It’s all About the Trade, Part II: What Constitutes a Trade Secret?

Congratulations to all winning teams at this past weekend’s Startup Weekend Honolulu.  I look forward to meeting you all. Good job by The Box Jelly for hosting a great event! So last week was trade name versus trademark.  Today is another area that a lot of startups get confused.  They find a programmer, designer, consultant, and other similar professions to help them bring their idea to reality, but want them only as an independent contractor, and if they have enough capital, possibly an employee.  However, no ownership, thus how do they protect their most sacred moneymaking idea that they slaved over a weekend trying to pitch?

Make them sign a nondisclosure agreement (NDA), is usually the first conclusion, then when a Client comes to me to draft them a NDA. I then ask them what they want to protect with the NDA, and they then to proceed to tell me everything including the kitchen sink . . . isn’t everything internal a trade secret?

No, just because you don’t want your competition to know does not make it a trade secret.

So What IS a Trade Secret?

Where we start off with trade secrets is the legislative definition, which is found in Hawaii at HRS §482B-2. This is the definition section under the Uniform Trade Secrets act and it states the following:

"Trade secret" means 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, and not being readily ascertainable by proper means by, 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.

So right off the bat, the definition indicates why a lot of business owners feel they have a trade secret.  Their information is precious (to them), they created a “new” “method” or “technique” (which was tried already and the market doesn’t think it is valuable), etc . . . . As you can tell by my commentary in the parentheses a trade secret has to be more.

Let’s use the famous example of a trade secret The Coca-Cola Company’s formula for coca-cola. First, it satisfies the first element. It’s a formula.

Second, the formula must have an independent economic value from not being known. In this case, it is clear that it does. No one has successfully replicated Coke’s formula AND it’s major rival Pepsico does not have the same formula.  Through its distribution deals and keeping the formula unattainable by normal means (such as experimenting) they have built a beverage empire.

Lastly, Coke has kept this secret for so many years, which supports the last element, which is the efforts to maintain secrecy.  At this point it may be beyond reasonable, but the efforts by Coke to maintain the correct amounts to the formula are legendary.  From bank vaults, to shopping around to different suppliers, etc . . . you name it, they have probably created an elaborate strategy to foil would be corporate spies.

What does this Mean for a Startup?

If you want to make a sound NDA, then you need to know what your company is all about.  Before, you think that is easy, remember you have gone around itching the idea to get investors, employees, etc . . . what have you told them?  Remember it’s a balancing act of trying to sell the idea without giving up the process, the secret has to be generally not know.

This brings me to another situation where people rely on public data, government information, etc . . . I will give them they have come up with a clever way to put disparate knowledge together, but if someone can readily replicate that “cleverness” on their own their really isn’t anything to protect.

Finally, the shotgun approach to NDA use should not be your method of maintaining secrecy.  Medium and large companies go overboard and have their janitors sign them when the have no intention of enforcing it against them and they aren’t privy to the company’s core secrets.  So for you, don't make everyone you come in contact sign it, especially investors. They aren't going to do it.

The rule of thumb is what your trying to protect your core strength and are you deriving that strength because no one else has figured it out.  This includes things like next year’s marketing plan, your competition not knowing how you will expand your product lines is a) valuable b) it is not known and c) if you are keeping it under lock and key, encrypted files, etc . . .  then you do have a trade secret. Obviously, it will no longer be a secret as to when you role out these new product lines, but before that time you need they are worth protecting. Then on the NDA side you only make people sign one if they can make use of your idea on their own (i.e. an engineer who knows the process to make a new material).

Anyway, the lucky winners from Startup Weekend Honolulu will get this information in a lecture and more regarding contracts, HR, Internet laws, and organizing their company as part of their winning package as provided by my firm.  So I urge you participate in Startup Weekend, as you may be the one asking, can I protect my business idea?

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.