Why a trade secret is the Spanish Inquisition of intellectual property

Nobody expects it -- until it's too late

“Nobody expects the Spanish Inquisition!” If you’re old enough, this phrase invokes a classic Monty Python skit starring a trio of bumbling 15th century cardinals who burst onto the scene. Perhaps you’re wondering why the Spanish Inquisition is making an appearance in a column about intellectual property.

You didn’t expect this, did you?

People with at least passing familiarity with the term “intellectual property” can associate it with patents, trademarks and copyrights. But “trade secret” doesn’t often come to mind. Simply put, a trade secret is the Spanish Inquisition of intellectual property: Nobody expects it until it is too late. 

Perhaps you and some colleagues left your jobs to start a business competing with your former employer. You figure that with reduced overhead, long hours, hard work and a little luck, you can provide the same product or service at a higher quality and for greater value. You and your business partners form an LLC, rent office space and advertise. You call some of the suppliers you used at your previous job, and you call upon some of your former customers to see if they are interested in switching.

You and your partners invest your life savings into making this new venture a go. But one day there is a knock on the office door, and a process server hands you a complaint and summons. You are being sued for misappropriation of trade secrets.

Or perhaps you own a successful company that employs a number of sales people. Things are going great until one day your best three sales people unexpectedly quit. A month or so later, your biggest customer informs you he is transferring his business to a company started by your former employees that is offering a similar product at a steep discount. Obviously, your former employees have taken knowledge of your clients, suppliers and pricing models and used this information to start a competitive enterprise. 

Sensing the unfairness, you make an appointment with an intellectual property attorney who asks if you treated the sensitive information as a confidential trade secret, or if you had the former employees sign non-compete agreements for the protection of trade secrets. You didn’t.

You go forward with a lawsuit for misappropriation anyway, hoping the fact that you lock your office doors at night and every employee’s computer is password protected is enough to get the pilfered information deemed a trade secret. It almost certainly isn’t enough. But the inquiry is very fact-specific and your case will proceed, potentially running up a hefty legal bill for both you and your former employees. 

If you remember the Monty Python skit, you recall that the Inquisition’s red-robed cardinals — Ximénez, Biggles and Fang — were particularly inept, stumbling over their lines and not impressing upon their intended victims the seriousness of the alleged crimes. Likely, your lawsuit will be perceived in a similar fashion. Chances are things will settle in the end, but you will have to accept a resolution that is less favorable than you desired, and you will wonder whether it was even worth the expense.  

Whereas few businesses will ever have the need to obtain patent protection, most could properly make use of trade secret law to protect sensitive information and business knowhow acquired and developed over the years. Protecting sensitive information isn’t particularly difficult and can be as easy as marking documents and electronic files as confidential and storing the information in password-protected files only accessible by personnel with a bona fide need to know the information.

Very few small companies — or even larger ones — bother. The importance of designating certain information as a confidential trade secret isn’t realized until this valuable information is being used by former employees to the company’s detriment. Those companies that do bother are much less likely to have former employees who violate policy in the first place.         

Misappropriation of trade secrets is a common litigation claim seen in lawsuits between companies and former employees. The question of whether sensitive information was sufficiently protected and guarded to qualify as a trade secret is very fact specific; information that wasn’t marked and systematically segregated is subject to great uncertainty in front of a court. Tens of thousands of dollars can be spent just determining whether a company has trade secrets before even getting to the question of whether the information was misappropriated. 

Categories: Business Insights, Legal