Protecting “trade secrets”

In my previous article, I discussed the unenforceability of non-compete agreements as applied to employees. This article relates to a similar issue – trade secrets.

A trade secret is information, which includes formulas, patterns, programs, customer lists in certain situations, devices, techniques or processes that “(1) Derives independent economic value...from not being generally known to the public or to 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” (Civil Code section 3426.1)

It is not enough to simply show that the information has value. In order for information to be classified as a trade secret, other businesses must be unaware of the information and must be able to put that information, if it were known to them, to beneficial use (Abba Rubber Co. v. Sequist (1991) 235 Cal.App.3d 1). Courts have outlined additional requirements for information to be considered a trade secret. The information must be (1) closely guarded, (2) an investment of a considerable amount of time and expense by the employer, and (3) not readily available to the public (State Farm v. Dempster (1959) 174 Cal.App.2d 418).

The following are some examples of valid trade secrets:

• Customer lists that have been compiled with significant time and/or money. Such a list would be a trade secret if the employer has refined a general customer list by noting particular products or other preferences for each customer
• Methods or sequences of manufacturing
• A product formula that is closely guarded (i.e. Coca-Cola recipe)
• The identity of a source of raw material not generally known in the industry
• Compensation and other financial data
• Marketing strategies
• Labor relations strategies
• Research into new materials or processes, and
• Pending projects

Trade secrets are of course different from general knowledge and skills. As long as an employee does not use any of the previous employer’s trade secrets, the employee is free to use the general knowledge, skill, and experience acquired from prior employment, and even solicit some of the same clients, in order to better succeed when working for later employers (American Alloy Steel Corp. v. Ross (1957) 149 Cal.App.2d 215). As outlined in last month’s article, non-compete agreements are only enforceable if they relate to the sale of a business or partnership.

As outlined above, the legal standard for properly classifying information as a trade secret is high. Not every “secret” is legally a “trade secret.” Yet given the importance of protecting valuable company information, becoming conversant with the rules regarding trade secrets can reap large rewards.