For an entrepreneur starting his or her own business, intellectual property is often the most valuable asset they have. Yet startup companies often need to share ideas and information with prospective investors or business partners. It’s important to understand the legal options for protecting your trade secrets before and after your new business is up and running.
The term “intellectual property” can refer to a number of proprietary entities or rights, including patents, copyrights, trademarks and trade secrets. A trade secret is confidential information that can be used in operating a business and that is sufficiently valuable to afford others a competitive advantage. Examples of a trade secret include formulas, devices, methods, techniques and processes.
The value of a trade secret lies in the fact that it is not publicly available. Therefore, protecting it against theft or misappropriation is critical. In contrast to the legal rights granted to patent holders, which require public disclosure of an invention, a startup can lose legal rights to its most valuable information, or an entire portfolio of trade secrets, based on the company’s failure to carefully maintain the information.
There are several steps entrepreneurs can take to safeguard sensitive information that does not fall under patent, trademark or copyright laws. Keep in mind that some of your information is not suitable for copyright or patent protection, and you could lose trade secret rights by disclosing them in a copyright or patent application filing:
Utilize a non-disclosure agreement: Before you share ideas or proprietary information with prospective investors, business associates, contractors or employees, have them sign a non-disclosure agreement (NDA). Agreements should detail the length of the agreement, the types of information covered and all receiving parties that are covered. Make sure the duty to maintain confidentiality covers a sufficient period of time, and that only those with a legitimate need to know are given access to the information. Each NDA should be customized to the company and situation, so it's important to get expert advice to ensure your agreement gives you adequate protection.
Not everyone you meet with will sign a NDA. For example, venture capitalists are exposed to so many new business ideas they often will not sign NDAs to avoid putting themselves at risk of lawsuits. It also may be impractical to have audience members sign NDAs if you are speaking at trade shows or in academic environments. In cases like these, a good rule of thumb is to avoid sharing any information that could seriously harm your startup.
Do your due diligence when hiring: Whether you are hiring staff or partnering with an independent service provider, it is critical to do your due diligence. Conduct background checks on potential hires, put trade secret confidentiality agreements in place and emphasize the importance of the agreements being signed. The goal is to prevent the possibility of accidental exposure as well as intentional theft.
Create employee awareness: It may be difficult to accept that your business partners or staff will want to steal information that is critical to your startup’s success. However, you need to establish and enforce comprehensive policies and processes to educate your team about the consequences of disclosing trade secrets and empower them to protect valuable company information.
Clarify what trade secrets must be protected and why. Establish safeguards to prevent inadvertent exposure, and make sure employees understand that there are state and federal statutes, such as the Economic Espionage Act, that criminalize the theft of trade secrets. You may also be able to obtain a civil injunction barring former employees from future work that would expose your company’s trade secrets.
Managing trade secrets can help startups prevent competitors from accessing information that is vital their success. If you have questions regarding safeguarding proprietary information or other legal aspects of starting your own business, we are here to help. Please call us at 973-509-8500 x213 or email LFarber@LFarberLaw.com.
The contents of this writing are intended for general information purposes only and should not be construed as legal advice or opinion in any specific facts or circumstances.