.
• It stipulates the way of resolving disputes either by court or arbitrage.
• The jurisdiction of the dispute - the disputes can be tied up to certain geographic region or state.
• Which laws will be predominant or applicable in resolving disputes;
• The time required for a lawsuit.

The NDA is not a cure to protect just any business information - the information must qualify as a trade secret. A trade secret is created in secrecy and kept secret through the life of the information, and only those that have access to it are bound to maintaining the confidentiality

Trade secrets typically include such elements as:

• Unpublished computer code
• Product design definitions and specifications
• Product development agreements and other related agreements.
• Business plans
• Financial projections
• Marketing plans
• Sales data
• Unpublished promotional material
• Cost and pricing information
• Customer lists, and
• Pending patent applications

Information must meet certain criteria in order to be qualified as the trade secret:
1. It should not be open to the public through legal methods, or in professional terms should not be generally known or readily ascertainable through legal methods.
2. Have an economic value.
3. Handled with the reasonable secrecy efforts.
Once the information is obtainable or readily ascertainable through legal methods then it loses its privilege to be considered as a secret and is no longer subject to protection under a nondisclosure agreement. Public databases, libraries and other publicly available sources are legal methods. The following is the reference from Florida Statutes covering specifically trade secret issues:

812.081 (c)
Trade secret" means the whole or any portion or phase of any formula, pattern, device, combination of devices, or compilation of information which is for use, or is used, in the operation of a business and which provides the business an advantage, or an opportunity to obtain an advantage, over those who do not know or use it. "Trade secret" includes any scientific, technical, or commercial information, including any design, process, procedure, list of suppliers, list of customers, business code, or improvement thereof. Irrespective of novelty, invention, patentability, the state of the prior art, and the level of skill in the business, art, or field to which the subject matter pertains, a trade secret is considered to be:

1. Secret;

2. Of value;

3. For use or in use by the business; and

4. Of advantage to the business, or providing an opportunity to obtain an advantage, over those who do not know or use it

when the owner thereof takes measures to prevent it from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.

(2) Any person who, with intent to deprive or withhold from the owner thereof the control of a trade secret, or with an intent to appropriate a trade secret to his or her own use or to the use of another, steals or embezzles an article representing a trade secret or without authority makes or causes to be made a copy of an article representing a trade secret is guilty of a felony of the third degree, punishable as provided in s. 775.082 or s. 775.083.

815.45 Trade secret information.--The Legislature finds that it is a public necessity that trade secret information as defined in s. 812.081, and as provided for in s. 815.04(3), be expressly made confidential and exempt from the public records law because it is a felony to disclose such records. Due to the legal uncertainty as to whether a public employee would be protected from a felony conviction if otherwise complying with chapter 119, and with s. 24(a), Art. I of the State Constitution, it is imperative that a public records exemption be created. The Legislature in making disclosure of trade secrets a crime has clearly established the importance attached to trade secret protection. Disclosing trade secrets in an agency's possession would negatively impact the business interests of those providing an agency such trade secrets by damaging them in the marketplace, and those entities and individuals disclosing such trade secrets would hesitate to cooperate with that agency, which would impair the effective and efficient administration of governmental functions. Thus, the public and private harm in disclosing trade secrets significantly outweighs any public benefit derived from disclosure, and the public's ability to scrutinize and monitor agency action is not diminished by nondisclosure of trade secrets.

Sometimes it is hard to determine when the information is "generally known". A trade secret can be known to more than one business within an industry and still be protected by an NDA, however if it is known by many businesses it will not qualify any longer as a trade secret.
A trade secret will not be considered as obtained through legal means if bribery, fraud and other deceptive ways were involved. The practice shows that most of the time trade secrets are obtained through professionals (financial advisor, accountant etc), stolen as a result of industrial espionage or just simply through the newly-hired employee who worked for the competitor.
As mentioned above the NDA is applicable for the protection of a trade secret if it has an economic value and will benefit the other party providing certain advantages over its competitors. Also, the trade secret will be qualified for protection if there is a cost involved in development of the secret and damages would be done to the business if the competitor acquired the information. As an example, there is a case where the process for freezing a sausage in pizza industry became a subject of legal dispute. The competitor acquired the information about the process avoiding legal means. As a result of the act the court awarded plaintiff $10.9 million as a remedy in the damages and the loss of profits.
Trade secrets must be maintained with the due efforts to keep them confidential. The primary part of the due and reasonable efforts that businesses undertake is entering into nondisclosure agreement with its suppliers, employees and contractors. Violators of the agreement become a subject to lawsuit, usually paying significant amount of money for damages.

NDA Protection Limitations
NDA is not always the remedy for protecting trade secrets. And there is no way to stop disclosing the trade secrets if:

• There were no reasonable efforts to maintain secrecy
• The trade secret was generally known or readily ascertainable
• The trade secret was the product of independent discovery; or
• The trade secret is lawfully acquired through reverse engineering

Out of the given four, the independent discovery and reverse engineering deserve the most attention. They are thought to be acquired through legal means and therefore there is no law that limits free usage or disclosure of the trade secret that was discovered independently. Even if the trade secret is identically the same there is no exclusive right to that secret if it was discovered by someone else independently. There is a well known technique called "Clean Room". A company that develops a product in order to insure itself from any possible lawsuits creates an almost isolated environment for its engineers assigning them a certain task. Isolation involves filtering any technical information from a competitor that could be a source to achieving the task. The entire process is monitored and well-documented in order to ensure compliance with the independent discovery rule. So any claims for copying of trade secrets automatically become invalid.
Reverse engineering is the disassembling of a product that is available to the public in order to reveal its trade secret. Disassembling is not protected by law as long as it is not a violation of the trade secret law. Any trade secret that is discovered through reverse engineering by another party is no longer subject to trade secret protection and the information becomes widely known to public. There is only one protection from reverse engineering, in which the party undertaking the task had previously signed an NDA. By signing the NDA, a contractor, employee or supplier may be prohibited to do reverse engineering.

Copyrights, trademarks and patents belong to the intellectual property group. Trade secrets are also a part of this group. The trade secret can be kept in secrecy or be patented. Once the secret patented the patent law assumes the protection role for patent as long as the information is publicly disclosed.
There are three types of patents: Utility patent, design patent and plant patent. Utility patent basically applies to novel and inventions. Once the invention is created it can be patented. The patent virtually stops any manufacturer from copying the product. The patents are obtained from US Trademark and Patent office. Besides the filing and formal burden there are also several other requirements for patent to be approved:
• It must be useful and capable to perform expected tasks.
• It must be novel or just differentiate from other products.
• It must be nonobvious i.e there is no one in the field who would invent the same easily.

Patent has its advantages and disadvantages over trade secret. As the patents guarantee for certain period of time that no one else can use invention without acquiring it. The patent holder has exclusive right to the invention and any infringement can lead to lawsuits. Disadvantages are: takes long to obtain, the information is publicly disclosed, limited time, expensive to obtain (attorney fees) and also if the patent is not approved then it becomes publicly accessible, therefore is not qualified any longer as a trade secret.
Copyright entitles its holders to an exclusive right to make copies or create a derivative work. Normally copyright and trade secrets are not combined, except the circumstances when the product is shown as a final product. For example the software can be compiled with the source code concealed to the public and openly sold. Copyright law protects that software from copying, while the trade secret law will protect it is source code.
Trademark law applies to logos, or any device that identifies and distinguishes the product. It entitles the owner to the exclusive rights to use the trademark in the market. As long as trademarks are virtually attached to products and publicly accessible, therefore they are not subject to NDA.

Protection of Trade Secrets

Protection of trade secrets involves three basic approaches: Identification of secret, cost, time, measures to keep the secret, and actions in the case of violation. Timely identified trade secret is important, especially for start up business where any adverse fact can fail the business. Cost and time are also should be reasonably equal the value of a secret. Measures of keeping the secret will ensure favorable decision of the judge if the violation was proved. As the development of stated above, the following are considered security measures for keeping trade secrets:

• Using Nondisclosure Agreements
• Maintaining of physical security (clean desk, locked cabinets and drawers etc)
• Computer security (file protection, password policy, data encryption and etc)
• Labeling of certain information as "Confidential"
• Limit employee access to trade secrets
• Document access log
• Restricted photocopying
• Shredding of documents that contain sensitive information
• Using of Noncompeet Agreement
• Screening of employee presentation and publications
• Controlling visitors
• Screening of new employees
• Dealing with leaving employee

Hiring of new employees and leaving employees is most concern involved with trade secrets. New employee, if the one is from competing company, could be the reason for suit by competitor If during an employment period that employee could use knowledge and skills which were trade secrets of competing company. A protection against suit could be enforced if nondisclosure agreement was signed at the time of the interview which specifically would stipulate that no trade secrets of current and former employer to be disclosed by hired employee. Former employees are considered main source of trade secrets leak. Statistically it is proven fact that disgruntled employee are most likely to harm a company by disclosing trade secrets.
Basic Nondisclosure Agreement comprised of several sections, which specifies subjects of the agreement (usually two parties), definitions of confidential information, exclusion from confidential information, obligations of receiving party, time periods the agreement is in effect, severability and etc. Severability implies that if the court finds that any part of the agreement is not in compliance with the law, then only that part will be cut from the agreement while leaving the rest as effective. Otherwise according to the law the whole document can be found discharged if any part was not in compliance. Besides all, the NDA must be signed by both parties in order to have a legal power. Some other provisions added such as Injuctive Relief, Indemnity, Attorney fees, Arbitration and Mediation, which state laws will govern disputes, Jurisdiction and other are intended to fortify agreement, tying up potential perpetrator of the agreement with maximum burdens.
The trade secrets created by employee sometimes create confusion about the ownership of the secrets. Most of the laws provide that any secrets created on employee's time, but without employee's materials are considered company's property. In order to fortify that provision employers need specifically add the clause where ownership of trade secrets is clearly indicated.
NDA does not guarantee an automatic protection from disclosing of trade secrets by breaching the agreement party. A breach in agreement forces suffered party to hire lawyers and file a lawsuit, which sometimes could take significant financial resources. Even though, yet certain procedures are required to follow in order to get trade secrets protected by law. Most of the laws that protect trade secrets are based on the Uniform Trade Secrets Act (UTSA). It was written in 1970 and Minnesota was the first state that enacted it in 1981. Currently 38 states enacted UTSA including District of Columbia. The UTSA was enacted in Florida as well and it refers to the Chapter 688 of the Florida Statutes.

Misappropriation and theft of trade secrets has traditionally been prosecuted under state laws, as either or a civil and a criminal offense. With the enactment of the Economic Espionage Act of 1996, federal protection of intellectual property has been extended to trade secrets, making misappropriation or theft of trade secrets a federal criminal offense. The primary focus of the Economic Espionage Act of 1996 is not on espionage or theft by foreign entities, but on misappropriation or theft of trade secrets involving United States citizens.

Books and sources used:

1. William H. Francis, Marc Tolon Brown "Cases and Maerials on Patent Law Including Trade Secrets, Copyrights, Trademarks" May 2002.

2. Gross Miller "West's Legal Environment of Business" Fifth edition 2003.

3. The Statutes of the State of Florida.

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