How to Protect Trade Secrets When Noncompete Agreements Are Not an Option

Colorado has always been one of the most restrictive states when it comes to enforcing noncompete agreements. However, Colorado’s restrictions have always included an exception for noncompete agreements that are tailored to protect a business’s trade secrets. That said, the Federal Trade Commission (FTC) recently proposed a rule that would ban most noncompete agreements, including those designed to protect trade secrets. While the FTC’s proposed rule is not yet the law of the land, businesses must take steps to protect their trade secrets now so that they are safe after the FTC publishes its final rule. 

READ: Changes To Non-Compete Rules Also Mean Paying More Attention To Your Trade Secrets

What does your business need to do?

1. Identify your trade secrets
2. Protect the secrecy of your trade secrets
3. Enforce your trade secret protections

Identify your trade secrets

People usually think of technological innovations, like the code in the latest smartphone, when they think of a trade secret. However, other trade secrets can include information on the business’s financial health, customer list, pricing margins, market research and business plans, to name a few. Additionally, a business’s methods, techniques, processes and procedures are also trade secrets. For example, a bakery’s unique recipe for chocolate chip cookies can be a trade secret. 

In other words, a trade secret can be almost anything if it has independent value. Generally, independent value exists when the secret provides a competitive advantage in the marketplace. For example, maintaining the secrecy of a business’s client list and pricing margins would provide that business with a competitive advantage because if that information became known, a competitor could simply call the business’s clients and undercut them on price.

Protect the secrecy of your trade secrets

Once the business has identified its trade secrets, it must be proactive in taking reasonable steps to protect its secrecy. Protection efforts will vary depending on the type of trade secret being protected and how the information is stored.

For example, a trade secret that is stored electronically needs to be saved on a secure computer system that is monitored and has restricted access. This means that in addition to having password protections (two-step authentication is recommended), the system needs to limit the access of the files containing the trade secrets to only those employees who have a need to know. This could mean that only the sales staff is able to view client lists and pricing margins, while support staff are excluded from that specific file. It is also important that these sensitive documents be marked appropriately so that an employee with access to the document knows they are handling a trade secret.

READ: How to Minimize Cybersecurity Risks and Balance Customer Friction for your Online Business

However, it is not enough to have reasonable security protocols in place. The business also needs to protect itself from its own employees. The reality is that if a trade secret is misappropriated, the theft will likely be traced back to an employee. Thus, it is critical for the business to require employees with access to the trade secrets to sign nondisclosure agreements and periodically train them on their responsibilities to protect those trade secrets. Additionally, when an employee with access to trade secrets leaves a business, the business needs to have audit protocols requiring the former employee to return all such materials and acknowledge in writing that they have done so.

Occasionally, businesses need to make limited disclosures of their trade secrets to third-party vendors. In these situations, the business and the vendor should enter into a confidentiality agreement that is tailored to the disclosure and the vendor’s duty to protect the secrecy of the information.

Enforce your trade secret protections

Enforcement of a business’s trade secret protections is equally important to identifying and protecting the secrecy of the information. Your business’s trade secrets are protected by the Defend Trade Secrets Act and Colorado’s Uniform Trade Secrets Act, which enable businesses to seek injunctive relief to stop stolen trade secrets from being used in the marketplace as well as obtain damages for the business loss caused by their theft. However, if a business knows a trade secret has been taken and wrongfully disclosed, it risks waiving its trade secret protections by not seeking to enforce them.

It is critical that you contact an attorney knowledgeable in trade secret protections as soon as you learn that a trade secret has been misappropriated. It is also wise to work with a knowledgeable attorney when identifying your business’ trade secrets and creating processes to protect their secrecy, because adequately caring for your trade secrets dramatically impacts the enforceability of your trade secret protections.

Michael J. Rudd, an Attorney with Fox Rothschild LLP, handles a broad range of labor and employment litigation matters. He focuses his practice on business protection litigation including trade secret theft disputes, shareholder rights litigation, and enforcement of protective agreements including non-compete clauses, non-solicitation clauses and non-disclosure agreements. He can be reached at [email protected].