Folder with Inscription Trade Secret on Wooden Desktop

Trade Secrets in the Tech Industry

Law Offices of David H. Schwartz, INC March 25, 2024

In the tech industry, trade secrets are at the forefront of business success. They encompass the unique processes, methodologies, and proprietary knowledge that give businesses a competitive edge in fiercely competitive marketplaces. 

Trade secrets are crucial for maintaining innovation, protecting market shares, and ensuring a company's long-term success. But as the world becomes increasingly digital and interconnected, safeguarding these invaluable assets can be a formidable challenge. Intellectual property theft, cyber espionage, and employee turnover all pose significant risks to a company's trade secrets. 

To protect their trade secrets, businesses should implement robust strategies and legal frameworks that can help ensure their security. 

The Law Offices of David H. Schwartz, INC., based in San Francisco, emphasizes the critical role of trade secrets in maintaining a competitive edge within the tech industry. They offer knowledgeable support to develop comprehensive trade secret protection programs that prevent unauthorized disclosures.  

What Are Trade Secrets? 

Trade secrets refer to any form of knowledge or information that is valuable to a business and is not generally known by others.

This can include practices, designs, formulas, processes, techniques, or any information that provides a business with a competitive advantage. In the tech sector, this could range from proprietary algorithms and software source codes to customer databases and marketing strategies. Additionally, customer lists, supplier lists, business strategies, pricing information, and even advertising strategies can also be guarded as trade secrets.

Unlike patents, trademarks, or copyrights — which require public disclosure and offer temporary exclusivity — trade secrets do not require any registration or filing with government entities and can provide indefinite protection as long as the information remains confidential. This makes trade secrets a valuable asset for businesses looking to maintain their competitive edge in the long run. 

Why Are Trade Secrets Important in the Tech Industry? 

Trade secrets play a significant role in the tech industry due to their fast-paced nature and constantly evolving landscape. In this industry, companies often invest time and resources into developing unique products, services, and processes.

Protecting these innovations can enable them to profit exclusively from their proprietary knowledge. Additionally, maintaining trade secrets can also help businesses maintain control over their market share and prevent competitors from replicating their success. 

How Are Trade Secrets Protected? 

For a trade secret to be legally protected, the information must be subject to reasonable steps by the business to keep it confidential. The protection of trade secrets is essential for fostering innovation and competition and providing businesses with the confidence to invest in new products, services, or processes. 

In California, the California Uniform Trade Secrets Act (CUTSA) and the Defend Trade Secrets Act (DTSA) provide a statutory framework for trade secret protection, with specific nuances that apply to the tech industry. Under California law, businesses have several legal mechanisms they can use to protect their trade secrets:

  • Confidentiality Agreements: Employees, contractors, and business partners are often required to sign confidentiality agreements, ensuring they do not disclose or use the company’s trade secrets without authorization. 

  • Non-Compete Clauses: While generally more limited in California, non-compete clauses can sometimes be used, particularly in the sale of a business or with respect to out-of-state activities. These clauses protect trade secrets by restricting former employees from working in directly competitive roles for a given period. 

  • Security Measures: Businesses should implement reasonable security measures to protect their trade secrets. This includes physical security, like locked files, and digital security measures such as encryption. 

  • Proprietary Labels: Marking documents or data with "confidential" or "proprietary" serves as a reminder of the material’s sensitive nature and its treatment as a trade secret. 

  • Trade Secret Audit Programs: Companies are encouraged to regularly conduct trade secret audits. These audits help identify what information qualifies as a trade secret, assess the adequacy of current protection measures, and update security protocols as needed. 

Challenges for Tech Companies in Protecting Trade Secrets 

The ever-evolving tech industry, combined with the digital era's ease of sharing information, presents distinctive challenges for safeguarding trade secrets. Some common obstacles include: 

  • Cybersecurity Risks: With increasing cyber threats, businesses must continuously update their security measures to safeguard trade secrets from hacking or data breaches. 

  • Employee Turnover: Tech companies often experience high employee turnover rates, making it challenging to keep track of who has access to what information. 

  • Competitive Espionage: Competitors may engage in unethical practices, such as corporate espionage, to gain access to confidential information. 

  • Globalization: In today's interconnected world, it can be challenging to keep trade secrets confidential when working with international partners and markets, as different countries have varying legal frameworks for trade secret protection. 

Trade Secret Misappropriation 

Trade secret misappropriation occurs when an individual or entity acquires a trade secret through improper means or discloses or uses a trade secret without permission from the business. This can include theft, bribery, misrepresentation, a breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.

Misappropriation can result in significant financial losses for a business, as well as losses in its market position and competitive advantage.

Under the DTSA and the CUTSA, businesses can take legal action against individuals or entities that misappropriate their trade secrets. The remedies for misappropriation can include injunctions to prevent further misuse of the trade secret, monetary damages for actual loss and unjust enrichment, and punitive damages in cases of willful and malicious misappropriation.

Given these potential consequences, it's crucial for businesses to proactively establish and maintain strong protective measures for their trade secrets. 

How You Should Protect Your Tech Trade Secrets 

To mitigate the changes of misappropriation, the following steps provide a robust framework that businesses can use to help safeguard their trade secrets:

  1. Establish a Comprehensive Trade Secret Policy: This policy should outline what constitutes a trade secret within your organization and how these assets are handled, shared, and protected. Ensure all employees are aware of the policy and understand its importance. 

  1. Use Non-Disclosure Agreements (NDAs): NDAs are critical when sharing confidential information with employees, contractors, partners, or third parties. These agreements should clearly define what information is considered confidential, the scope of its use, and the obligations for protection. 

  1. Implement Access Controls: Limit access to trade secrets to only those who need to know. Use physical and digital access controls to safeguard sensitive information. This includes secure passwords, two-factor authentication, and rigorous access logs. 

  1. Maintain Digital Security: Regularly update your cybersecurity measures to protect against hacking, phishing, and other digital threats. Employ encryption for sensitive data, conduct regular security audits, and ensure all software is kept up to date. 

  1. Conduct Regular Training: Educate your employees on the importance of trade secret protection, including the proper handling of sensitive information, recognizing potential cybersecurity threats, and understanding the legal implications of trade secret breaches. 

  1. Monitor for Infringements: Watch for any unauthorized usage of your trade secrets. This can include monitoring the market for similar products or services and continuously scanning your network for potential breaches. 

  1. Be Prepared to Act: Have a plan in place for responding to trade secret misappropriation. This should include steps for internal investigations, securing breached information, and legal action if necessary.  

By taking these steps, tech companies can significantly enhance the security of their trade secrets. Remember, the protection of trade secrets is not just a technical challenge but a strategic necessity that requires continuous attention and adaptation. 

Consult an Experienced Attorney 

Trade secrets are a vital component of businesses within the tech industry, offering a means to secure a competitive advantage in a rapidly evolving market. If you believe your trade secrets have been disclosed without authorization, reach out to an experienced attorney like David at the Law Offices of David H. Schwartz, INC. The firm serves clients in the San Francisco Bay Area, providing seasoned legal counsel to tech companies seeking to safeguard their trade secrets.