June 2010
China IP News
By John F. Hornick
Authored by John F. Hornick
Trade secrets and confidential information are the lifeblood of many companies. Nearly all companies have them. This article is a guide to what Chinese companies need to know about U.S. trade secret law.
Many businesspeople and business documents use the terms trade secret, confidential information, and proprietary information interchangeably, or use them inconsistently. Trade secrets and confidential information are in fact a subset of the potentially much larger class of proprietary information.
Trade Secrets. To be a trade secret, the information must not be generally known to the public or to people in the relevant industry. The information must be sufficiently secret to confer an actual or potential business advantage on the company that owns it. Steps must be taken, which are reasonable under the circumstances, to maintain the secrecy of such information.
Confidential Information. All trade secrets are confidential information, but business information that may not rise to the level of a trade secret may be deemed confidential within the company.
Proprietary Information. All trade secrets and items of confidential information are also company proprietary information. However, proprietary information can include information that is not secret in any way, such as copyrighted information and the subject matter of patents. In fact, a company may view as proprietary virtually everything it does or creates, even if some of it is not protectable as a form of IP.
Careless use of these terms can lead to confusion or misunderstanding. Moreover, if all of the terms are used in an agreement, courts may infer that each term has a separate meaning even if the parties’ intent was that they have interchangeable meanings.
The company should regularly assess all company information at each operational level to determine which information should be maintained as trade secrets, and to take appropriate steps to maintain the secrecy of such information. The company should maintain an up-to-date inventory of its trade secrets.
Documentation. Trade secrets should be documented whenever possible, in paper or electronic form. Company executives may prefer not to document trade secrets for fear that some important elements could be inadvertently omitted. The better approach is to devote the necessary time to identifying trade secrets and to document both their status as secrets and their value to the company.
In Lynchval Systems Inc. v. Chicago Consulting Actuaries Inc., 49 U.S.P.Q. 2d 1606 (N.D. Ill. 1998), the plaintiff lost on the defendant’s motion for summary judgment because it failed to prove that it actually viewed and treated as company secrets the alleged trade secrets in question before filing suit. Courts may require the trade secret owner to identify its alleged secrets before discovery relating to the defendant’s alleged misappropriation can begin. Thus, the company must be prepared to identify its trade secrets and to show that it has in fact viewed and treated them as such.
Notice of Confidentiality. All trade secret documentation should be marked as confidential information. An example of such a notice, to appear on the title page of every trade secret document in either paper or electronic form, is this:
CONFIDENTIAL
This document contains trade secrets or otherwise confidential information owned by the Company. Access to and use of this information is strictly limited and controlled by the Company. This document may not be copied, distributed, or otherwise disclosed outside of the Company’s facilities except under appropriate precautions to maintain the confidentiality hereof, and may not be used in any way not expressly authorized by the Company.
The words “Confidential Information of the Company,” or similar language, should appear on all other pages of such documents.
When trade secrets cannot be marked as such, they should be designated as confidential by a method appropriate under the circumstances. For example, physical facilities containing trade secrets may be designated as confidential by posting appropriate signs. Appropriate labels should be placed on hardware. Electronic media, e-mails, and electronic files containing trade secrets also should bear an appropriate notice of confidentiality. The following sample notice of confidentiality can be modified as appropriate under the circumstances.
CONFIDENTIAL
This equipment contains trade secrets or otherwise confidential information owned by the Company [or: Trade Secrets or otherwise confidential information owned by the Company are used in this area]. Access to and use of this [equipment/area/information] is strictly limited and controlled by the Company. Such trade secrets may not be used or disclosed outside of the Company’s facilities except under appropriate precautions to maintain the confidentiality hereof, and may not be used in any way not expressly authorized by the Company.
Questions regarding how to mark or otherwise designate documents or other information as trade secrets should be directed to knowledgeable legal counsel.
Every company should appoint a trade secrets compliance officer and/or committee to develop and manage a trade secret policy and a set of trade secret procedures tailored to the company. The purpose of the policy is to inform the employees of the existence of the company’s trade secret procedures and their responsibilities under them. The purpose of the procedures is to set forth in detail the company’s rules for managing trade secret information, people with access to such information, equipment used with such information, disclosing company trade secrets to third parties, and receiving, handling, and protecting trade secret information received from third parties. Such policies and procedures should be developed in close association with trade secret counsel. Examples of such procedures are set forth below.
Handling and Storage. Materials containing trade secrets should be required to be marked, stored, and handled with sufficient care to maintain their confidentiality. Undocumented trade secret information also should be maintained with sufficient care to maintain its confidentiality.
Documents, physical objects, and undocumented information, such as processes, that contain or constitute trade secrets should not be left in plain view, nor be accessible to any persons—particularly nonemployees, such as visitors—who are not authorized to have access to the confidential information and who have not signed a confidentiality agreement with the company.
Employees should not be allowed to download or transmit trade secrets to their home computers, remove materials containing trade secrets from the company premises, or disclose trade secrets to persons under no obligation of confidentiality to the company, except with prior express written permission of an officer or desig¬nated employee of the company with authority over such trade secrets.
Unneeded paper or electronic copies of documents containing trade secrets should be destroyed.
Access Restriction. Documents containing trade secrets should be maintained in secure locations, when not in use and after business or work hours. When appropriate, documents containing trade secrets should be maintained in a limited number of copies. Authorized persons accessing such copies should be required to sign them out, sign them in, not duplicate them, and maintain possession of them only for a specified period of time.
Trade secret information stored in computers, in magnetic media, or on other devices should be password or copy protected and/or encrypted, and should not be accessible to unauthorized persons or through the Internet, e-mail, or any other form of electronic communication.
Visitors to the company’s facilities should be required to sign in and sign out, should be escorted by a company employee at all times, and should wear badges identifying them as visitors. Company employees with authorized access to secret areas should not be permitted to take visitors to such areas unless those visitors have signed an appropriate confidentiality agreement.
Trade secrets should not be disclosed to any person owing no obligations of confidentiality to the company.
Company employees sometimes may wish to present a speech or technical paper containing trade secrets. Any such presentations to any persons not under an obligation of confidentiality to the company should be authorized in advance in writing by an officer of the company.
If any such speeches or papers relate to the subject matter of any joint venture between the company and any other entity, or if they include any information that may be considered proprietary by any other entity, the company should seek legal advice regarding the disclosure of such information.
Demonstrations of company products or processes may be made at trade shows, in customer meetings, or in other situations. However, trade secret aspects of such products or processes should not be revealed unless the recipients of the demonstration have signed a confidential disclosure agreement.
Companies should never reveal more trade secret information than required under the circumstances. Ideally, all disclosures should be made only under a nondisclosure agreement. However, differences in the bargaining power of the parties can substantially reduce or even eliminate the value of such an agreement. The more sophisticated a company is, the more likely that it will require the disclosing party to accept its own nondisclosure agreement, which may so strongly favor that company that the disclosing party is virtually unprotected. Companies with sufficient bargaining power also may refuse to sign nondisclosure agreements.
Trade secrets may be disclosed in nonwritten form during discussions between the company and third parties. Such disclosures could be verbal, or they could be made through the exchange of sample devices or products. In such situations, it is important that the trade secret owner either not disclose secrets at all, or do so only under an agreement providing that verbal or other nonwritten disclosures shall be treated as secret.
Such an agreement should require that verbal or other nonwritten disclosures be memorialized before disclosure. However, it should also provide that if verbal or nonwritten trade secrets are not memorialized before they are disclosed, they should be described and reduced to writing within a certain number of days after disclosure. The agreement should also provide that the receiving party's obligation to preserve such secrets is contingent upon the disclosing party identifying the secrets and reducing them to writing.
The company should ensure that trade secrets are accessible only to employees with a need to know them, and then only to the extent necessary for such employees to carry out their duties. Access should be limited to the particular materials containing the information the employee needs to know.
As a condition of initial or continued employment, all company employees should be required to sign an employment agreement setting forth their obligations with respect to the company’s trade secrets and other matters. Such agreements should not be confidential so that employees can show such agreements to future employers. The permissible scope and enforceability of such agreements varies from state to state. The company should enforce such agreements to the fullest extent of the applicable law. Failure to do so could affect the company’s right or ability to enforce the same or another agreement in other situations.
Employees should be reminded periodically of their confidentiality obligations, and of the fact that maintaining such obligations is a condition of their employment. Such reminders should be given at least twice per year.
Arriving Employees. All new employees should be required to sign the company’s standard employment agreement, which should evolve with changing circumstances. Someone from the company’s human resources (HR) department should be designated to meet with each new employee soon after his/her start date. The HR representative should explain the company’s trade secret policy and provide the new employee with a copy of it.
The employee should be instructed not to bring any proprietary information from any prior employer into the company. The HR representative should prepare a report documenting the employee’s comments during the interview. If the employee says that he/ she has retained proprietary information from a prior employer with whom a confidentiality agreement was signed, if the employee will be performing work of substantially the same nature as for any prior employer, or if the employee disagrees with any of the interview points, the company should seek legal advice immediately so that appropriate action can be taken.
The company should also consider contacting an employee’s former employer when, in the judgment of the appropriate officer of the company and legal counsel, such contact is likely to reduce the risk of a dispute between the company and any previous employer. If the employee has signed a confidentiality agreement with a former employer, the company should review that agreement unless the terms of the agreement are confidential.
Departing Employees. A designee of the HR department should meet with each employee departing the company prior to that person’s last day of employment. If the employee leaves the company abruptly or without notice, the HR representative should still try to speak to the employee. The HR person should conduct an interview similar to the one pertaining to new hires, emphasizing the outgoing employee’s continuing legal obligations under the company’s confidentiality agreement and trade secret policy and procedures. Again, the HR representative should prepare a report of the meeting.
If the employee says that he/she has retained proprietary information from the company, if the employee will be performing work of substantially the same nature for the next employer, or if the employee disagrees with any of the interview points, the person conducting the interview should seek legal advice immediately. The company should contact an employee’s next employer when, in the judgment of the appropriate officer of the company and legal counsel, such contact is likely to reduce the risk of a dispute between the company and the next employer, or when such contact appears to be necessary to reduce the risk that the employee or his or her new employer will learn or use any of the company’s trade secrets.
When an employee is terminated or laid off, the company should take steps, before informing the employee of such termination or layoff, to secure trade secrets to which the employee has had access.
This article is intended to serve only as a guide. Particular trade secret situations are very fact-dependent. Some are highly complex. Many companies could find the approach set forth in this article inadequate for their needs. Thus, the guidance provided here is no substitute for obtaining legal advice from experienced trade secret counsel and tailoring a set of trade secret procedures to the company.
This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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