Trade Secrets – Protecting Your “Jewels” and Honoring Your Obligations to Your Clients When Providing Consulting Services November 29, 2007 for the IEEE - Denver Chapter Law Offices of Sandra T. Carr, P.C.

(c) 2007 Law Offices of Sandra T. Carr, P.C. 2 What are Trade Secrets? --the evolution  Originally, The Restatement Second of Torts; A “trade secret” is: "any formula, pattern, device, or compilation of information -used in one's business -gives owner an opportunity to obtain an advantage over competitors who do not know or use it. "  UNIFORM TRADE SECRETS ACT (UTSA), 1970; amd. 1985), a "Trade secret" is “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: oderives 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 ois the subject of efforts that are reasonable under the circumstances to maintain its secrecy”  Most States in the US have adopted some form of the UTSA definition; some with modifications and additions  Internationally, trade secrets may not be protected by statute or by precedent

(c) 2007 Law Offices of Sandra T. Carr, P.C. 3  The Colorado definition of trade secrets is even broader than the UTSA definition. –"Trade Secret“: the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a "trade secret", the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes. –This Colorado definition expands the UTSA by expressly including: confidential business or financial information listing of names, addresses, or telephone numbers other information relating to any business or profession “which is secret and of value." Has broadened the scope from traditional notions of secret formulas to other business information as well

(c) 2007 Law Offices of Sandra T. Carr, P.C. 4 How Do You Know if Information is a Trade Secret? In deciding whether something is a trade secret, courts consider: 1.Is information known outside the business? 2. Is information known to those inside the business? 3. What efforts are made by the owner to keep the information secret? 4.What is the value to the owner in keeping the information from competitors? 5.What is the cost to obtain and develop the information? 6.How much time and expense, and how easy or difficult, is it for others to acquire and duplicate the information?

(c) 2007 Law Offices of Sandra T. Carr, P.C. 5 Examples of Information that Can Be Protected as Trade Secrets:  Customer Information  Manufacturing/Scientific/Technical Processes and Methods  Business and Financial Information  Computer Programs and Databases, source code  Employee Know-How and Training for Employees  Ingredients/Formulas for foods, drugs, cosmetics

(c) 2007 Law Offices of Sandra T. Carr, P.C. 6 Examples of Information that Can't Be Protected as Trade Secrets  General Knowledge (w/n a particular industry is sufficient)  Skills and Abilities Necessary To Perform A Job  Publicly Available Information (e.g., ingredients in “KFC’s Secret Recipe”: salt, pepper, garlic, etc.)  Information Obtained by Another Through Reverse Engineering  Information Obtained by Another Through Independent Invention

(c) 2007 Law Offices of Sandra T. Carr, P.C. 7 Remedies Available for Misappropriation of Trade Secrets  Damages, profits, reasonable royalties, injunction (against unauthorized use by another).  If willful and malicious misappropriation exists: exemplary damages awards are possible: twice any damages award attorneys’ fees

(c) 2007 Law Offices of Sandra T. Carr, P.C. 8 Statistics Regarding Employee Mobility and Loss of Trade Secrets – 2007 Studies  40% of the responding companies reported incidents of known or suspected losses of proprietary information such as trade secrets.  The top 4 areas of risk for loss of proprietary information are: o R&D data (49% reported losses) ocustomer lists and related data (36% reported losses) ofinancial data (27% reported losses) ostrategic plans and roadmaps (25% reported losses )  Other areas of risk: M&A data, manufacturing data, nonpublic product specifications, prototypes

(c) 2007 Law Offices of Sandra T. Carr, P.C. 9 More Statistics…  $332K: average loss per incident of trade secret misappropriation for under $5B mfg companies  #1 Risk Factor: current and former employees, consultants  Problems caused by loss of proprietary information: Loss of revenue Loss of competitive advantage Loss of market share Increased R&D costs Increased legal costs Increased insurance costs Embarrassment

(c) 2007 Law Offices of Sandra T. Carr, P.C. 10 Practical Steps You Can Take to Protect Trade Secrets – Owner must demonstrate an active course of conduct designed to prevent unauthorized disclosure or use of the information--a Balanced Approach is Best; standard: “reasonable under the circumstances”  Create a Confidentiality Policy – Document it Classify Company Business Information (2-3 categories; focus on detrimental effect of loss to the company)  Educate Employees and Third Parties (through agreements) about Your Confidentiality Policy and how to use and read NDAs  Enforce the Confidentiality Policy  New Employees – - Confidentiality Obligation Agreements -Proprietary Rights Agreements -Previous Employer Obligations -What About Noncompete Obligations?

(c) 2007 Law Offices of Sandra T. Carr, P.C. 11 More Steps…  Restrict Access to the Information  Store Trade Secrets in Secured Areas locked areas, badges, limiting access to only those “with a need to know” to perform their jobs properly  Label Confidential Documents: "CONFIDENTIAL. TRADE SECRET. DO NOT COPY. DO NOT DISTRIBUTE”  Use Confidentiality Agreements with Third Parties oIdentify Trade Secrets specifically (w/ caveat)  All Employees – – Continuing obligations – Reminders for Specific Confidential Projects

(c) 2007 Law Offices of Sandra T. Carr, P.C. 12 More Steps…  Have Employees Use Only Designated Notebooks  Implement periodic internal review procedures re: inventions, periodicals, marketing materials, government filings  Shred Documents  Exiting Employees Exit Interviews Exit Interview Agreement Follow-up Letter to New Employer

(c) 2007 Law Offices of Sandra T. Carr, P.C. 13 Noncompete Agreements in Colorado  Regulated by Statute: Only 4 types of noncompete agreements will be considered as enforceable (others are considered void as against public policy to allow people to be employed): a.Purchase and sale of a business or the assets of a business b.Executive and management personnel and employees who constitute professional staff to executive and management personnel c.Recovery of the expense of educating and training an employee who has been employed less than 2 years d. Protection of trade secrets.  Noncompete provisions may still be unenforceable if the length, geographical coverage and/or scope is broader than "necessary to protect the employer's interest."  For trade secrets, it is a question of fact for the court/jury to determine what constitutes a trade secret in accordance with the Colorado Trade Secret statute.

(c) 2007 Law Offices of Sandra T. Carr, P.C. 14 Noncompete Agreements in Colorado, con’t… If a noncompete agreement is too broad to be enforceable under Colorado law, then the courts have 3 approaches with the offensive provisions: 1.Declare entire contract unenforceable 2.“Blue pencil" Rule: strike offensive provisions and enforce the remainder of the agreement or portion of provision 3.Courts will reform a noncompetition clause so that is enforceable by inserting reasonable time, geographic, scope limitations

(c) 2007 Law Offices of Sandra T. Carr, P.C. 15 Inevitable Disclosure  Former employees may be prevented from disclosing trade secrets to a competitor, even if the employee has never signed a non-disclosure or non-compete agreement.  Basic Concept: An employee is necessarily exposed to proprietary information throughout the course of employment, and if that employee is hired by a competitor, particularly in a similar role, he or she will "inevitably disclose" that critical information to the new employer.  Two elements required: Ex-employer must establish that the information it is seeking to protect qualifies as a trade secret. Is disclosure “inevitable” as opposed to “merely possible”?

(c) 2007 Law Offices of Sandra T. Carr, P.C. 16 Mistakes Made…  NDA that doesn’t distinguish between ordinary confidential information (e.g., nonpublic/may not be of value) and trade secrets (secret, imputing potential economic value to owner) in terms of length of confidentiality provision (e.g., 3/5/7 years vs. indefinitely per statute)  No adequate notice or description of what owner considers “trade secrets” (e.g., defective descriptions):  “any information of owner;”  “information that a reasonable person might deem to be confidential;”  information that the owner might hereafter consider a trade secret”  Unilateral NDA  “Free to Talk About Anything – We signed an NDA”

(c) 2007 Law Offices of Sandra T. Carr, P.C. 17 Contract Provisions to Add to Protect Consultants When Providing Services  Consultant Rights. Consultant owns Consultant’s Preexisting Intellectual Property and any modifications, derivatives, or improvements it makes thereto; and any new Intellectual Property it creates independent of its performing the Services or delivering the Deliverables that (a) don’t contain Customer Preexisting IP or (b) don’t use Confidential Information of Customer.  Deliverables don’t include (and Consultant owns): Any Consultant Rights above Information, intellectual property, business methods, creations, materials, documents and software developed by Consultant, REGARDLESS OF WHEN CREATED THAT ARE - designed to perform generalized functions related to Consultant's business’ - are not developed specifically to Customer’s unique requirements - do NOT use Customer's Confidential Information or IP  Don’t agree to freely give “Feedback” (suggestions, feedback, etc.) and give client ownership or unrestricted rights to use and rely on  Watch out for source code licenses

(c) 2007 Law Offices of Sandra T. Carr, P.C. 18 THANK YOU!