Impact | Business Risk Management Blog

When it comes to protecting a company’s competitive advantage, it is important to know the difference between confidential information and trade secrets. Knowing the difference allows businesses to design and implement the appropriate measures to protect their information and secure their competitive advantage.

The emerging market of 3D printing is primed for trade secrets and the disputes over who “owns” these trade secrets. Shared ideas, broken business deals, and employee mobility fuels most of these disputes. The Defend Trade Secrets Act (DTSA), a newly enacted federal trade secret act, defines the term “owner” as “the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed.”

To some it may seem obvious, but before a business can take reasonable steps to protect its trade secrets, it must be able to identify which of its intellectual assets are protectable as trade secrets. A business may not differentiate between trade secrets and confidential information, but there is a difference and a business should differentiate between the two (see our previous post on the differences here). A business may believe that whatever steps it takes to protect its confidential information will be sufficient to protect all of its trade secrets. However, that approach can prove harmful in practice, as the practical measures to protect the intellectual assets may differ depending on the nature of the assets. 

The following is a non-exhaustive checklist of steps that a business might take to protect information it considers to be a trade secret. While these steps will provide a good overview, it is highly recommended that any business consult with an attorney familiar with litigating trade secret matters to develop a robust plan to protect trade secrets that will work for your business.

In all but three states, trade secrets are defined under some variant of the Uniform Trade Secrets Act (UTSA)¹. Trade secret information is a subset of confidential information. All information that qualifies for trade secret protection is confidential information. But not all “confidential information” falls within the coverage of the UTSA.

Almost daily, we hear about cyber attacks on big businesses and government agencies. But the attacks are not isolated to the big entities. Your business’s most valuable trade secret information more than likely resides in an electronic database that is vulnerable. Yet probably the greatest threat to that database may come from within: your own employees.

The talent market is increasingly fluid, with many businesses following the talent development mantra “if you can’t beat 'em, hire 'em.” Poaching from a competitor is not without risk. However, there are reasonable steps that should be taken to reap the rewards of the fluidity of today’s talent pool while managing the risks. Two principal risks in “poaching” are trade secret misappropriation and interference with a contract. Some employers seek to build on the lessons learned by their competition, and to do so does not inherently violate the law. However, an employer may misappropriate trade secrets by obtaining trade secrets from its new hires.

Woody Allen once said, “Showing up is 80 percent of life.” But this observation, while often apropos, is not applicable if one’s objective is to obtain insurance coverage for IP infringement claims.

Coverage can often be found for those claims if they are viewed through the right lens. But recent insurance coverage decisions highlight the nuance required to present such a claim in a way that brings it potentially within the coverage. The “potentially within the coverage” is magic that triggers the insurer’s duty to provide a defense in what can be expensive litigation. And even if a claim is potentially covered, coverage will be lost if the claim is not timely asserted. So showing up late may be no better than failing to show up at all.

Two recent appellate decisions¹, one in the Fifth Circuit and one in Illinois, highlight the value to policyholders from the aggressive pursuit of insurance coverage in claims arising from allegations of the infringement of intellectual property rights. In most insurance policies that afford advertising injury coverage, coverage is generally excluded for injuries “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” In other words, the policies, on their faces do not provide coverage for the infringement itself. However, this exclusion from coverage does not apply when the infringement is in the policyholder’s “advertisement.” In other words, a claim to coverage, both for the cost of defense and indemnification for settlement or judgment, can be developed to the extent that an argument can be made that the infringement at issue is actually found in the “advertising.” By taking expansive approaches to what constitutes an “advertisement,” the policyholders in Kipp Flores Architects and Creation Supply obtained insurance coverage for their infringement of intellectual property rights by pointing to the use of the infringement in the marketing of the product.

Buyer beware as the asset protection afforded by non-disclosure and non-solicitation agreements signed by prospective purchasers may not survive the sale. This issue was addressed in a recent federal decision in Illinois offering some cautionary reminders for business buyers. In this case, Keywell LLC (“Keywell”) sought to sell its assets. Croniment Holdings, Inc. (“Croniment”), a bidder for Keywell’s assets, signed a non-disclosure agreement (the “NDA”) which prohibited Croniment from disclosing Keywell confidential information and prohibited Croniment from hiring any of Keywell’s employees with whom Croniment came into contact during negotiations. Keywell and Croniment entered into an asset purchase agreement by which Croniment would serve as the stalking horse bid for Keywell’s assets in bankruptcy.