Protecting Market Share by Safeguarding Trade Secrets

Entrepreneur's Notebook
by George Salmas

Mention trade secrets and industrial espionage comes to mind. But more often than not, trade secrets are found in seemingly innocuous data. What may appear trivial could in fact give you an edge over the competition, or even be the key to your success.

Take Henry Ford, for example, who insisted that parts for his cars be delivered to his factory in a wooden crate of a particular size. As it turns out, a piece of that crate was the perfect size for the floorboard in the Model A. Henry figured out how to get a car part for free, and that's a trade secret.

As an entrepreneur, you may think you don't have trade secrets until you're asked to invite your competitors in and show them client lists and marketing plans, talk to employees and observe the way you do business. Then it becomes obvious you have something to protect.

Some business owners mistakenly think patents protect their products, processes or production efficiencies. But patents have a limited life span and are published on the Internet by the U.S. government. A person can look at a manufacturing patent, copy it, and (as long as you can't figure out that he or she has secretly stolen your idea) use it to compete with you. However, trade secrets can be anonymously protected much longer sometimes in perpetuity.

Whether it's a simple "trick of the trade" or a truly ingenious invention, entrepreneurs can safeguard their bread and butter by building a "need to know" corporate culture. Take a good look at who has access to information that makes your company work, and you'll find it's not just upper management. Business owners often trust front line employees, suppliers and even customers with pieces of information that competitors could easily use to take a bite out of your business.

To deflect trade secret invasions by competitors, ask yourself three questions: What is important? Who knows it now? Who needs to know it to do their job?

Determining value

Trade secrets are established when a business owner concludes certain information is intrinsically valuable to their business and it would be detrimental if that information was known by their competitors. There is no legal process that dubs this information a "trade secret," but the actions business owners take to protect it will make the difference later if it becomes necessary to oppose competitor's claims of trade secret misappropriation. In short, if you do not treat it like a trade secret now you will not prevail if it is someday challenged in court.

The first step to protect trade secrets is to tell employees that you have them. While it may seem counterproductive to reveal that you have secrets, a program that sensitizes employees to these issues is key to protecting company secrets. Not informing employees can result in two kinds of damaging actions: well-intentioned employees cannot help safeguard the information if they don't realize how important it is; and dissatisfied employees can claim they did not know how important the information was if they are later caught using it inappropriately.

One way of informing employees about sensitive data is requiring them to sign a confidentiality agreement. Good confidentiality agreements are detailed and direct, but not steeped in legal jargon.

For example, telling employees "not to violate state or federal copyright laws" is not as protective as instructing them "not to remove, relay or copy any part of the production manual." The latter statement clearly articulates instructions for protecting an element of the company's intellectual property. A policy breech should have serious consequences, such as employee termination.

Risks not considered

Following the "need to know" strategy, business owners should take steps to separate or secure sensitive information from employees who do not need that data to do their job. Pay particular attention to employee computer activity and access. E-mail, for example, is one of the most likely avenues leading to a security breach. Employees may attach sensitive files to an email and send it to a competitor or other inappropriate party.

Additionally, employees who are allowed to keep personal information on the company computer have an expectation of privacy that discourages the employer from monitoring e-mail traffic. Keep your computers all business and institute a written e-mail policy to make your intent perfectly clear.

An entrepreneur's worst nightmare is to lose a trade secret through the actions of a part-time employee. While a judge can enjoin a person or company to keep your information private, the court cannot swear the entire planet to secrecy. If your trade secret gets broadcast via the Internet, your only recourse would be to collect damages from the perpetrator not much if the perpetrator is a minimum wage employee.

Business owners would also be wise to have confidentiality agreements with suppliers. Every time you purchase goods for your business, a certain amount of intelligence leaves your building. A wary competitor who started compiling a list of your purchases could eventually figure out what you are doing, especially if the supplies are unusual in any way.

A confidentiality agreement insists the supplier acknowledge you have trade secrets, and they will not reveal any information about your business transactions, and perhaps not even reveal they are one of your suppliers. If a supplier will not sign a confidentiality agreement, you might decide your information is too important to risk and therefore take your business elsewhere.

Think about what information you have that makes your business run and take steps to protect the secrets of your success.

George Salmas is an attorney who has spent the majority of his 20-year career in Century City. Contact him at

Entrepreneur's Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.

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