Originally Published MX May/June 2005
GOVERNMENTAL & LEGAL AFFAIRS
Trade Secrets: What Medtech Companies Need to KnowTrade secrets are important weapons in the IP arsenals of medical device executives.
John F. Hornick
The formula for Coca-Cola may be the world's most famous trade secret. The company's success in keeping that secret is probably a large factor in its long-term, and current, market standing. Medical technology companies often have trade secrets, too—not so well-known as Coke, but equally essential to the companies' ongoing success.
Famous or not, trade secrets and confidential information are the lifeblood of many companies. In fact, nearly all medtech companies have them.
Patents and copyrights, which are creatures of federal statutes, and trademarks, which are creatures of common law with statutory benefits, are the more visible forms of corporate intellectual property (IP). But residing quietly in the background, and often supporting basic elements of its infrastructure, are a company's trade secrets and confidential information. This article is a guide to what medtech industry executives need to know about U.S. trade secret law. The emphasis, of course, is on how to protect trade secrets.
Terminology
Many businesspeople and business documents employ the terms trade secret, confidential information, and proprietary information interchangeably, or use them inconsistently. Although the first two terms may have the same meaning in certain contexts, they may not mean the same thing in other contexts, and the last term often may be used generically. Trade secrets and confidential information are in fact subsets of the potentially much larger class of proprietary information.
Trade Secrets. Types of information encompassed by the category of trade secret include engineering information; methods, processes, and know-how; tolerances and formulas; business and financial information; computer programs (particularly source code) and related information; pending, unpublished patent applications; business plans; budgets; methods of calculating costs and pricing; customer and supplier lists; internal marketing data; customer- and supplier-related data; products and services in the research or development stage; collections of data; and certain other information relating to the business.
To be a trade secret, the information in question must not be generally known to the public or to persons outside of the company who are knowledgeable about its general subject matter. The information must also be sufficiently secret to confer an actual or potential economic or business advantage or benefit upon the entity that possesses it.
Confidential Information. All trade secrets are confidential information, but business information that may not rise to the level of a trade secret may also be deemed confidential within the company. This includes any documents or physical objects marked as confidential; categories of documents and objects designated as confidential; physical areas designated as confidential; procedures, processes, and methods; computer programs; and any other information, objects, locations, and so on, that the company wishes to treat as confidential by any means.
Proprietary Information. All trade secrets and items of confidential information are also company proprietary information. However, the realm of proprietary information can include as well information that is not secret in any way, such as copyrighted information and the subject matter of patents. In fact, a company may view as proprietary virtually everything it does or creates, even if some of it is not protectable as a form of IP. A philosophy of customer management, for example, may be considered proprietary even though that philosophy cannot be protected in any way.
Careless use of these terms can lead to confusion or misunderstanding, unfortunately. Moreover, if all the terms are used in an agreement document, courts may infer that each term has a separate meaning even if the parties' intent was that they have interchangeable meanings, or, worse, that in their loose application of these terms the parties did not know what they meant by them.
Identification of Trade Secrets
The company—that is, its directors, officers, supervisors, and employees—should regularly assess all company information within the purview of each operational level in order to determine which pieces of information should be maintained as trade secrets, and to take appropriate due-diligence steps to maintain the secrecy of such information. It is advisable to err on the side of maintaining the secrecy of company information.
Trade secrets should be identified as such, and their confidential nature clearly marked as far as that can be done.
Documentation. Trade secrets should be documented whenever possible, in paper or electronic form. Company executives might prefer not to document certain trade secrets for fear that some important elements could be inadvertently omitted from the defining documentation process. However, a better approach to avoiding exposure is to devote the necessary time to identifying trade secrets and to document both their status as a secret and the value that their secret status confers on the company.
In a cautionary lawsuit, the plaintiff lost on the defendant's motion for summary judgment because it failed to meet its burden of persuasion that it actually viewed and treated as company secrets the alleged trade secrets in question before filing suit.1 Courts adjudicating litigation may require the trade secret owner to identify its alleged secrets before discovery relating to the defendant's alleged misappropriation can begin. Thus, a company always has to be prepared to identify its trade secrets and to show that it has in fact viewed and treated them as such.
Notice of Confidentiality. All trade secret documentation should be accompanied by a notice of confidentiality or be marked or designated as confidential information. An example of such a notice, to be stamped on or otherwise applied to the first or main title page of every trade secret document in either paper or electronic form, is this:
CONFIDENTIAL
This document contains trade secrets or otherwise-confidential information owned by the Company. Access to and use of this information is strictly limited and controlled by the Company. This document may not be copied, distributed, or otherwise disclosed outside of the Company's facilities except under appropriate precautions to maintain the confidentiality thereof, and may not be used in any way not expressly authorized by the Company.
The words "Confidential Information of the Company," or similar language, should be stamped on or otherwise applied to all other pages of such documents.
When trade secrets cannot be marked as such, they should be accompanied by a notice of confidentiality or otherwise designated as confidential by a method appropriate under the circumstances. For example, physical facilities containing or constituting trade secrets may be designated as confidential by the posting of appropriate signs. Likewise, appropriate labels should be placed on hardware or computer monitors. Electronic media, e-mails, and electronic files containing trade secrets also should bear or be accompanied by an appropriate notice of confidentiality. The following sample notice of confidentiality could be modified as appropriate under the circumstances.
CONFIDENTIAL
This equipment contains trade secrets or otherwise-confidential information owned by the Company. [or: Trade Secrets or otherwise-confidential information owned by the Company are used in this area.] Access to and use of this [equipment/area/information] is strictly limited and controlled by the Company. Such trade secrets may not be used or disclosed outside of the Company’s facilities except under appropriate precautions to maintain the confidentiality thereof, and may not be used in any way not expressly authorized by the Company.
Questions regarding whether or how to mark or otherwise designate documents or other information as trade secrets should be directed to knowledgeable legal counsel.
Disclosure of Secrets
Trade secrets may be disclosed during meetings between parties. Ideally, such disclosures are made under a confidential-disclosure, or nondisclosure, agreement. Companies should never reveal more trade secret information than required under the circumstances.
However, differences in the bargaining power of the parties can substantially reduce or even eliminate the value of such an agreement. The more sophisticated a company is, the more likely that it will require the disclosing party to accept the other company’s nondisclosure agreement, which may so favor that company that the disclosing party is virtually unprotected. Companies with sufficient bargaining power, on the other hand, might refuse to sign nondisclosure agreements.
This can be a problem when trade secrets are, or may be, disclosed in nonwritten form during discussions between parties. Such disclosures could be verbal in nature, or they could be made through the exchange of sample devices or products. In such situations, it is important that the trade secret owner either not disclose secrets at all or else do so only under an agreement providing that verbal or other nonwritten disclosures shall be treated as secret.
Such an agreement may require that verbal or other nonwritten disclosures be memorialized before disclosure. However, it should also provide that if verbal or nonwritten trade secrets are not noted in this legal manner before they are disclosed, they can be described and reduced to writing after disclosure. In addition, the agreement should provide that verbal and nonwritten trade secrets must be identified, reduced to writing, and designated as such within a certain number of days after disclosure, as well as that the receiving party’s obligation to preserve such secrets is contingent upon the disclosing party identifying the secrets and reducing them to writing.
Employees and Trade Secrets
Only employees who need to know a trade secret for purposes of carrying out their employment duties should have access to such a trade secret. The company should ensure that trade secrets are accessible only to employees with such need to know them, and then only to the extent necessary for such employees to carry out their duties. Access should be appropriately limited to the particular materials containing the information the employee needs to know.
As a condition of initial or continued employment, all medtech company employees should be required to sign a nonconfidential employment agreement setting forth their obligations with respect to the company's trade secrets and other matters. The permissible scope and enforceability of such agreements vary from state to state. Company executives should see to it that such agreements are enforced to the fullest extent of the applicable law. Failure to do so could affect the company's right or ability to enforce the same or another agreement in other instances.
Arriving Employees. All new employees should be required to sign the company's standard employment agreement, which should evolve with changing circumstances. Someone from the human resources (HR) department should be designated to meet with each just-hired employee within five working days of the commencement of the individual's employment. That HR representative should explain the company's trade secret policy and provide the new employee with a copy of it.
Next, he or she should ask the employee a series of inclusive questions regarding prior employment and related confidentiality agreements and proprietary information (see sidebar, this page). The employee should be instructed not to bring any proprietary information from any prior employer or any other person into the premises of the new employer.
Finally, the HR designee should prepare a report documenting the employee's answers and comments during the interview. If the employee answers affirmatively that he or she has retained proprietary information from a prior employer with whom a confidentiality agreement was signed, and if the employee will be performing work of substantially the same nature or will be working in substantially the same subject areas for the current company as for any prior employer, or if the employee is in disagreement with any of the interview points, the person conducting the interview should seek legal advice immediately so that appropriate action can be taken.
The company should also consider contacting an employee's former employers when, in the judgment of the appropriate officer of the company and legal counsel, such contact is likely to reduce the risk of a dispute between the company and any of those earlier employers. If the employee has signed a confidentiality agreement with a former employer, the company should review that agreement unless the terms of the agreement itself are confidential.
Departing Employees. By the same token, an appropriate designee of the HR department should meet with each employee departing the company no more than five working days prior to that person's last day of employment. If the employee leaves the company abruptly or without notice, the HR representative should try to speak to the employee before he or she departs—or even afterward. The HR person should conduct an interview similar to the one pertaining to new hires, but emphasizing the outgoing employee's continuing legal obligations under the company's confidentiality agreement (see sidebar).
The company does not want its secret or proprietary information conveyed to another company's facility or used in any way; thus, the questions and instructions presented at the interview should center on a clear statement of the possibility and conditions of legal action. Here again, the HR designee should prepare a report of the meeting.
If the employee answers affirmatively that he or she has retained proprietary information from the company after signing a confidentiality agreement, and if the employee will be performing work of substantially the same nature or will be working in substantially the same subject areas for his or her next employer, or if the employee disagrees with any of the interview points, the person conducting the interview should seek legal advice immediately so that appropriate action can be taken. The company should contact an employee's next employer when, in the judgment of the appropriate officer of the company and legal counsel, such contact is likely to reduce the risk of a dispute between the company and that employee's next employer, or when such contact appears to be necessary to reduce the risk that the employee or his or her new employer will learn or use any of the company's trade secrets.
When an employee is terminated or laid off, executives should take steps, before informing the employee of such termination or layoff, to secure trade secrets and other proprietary information to which the employee has had access.
Outsiders and Trade Secrets
Companies whose business depends on the development and protection of trade secrets often depend on relations with persons and organizations that are not employees or business units of the company. Trade secrets disclosed through those relationships should be secured by legal confidentiality agreements.
Agreements with Independent Contractors. As a condition of initial or continued engagement, all independent contractors used by medtech companies should be required to sign an agreement that sets forth the contractor's obligations with respect to the company's trade secrets and other matters.
The company should retain the right to change such agreements from time to time. As a condition of continued engagement, and to minimize uncertainty regarding the contractor's obligations at any particular time, the company should require any contractor to execute the company's current contractor agreement. The permissible scope and enforceability of such agreements vary from state to state.
Agreements with Other Companies. Trade secrets should not be disclosed to persons or entities other than company employees or independent contractors who have signed appropriate employment or other covenants, unless those persons or entities sign an appropriate confidential-disclosure agreement or other agreement containing sufficient confidentiality obligations to protect the company. Such agreements should be prepared or approved by legal counsel.
The obligations of recipients of trade secrets under such agreements should be perpetual unless the trade secrets become publicly known through no act or omission of the recipients, or unless other reasons exist for specifying a shorter term.
Internal Security Measures
All of a company's officers, managers, directors, and supervisors should ensure that a range of security measures are instituted and followed, as appropriate, with respect to all trade secrets. Questions regarding which of the following security measures should be used in any particular circumstance, how to implement and enforce such measures, and how to handle breaches of them, should be directed to legal counsel.
Handling and Storage. Materials containing trade secrets should be required to be marked, stored, and handled with sufficient care to maintain their confidentiality. Trade secret information not reduced to documented form should also be maintained with sufficient care to maintain its confidentiality.
Documents, physical objects, and undocumented information, such as processes, that contain or constitute trade secrets should not be left in plain view nor be accessible to any persons—particularly nonemployees, such as visitors—who are not authorized to have access to the confidential information and who have not signed an agreement with the company to abide by appropriate confidentiality obligations.
Documents containing trade secrets should be maintained in secure locations, under lock and key when possible, when not in use and after business or work hours.
Employees should not be allowed to download or otherwise transfer or transmit trade secrets to their home computers, remove materials containing trade secrets from the company premises, or disclose trade secrets to persons under no obligation of confidentiality to the company except with prior express written permission of an officer or designated employee of the company with authority over such trade secrets.
Unneeded paper or electronic copies of documents containing trade secrets should be destroyed.
Access Restriction. When appropriate, documents containing trade secrets should be maintained in a defined, limited number of copies. Authorized persons accessing such copies should be required to sign them out, sign them in, not duplicate them, and maintain possession of them for only a specified period of time.
Trade secret information stored in computers, in magnetic media, or on other devices should be password or copy protected and/or encrypted, and should not be accessible to unauthorized persons or through the Internet, e-mail, or any other form of electronic communication.
Visitors to the company's facilities should be required to sign in and sign out, should be escorted by a company employee at all times, and should be made to wear badges identifying them as visitors at all times. Company employees with authorized access to secret areas should not be permitted to take visitors to such areas unless those visitors have executed an appropriate confidentiality agreement.
Trade secrets should not be disclosed to any person owing no obligations of confidentiality to the company.
Policy and Enforcement. The company should have written trade secret policies and procedures in which employees should be educated. Employees should be reinformed periodically of such policies and procedures.
The company should appoint a trade secret officer or committee to prepare, disseminate, and enforce the company’s original trade secret policies and procedures, and any changes in those policies and procedures.
Employees should be reminded periodically of their confidentiality obligations, and of the fact that maintaining such obligations is a condition of their employment. Such reminders should be given no less frequently than twice annually.
Presentations outside the Company
Occasions may arise in which employees of the company wish to present a speech or technical paper containing trade secrets. Any such presentations to any persons not under an obligation of confidentiality to the company should be authorized in advance in writing by an officer of the company. This preclearance is necessary to :
- Prevent an inadvertent disclosure of trade secrets.
- Provide an opportunity for review of the technical accuracy of papers or speeches.
- Provide the time and opportunity to prepare and file patent applications, if appropriate, before the information set forth in such speeches or papers is disclosed to the public.
If any such speeches or papers relate to the subject matter of any joint venture between the company and any other entity, or if they include any information that may be considered proprietary by any other entity, the company officer or designated employee with authority over such trade secrets should seek legal advice regarding the disclosure of such information.
Demonstrations of company products or processes may be made at trade shows, in customer meetings, or in other situations. However, trade secret aspects of such products or processes should not be revealed in demonstrations unless the recipients of the demonstration have signed a confidential-disclosure agreement.
Conclusion
This general overview of trade secret principles and practices, even with its specific suggestions of procedures for protecting corporate secrets from unauthorized disclosure or dissemination, is intended only to serve as a guide for medtech company executives. Particular trade secret situations are very fact-dependent. Some are highly complex. Many companies could find the approach set forth in this article inadequate for their needs. The guidance provided here is no substitute for obtaining legal advice from experienced trade secret counsel.
Reference
John F. Hornick is a litigator and counselor at the law firm of Finnegan, Henderson, Farabow, Garrett & Dunner LLP (Washington, DC).
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