The Secrets behind Trade Secrets

By: Idan Ghazanfari
Pictured: You (left) Chad (right)

“I really want to own my own business one day.”  Seemingly, everyone has had at least one person in their life use this sentence as their go-to ice-breaker for some poor soul at an office water cooler for the better part of five years now.  Just do it already, Chad, so we can both move on with our lives.

So, You Want to Own Your Own Business?

The common trope of wanting to own your own business might be boring anecdotally. Still, studies have shown positive results for bold coworkers who finally take the plunge into that world.  According to a study published on entrepreneur.com,

  • About 68 percent of entrepreneurs reached profitability within the first year
  • About 16 percent did so between years one and four
  • Only 8 percent reached profitability after their fifth year in business, and
  • Only 7 percent of respondents said they still were not profitable. [1]

The overwhelming indication is that the first four years are truly make-or-break years for any new company.  However, profitability is not synonymous with success.  Sadly, breaking even into the black is not the only consideration; entrepreneurship has major risks associated with the practice as well.  A bit more than 50 percent of small businesses fail within the first four years.  In fact, of all small businesses started in 2011:

  • 4 percent made it to the second year
  • 3 percent made it to the third year
  • 9 percent made it to the fourth year
  • 3 percent made it to the fifth year.[2]

Shh, it’s a trade secret…

Given the risk of failure associated with being an independent business owner, before quitting your job to team up with Chad to start your revolutionary idea for a two-sided stapler, make sure your “new” idea is original.  One potential obstacle for new entrepreneurs to hurdle through comes in a mysterious package called trade secrets.   A “Trade Secret” is an inherently nondescript label for any confidential business information which provides an enterprise a competitive edge.[3] These secrets bring economic value because they are not publicly known and come in a variety of shapes and sizes.  Some of the most common trade secrets come in the form of a company developed list/survey method, a customer list, an algorithm/formula, or even a recipe/secret ingredient(s).  Examples include the New York Times Bestseller List, the Google search algorithm, and the Colonel’s delicious crispy fried chicken.[4]

Trade secrets have certain advantages that do not come with other well-known methods of protecting information like copyrights, patents, and trademarks.  These advantages include no requirements for publicizing your invention and, theoretically, indefinite protection.  Federal laws protecting trade secrets include the Uniform Trade Secrets Act (UTSA) and the Economic Espionage Act.  Violating these laws can also come with hefty penalties, which could be devastating to small businesses, especially in their infancy.  Potential penalties include injunctions, damages (including value lost due to misappropriation and unjust enrichment), and paying attorney’s fees.[5]

Trade secret protections also exist at a state level.  Through most of Pennsylvania’s history, individual cases shaped trade secrets law.  These cases created a “common law” authority.  Common law, however, often leads to conflicting reasoning and is sometimes difficult for others to abide by.  For these reasons and others, the National Conference on Uniform State Laws drafted the Uniform Trade Secrets Act to codify and effectively replace the common law. Effective April 19, 2004, Pennsylvania joined the growing number of states which have adopted the Uniform Trade Secrets Act.

Armed with this knowledge of trade secrets, the next logical question for aspiring entrepreneurs has to be, “How do I make sure not to violate protected trade secrets?” If you have stolen, extorted, or bribed someone for protected company information, you are in violation.  If you want to double-check you aren’t utilizing or taking protected information, look to your employment agreement to see if you are bound by a duty of confidentiality not to disclose or use trade secret information. This is particularly important if you are in a leadership position.  Additionally, check any non-disclosure agreements you may have signed. Note however that employees have a fiduciary duty not to steal company information regardless of whether or not they have an agreement.

People who discover the “secret” independently, that is, without using illegal means or violating agreements or state laws, cannot be punished. For example, it is not a violation of trade secret law to analyze (or “reverse engineer”) any lawfully obtained product and determine its trade secret.[6] The moral of the story is that authentic, independent creativity is ultimately not hindered by any legislation designed to protect trade secrets.

This all may seem daunting, but don’t worry! If you feel like owning your own business, make sure to keep trade secrets in mind.


This post was originally authored on February 4, 2019 and was reproduced with the author’s permission.

Idan Ghazanfari, at the time of this post, is a third-year law student at Penn State’s Dickinson Law. He was raised in Central Illinois where he enrolled in the University of Illinois and earned a B.S. in Finance. He is interested in leveraging his undergraduate business background into private firm work with a corporate law focus upon graduation. Idan is currently serving as President of the Phi Alpha Delta legal fraternity and as a member of the Middle Eastern Law Students Association at Dickinson.

Sources:

[1] https://www.entrepreneur.com/article/315718

[2] https://smallbiztrends.com/2016/11/startup-statistics-small-business.html

[3] https://www.wipo.int/sme/en/ip_business/trade_secrets/trade_secrets.htm

[4] https://info.vethanlaw.com/blog/trade-secrets-10-of-the-most-famous-examples

[5] https://www.rocketlawyer.com/article/uniform-trade-secrets-act-ps.rl

[6] https://www.nolo.com/legal-encyclopedia/trade-secret-basics-faq.html

Author: Prof Prince

Professor Samantha Prince is an Associate Professor of Lawyering Skills and Entrepreneurship at Penn State Dickinson Law. She has a Master of Laws in Taxation from Georgetown University Law Center, and was a partner in a regional law firm where she handled transactional matters that ranged from an initial public offering to regular representation of a publicly-traded company. Most of her clients were small to medium sized businesses and entrepreneurs, including start-ups. An expert in entrepreneurship law, she established the Penn State Dickinson Law entrepreneurship program, is an advisor for the Entrepreneurship Law Certificate that is available to students, and is the founder and moderator of the Inside Entrepreneurship Law blog.