Always Keep a (Trade) Secret

A long long time ago, my wife Devra and I developed a recipe for the most decadent brownies anyone had ever tasted. Anyone who tasted them pleaded for a copy of the recipe. Of course, we started a side business, and guarded the recipe with our lives. Even without a formal understanding at the time of trade secrets laws, we knew instinctively that if the recipe were revealed, our business would be diminished. There were many missteps in our venture: we set up a sole proprietorship under Devra's name with a D.B.A. (doing business as) called Devracakes; we should have formed an LLC or S-Corporation to protect ourselves and our personal assets from liability. We should have hired a lawyer to help us navigate FDA and Federal and local food product regulations and laws. We should have registered our trademarks. We should have acquired insurance to further protect ourselves. The business was short-lived, mainly serving film and television production companies and friends of friends until it would have required a serious investment of time and capital, but during that short time we were flying blind.

Luckily, we never registered a copyright for the recipe--recipes are only protected by copyright for the manner in which they are written; the amounts of each ingredient are not protected by copyright. A registered copyright would have likely destroyed our trade secret protection, which is different than all other intellectual property protections (patent, trademark/service mark, trade dress, copyright) in that there is no federal or state office or agency where someone can "register" a trade secret. In fact, we did something very right--we made reasonable efforts to maintain the secrecy of the information associated with the recipe. Reasonable efforts by a business can include limiting the number of people with access to the information, encrypting and password-protecting information entered into a computer, and requiring those with access to the confidential information to sign non-disclosure agreements and non-compete agreements. The revelation or use of trade secret information can bring irreparable harm to the owner of the information.

New York actually has no statute that explicitly defines a trade secret. Furthermore, unlike most states in the U.S., New York does not subscribe to the Uniform Trade Secrets Act, which defines a trade secret as: "information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

In New York, there are a number of factors to consider to determine whether information qualifies as a trade secret (EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d. 299, 314 (S.D.N.Y. 1999)):

  • The extent to which the information is known outside of the business.

  • The extent to which it is known by employees and others involved in the business.

  • The extent of measures taken by the business to guard the secrecy of the information.

  • The value of the information to the business and its competitors.

  • The amount of effort or money expended by the business in developing the information.

  • The ease or difficulty with which the information could be properly acquired or duplicated by others.

Notice that information is not just a formula or recipe; it's not restricted to Devracakes Brownies or Coca-Cola's secret ingredient. Marketing strategies, computer programs, pharmaceuticals, and so many other key confidential elements of a given business can be protected by trade secret enforcement. And any startup that depends on a "secret sauce," whether figurative or literal, would be wise to draw up a plan of attack that begins with the hiring of an attorney to guide the business and prevent the proverbial cat from escaping the proverbial bag.

Related: Why Do Entertainment Stars Like Katy Perry and Taylor Swift Go After Small Businesses for IP Infringement?