How can I protect my trade secret? 2 Answers as of February 09, 2011

We are a food manufacturer organized as an S-Corp. We have a product that an out-of-state customer uses as an ingredient in one of their products. We would like to sell to our customer the right to use our product recipe in their product, instead of producing the product for them - less hassle for us and no shipping costs for them. However, we do want to restrict them to using it only as an ingredient - we do not want them producing it for sale by itself. How can we protect our recipe? A non-disclosure agreement? Do I correctly assume that an IP Assignment/Sale would only be used for trademarks, copyrights, etc. and not trade secrets?

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Mark S. Hubert PC
Mark S. Hubert PC | Mark Hubert
Correct, because you don't own anything. No patent trademark or copyright. What you have is just information until you patent the embodiment of it. You could file a quick patent and then assign your rights in the patent application. You could strike an agreement to divulge your trade secret to them or to have them pay royalties to use it and cover the entire trade secret with an NDA or non-compete agreement. Preferably both.
Answer Applies to: Oregon
Replied: 2/9/2011
Fish & Associates, PC
Fish & Associates, PC | Robert D. Fish
Critical to protecting a trade secret is the company's treatment of the information as a secret. Yes, you really need to enter into a written agreement regarding use or purchase of the trade secret. And yes again, trade secrets can be assigned.

But first things first - you need to make sure you are doing the right things to establish that the information qualifies as a trade secret. To do that we would typically run through a trade secret inventory, along the following discussion points.

1) Physical Security

a) Building

i) Limited hours, access

ii) Sign-in and movement procedures for visitors

iii) Locked side and rear doors

b) Files

i) Limited access, (e.g. locked)

ii) Computer files containing critical information should be password protected

c) Documents

i) Labeling with copyright, trade secret, need-to-know notices

ii) Critical documents should be numbered

iii) Production instructions should have limited distribution

iv) Notebooks

(1) consecutively numbered books, preferably spine bound

(2) used books and book numbers should be maintained by company; if individual still has book after one year the administrator should find the book and confirm its existence and contents

(3) books should not leave the office

(4) printed page numbers

(5) entries should be dated

(6) do not leave blank pages or large blank areas

(7) lab results and other materials can be pasted into the book, but a handwritten note should refer to the added materials

(8) entries should be reviewed by supervisor or someone else who understands the technology on regular basis, perhaps monthly

(9) books should be turned in when employee leaves employment

d) Tangible Items

i) Limited access, ie separate room, locked

e) Waste disposal

i) Critical papers should be shredded

2) Agreements

a) Non-disclosure

i) Employee

ii) Business contacts

b) Non-competition (may be valid outside California)

i) Employee

ii) Business contacts

3) Procedures

a) Periodic trade secret awareness program

i) Discuss scope of trade secrets being protected, including processes, processing details, equipment used, supplier name and purchase items lists

ii) Discuss importance of protection

iii) Discuss potential breaches

(1) Work to take place within company walls

(2) Locking up critical documents and tangibles

(3) Distribution of information on need to know basis

(4) Potential problems with photocopying

(5) Dealing with non-employees

(6) Discussing work with outsiders

(7) Visitors

(8) Disclosures (marketing, sales, purchasing)

(9) Interviewing new employees

(10) Promotion and responsibility changes

(11) Termination

4) Tax considerations

a) Improper amortization of trade secrets
Answer Applies to: California
Replied: 2/9/2011
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