Protecting Your Trade Secrets When Working With Third Parties

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A common concern when starting a new business is how to protect your trade secrets. Maybe you have come up with a great business concept or developed a fantastic new product or service. How do you make sure the people you’re dealing with don’t steal your product or copy your idea?

The Uniform Trade Secrets Act (“UTSA”) has currently been adopted in every state except Massachusetts, New York, New Jersey and Texas. These states instead have independent statutes in place to protect trade secrets. The Act defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique or process, that (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The purpose of the Act is to prohibit misappropriation of a company’s confidential information primarily by an independent contractor or a former employee. We’ve already discussed the difference between hiring an individual as an independent contractor as opposed to an employee in a previous post. Strategies for dealing with preventing former employees from disclosing proprietary information and how to perform exit interviews will be discussed in a separate post but for now, we’ll focus on ways you can protect your trade secrets when dealing with independent contractors or other third parties.

To bring a claim under the UTSA, you must be able to show you have taken reasonable measures to maintain the secrecy of your company’s confidential information. An obvious way to protect your company’s confidential information is to limit its disclosure to others in the first place. Third parties should only be given access to information that is absolutely necessary for them to carry out the specific work they have been hired for. Take measures to ensure that any data that they do not need is sufficiently protected, whether this means securely locking it away or keeping electronic data password protected. Any confidential information you do need to disclose should be clearly labeled ‘CONFIDENTIAL’ and ‘PROPRIETARY’.

We’ve already covered the basics of confidentiality or non-disclosure agreements in a previous post. Not only should you use such agreements with all new employees, it’s also crucial that any third parties you deal with agrees to handle and maintain confidential information appropriately in order to prevent the disclosure of your confidential information during their relationship with you or your company. These agreements should clearly outline the steps a third party is required to follow upon the termination of the working relationship including the return or destruction of any of your proprietary information they received. Entering into such an agreement should be your initial step before beginning any preliminary discussions with a third party. The only third party you do not need to enter into one of these agreements with is your attorney because your attorney is legally bound not to disclose any of your trade secrets he or she may learn in the process of giving you legal advice.

There are plenty of other measures you can take to protect your trade secrets but these are just some of the more basic ones. Most importantly, remember that these are preventative steps and you should make sure that from day one you have a consistent, written confidentiality policy in place to protect your confidential information.

Image by Flickr user Nadya Peek (Creative Commons)

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