Risky Business: Start-ups and the Law

“I really want to own my own business one day.”  Seemingly, everyone has at least one person in their life that has had this sentence as their go to ice-breaker for some poor soul at their office cocktail party for the better part of 5 years now.  Just do it already Chad so we can both move on with our lives.

The common trope of wanting to own your own business might be boring anecdotally, but studies have actually shown positive results for the bold coworkers that have finally taken the plunge into the independent 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 or go out of business 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]

Given the inherent risk of failure associated with being an independent business owner, before you go head first and quit your office job to team up with Chad from accounting to start your revolutionary new idea for a two-sided stapler, you should make sure your “new” idea is actually original.  One potential obstacle for new entrepreneurs to hurdle comes in the mysterious package of trade secrets.  If you’re scratching your head skeptically trying to reassure yourself that you know what a trade secret is, you are not alone as it is a rather complicated topic.  Basically, a “Trade Secret” is an inherently non-descript label for any confidential business information which provides an enterprise a competitive edge.[3]  These secrets bring economic value due to the fact that 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, 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 to them 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 at least, indefinite protection.  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 both value lost due to misappropriation and unjust enrichment), and paying attorney’s fees.[5]

Trade Secret protections additionally 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 the knowledge of what a trade secret is and how they are protected, the next logical question of aspiring entrepreneurs logically has to be “How do I make sure to not violate protected trade secrets?”  Obviously, if you have stolen, extorted, or bribed someone for protected company information, you are in violation.  However, if you are currently working for a company and 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, especially if you are in a leadership position.  Additionally, check any non-disclosure agreements you may have signed.

This all may seem daunting, but don’t worry!  There is one group of people that cannot be stopped from using information protected under trade secret law. 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.  If you feel like owning your own business make sure to keep trade secrets in mind!

 

[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