Proprietary information, also known as a trade secret, is information that a company wishes to keep confidential or protect from those outside the company. The Uniform Trade Secrets Act (UTSA) defines trade secrets as "information that derives independent economic value from not being generally known, and that is kept secret through reasonable actions." Proprietary information can include secret formulas, processes, and methods used in production. It can also include a company's business and marketing plans, salary structure, customer lists, contracts, and computer systems. 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.
"Simply put, a trade secret is unpublished knowledge that, unlike a patent, can be kept forever if it is maintained as a secret," Keith Orum wrote in Beverage World. "One common characteristic of a trade secret is that it gives its owner an advantage over the competition in the marketplace. Other characteristics of a trade secret are that it can't be easily 'reverse-engineered,' and that its secrecy must be aggressively protected by its owners."
Although legal protections exist for inventions (patents), creative works (copyrights), and distinctive names and symbols (trademarks), no specific form of legal protection is available for trade secrets. In fact, there is no single standard by which to determine whether or not information is proprietary—some 39 U.S. states have different laws that define a trade secret and the conditions under which it is considered to have been stolen. But there is a significant body of case law covering proprietary information and trade secrets. This legal framework recognizes a company's right to have proprietary information and provides the company with remedies when its trade secrets have been misused or appropriated illegally.
In some ways, the lack of specific forms of protection makes it easier for small businesses to protect their proprietary information. No complicated forms or formal registration are required, for instance, and trade secret protection lasts indefinitely—or at least as long as the information remains secret. In other ways, however, the lack of specific forms of trade secret protection hurts small businesses. It does not prevent competitors from determining the trade secrets by examining products already on the market, for example, and it does not prevent others from using the proprietary information once it is uncovered. Compared to other legal forms of protection, it also makes it more difficult to prove a violation of rights.
In general, for information to be considered proprietary, companies must treat it as confidential. Thus, information that is readily available in public sources will not be treated by the courts as proprietary. In addition, proprietary information should give the firm some sort of competitive advantage and should not be generally known outside of the firm. A company must be able to demonstrate that it has taken every reasonable step possible to keep the information private if it hopes to obtain court assistance in protecting its rights. "Courts require that trade secret holders take 'reasonable' steps to maintain the secrecy of their trade secrets," Randy Kay wrote in the San Diego Business Journal. "Courts do not require that companies take all measures conceivable to maintain the secrecy, nor do courts require absolute secrecy. Rather, the confidentiality measures must be 'reasonable under the circumstances.' "
There are several steps a company can take to protect its proprietary information. Key employees with access to proprietary information may be required to sign restrictive covenants—also called confidentiality, nondisclosure, or noncompete agreements—that prohibit them from revealing that information to outsiders or using it to compete with their employer for a certain period of time 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.
In addition, the courts generally consider it unfair competition for one company to induce people who have acquired unique technical skills and secret knowledge during their employment at another company 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.
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 restricting employee access, to data protection, to securing phone lines and meeting rooms. In some cases a chief information officer (CIO) would be responsible for implementing such a plan.
As Kay noted, other means of demonstrating reasonable efforts at secrecy include marking documents as "confidential," prohibiting people from making photo copies of trade secret documents or removing them from company premises, limiting the access of employees to sensitive materials, creating a written trade secret protection plan, and bringing suit for the theft of trade secrets as required.
On the other hand, small businesses are unlikely to prevail in cases involving trade secret protection if they sell a product or publish technical literature that discloses the trade secret, expose the trade secret to employees or colleagues who have not signed confidentiality agreements, publish information about the secret in professional journals or on the Internet, or disclose the trade secret in public documents such as court records and government filings.
"How to Protect Yourself from Employees Who Become Competitors." Profit-Building Strategies for Business Owners. April 1993.
Kay, Randy. "Guide to Trade Secret Protection—Maintaining Secrecy." San Diego Business Journal. June 5, 2000.
"Keeping Secrets Secret." Small Business Reports. February 1994.
Lickson, Charles P. Legal Guide for Small Business. Crisp Publications, 1994.
Lynn, Jacquelyn. "Shhh! Keep It Quiet: Revealing Trade Secrets Could Cost You Your Business." Entrepreneur. December 1995.
Orum, Keith. "Trade Secrets Made Simple." Beverage World . October 1995.