Proprietary information, also known as a trade secret, is information that a company wishes to keep confidential or secret from those outside the company. Proprietary information may include secret formulas, processes, and methods used in production. It may also include a company's business plans, marketing strategies, salary structure, customer lists, contracts, and computer system. In some cases the special knowledge and skills that an employee has learned on the job are considered to be a company's proprietary information.

There is no single standard by which to determine if information is proprietary or not. Some 39 U.S. states have laws that define a trade secret and the conditions under which it is considered to have been stolen. In general, for information to be considered proprietary, companies must treat it as such. Information that is readily available in public sources will not be treated by the courts as proprietary. The body of case law covering proprietary information and trade secrets recognizes a company's right to have proprietary information and provides it with remedies when its trade secrets have been misused or appropriated illegally.

There are several ways for a company to protect its proprietary information. Key employees with access to proprietary information may be required to sign restrictive covenants, also called noncompete agreements, that prohibit them from competing with their employer for a certain period after leaving the company. These restrictive covenants are usually enforced by the courts if they are reasonable with respect to time and place and do not unreasonably restrict the former employee's right to employment. In some cases the covenants are enforced only if the employee has gained proprietary information during the course of his or her employment.

Companies may also develop security systems to protect their proprietary information from being stolen by foreign or domestic competitors. Business and industrial espionage is an ongoing activity that clandestinely seeks to obtain trade secrets by illegal methods. A corporate system for protecting proprietary information would include a comprehensive plan ranging from employee education to data protection to securing phone lines and meeting rooms. In some cases a chief information officer would be responsible for implementing such a plan.

An employee who divulges a trade secret is committing a tort by violating a duty of loyalty that includes nondisclosure of proprietary information. Once the employee leaves the company, however, that duty no longer exists. For this reason companies often require employees to sign a restrictive covenant, or noncompete agreement.

In addition, the courts generally consider it unfair competition for one company to induce employees of another company who have acquired unique technical skills and secret knowledge during their employment, to terminate their employment and use their skills and knowledge for the benefit of the competing firm. In such a case the plaintiff company could seek an injunction to prevent its former employees and the competing company from using the proprietary information.

Case law has given rise to the doctrine of" inevitable disclosure," which recognizes that certain key employees have learned proprietary information and will carry it with them when they leave their employer. In cases where a key employee has left one company to work for a competitor, the courts have attempted to balance the original employer's right to protect its proprietary information against the former employee's fundamental freedom to change employers.

After a high-profile case involving the vice president and group executive in charge of purchasing for General Motors, who left GM to work for Volkswagen in Germany, the U.S. Congress passed the Economic Espionage Act of 1996. This act made it a federal criminal offense to steal trade secrets. According to the American Society for Industrial Security, theft of proprietary information and trade secrets costs U.S. companies approximately $300 billion a year.

[ David P. Bianco ]


Mathiason, Garry. "What's in Your Head Can Hurt You." Fortune, 20 July 1998, 153.

Seglin, Jeffrey L. "Boundaries to Stealing All Those Bright Ideas." New York Times, 17 January 1999, 6.

Shook, Carmie. "Information Is Property." Forbes, 23 February 1998, 104.

Silverman, Rachel Emma. "The Millennium—Trade and Commerce: Stop, Thief!—Business Espionage Has Been Common for as Long as There Have Been Secrets Worth Stealing." Wall Street Journal, 11 January 1999, R50.

User Contributions:

Comment about this article, ask questions, or add new information about this topic: