As any entrepreneur is well aware, the early stages of a new business venture are an incredibly busy time. Entrepreneurs must focus on building the core team, structuring the company, attracting investors, developing the product/service, and developing key partnerships, sales channels and marketing plans. These tasks are typically all-consuming for the founders, taxing both their financial and time resources.

During this time, it may be challenging to allocate attention to intellectual property (IP) issues.  However, this early stage is also a critical time to ensure that a business takes steps to protect its core IP and avoids the risk of third-party IP issues. It is increasingly crucial to gain a solid understanding of IP and developing a strategy that aligns with the business to build a new venture on a solid foundation.

This article includes an overview of the different types of intellectual property and provides advice to startup companies on how to secure their own intellectual property as well as protect against risks from others.

The four basic types of intellectual property that startups should understand are:

  • Patents
  • Trade Secrets
  • Trademarks
  • Copyrights

In this second post in the series, we cover Trade Secrets.

Trade Secrets

Trade secret laws provide another way to protect intellectual property or confidential information. The range of information protectable by trade secret law is much broader than patentable subject matter and encompasses various types of financial information, business plans, client and supplier information, computer code, scientific and technical knowledge, manufacturing know-how, etc. Some famous examples of trade secrets include Coca Cola’s syrup formula, McDonald’s special sauce, and Google’s search algorithm. 

A trade secret can be nearly any type of secret or confidential information that (a) is not readily known or ascertainable by others, (b) has economic or strategic value to its owner, and (c) is protected from disclosure though reasonable efforts to maintain its secrecy.

Compared to patent protection, which provides the patent holder with the ability to exclude others from making, using, and selling the patented invention, trade secret law protects against “misappropriation,” that is, the disclosure or acquisition of the secret information through improper means, such as theft, bribery, misrepresentation, or breach of duty to maintain secrecy. Trade secret law does not protect against reverse engineering or independent development, however. For this reason, trade secret protection is best suited to protect information that is not readily ascertainable by others and/or that would not qualify as patentable subject matter. 

Unlike a patent, which will enter the public domain upon the expiration of its limited term, a trade secret can be protected indefinitely, as long as the trade secret owner maintains reasonable measures to keep the information secret. Also, unlike a patent, trade secret law is readily available to protect intellectual property – there is no lengthy or expensive application process. Nor is there any requirement to pay periodic maintenance fees as with a patent. The trade secret owner does, however, have an ongoing obligation to maintain the confidentiality of the secret information through “reasonable measures”, i.e., efforts to maintain secrecy that are commensurate with the nature of the trade secret. 

Trade secrets are protectable under both state and federal laws, and the available remedies include injunctions, civil fines, and even criminal penalties. 

An invention inevitably starts out as a trade secret, and at some point in its development, the owner of the invention must decide whether apply for a patent or continue to protect the invention as a trade secret. This is not to suggest that patents and trade secrets are mutually exclusive. A patent attorney will be able to provide guidance as to what aspects of an invention are well suited for patent protection and what other aspects may be better suited for protection as a trade secret. 

In addition to protecting secret information as trade secrets, companies must also be vigilant against incurring liability from new hires who may inadvertently bring in trade secrets from their former employers. It is important to remind employees of their ongoing obligations with respect to trade secret confidentiality during onboarding and exit interviews. Measures such as employee training in how to handle trade secrets and the use of nondisclosure agreements will not only protect a company’s IP assets, but also help shield the company from potential liability.