I’ve been concentrating on intellectual property issues for small and medium-sized businesses in recent columns to provide a better understanding of if, and when, patent, copyright, or trademark problems affect operations.
Now let’s discuss one of your company’s most valuable assets: its confidential information and trade secrets. For the sake of simplicity, the terms “confidential information” and “trade secrets” will be used interchangeably, even though they can mean different things.
Unlike the Copyright Act, the Trademarks Act or the Patent Act, there is no statute that directly legislates or regulates the law of confidentiality and trade secrets in a commercial environment. This means the law that governs confidentiality and trade secrets is the common law; the law that has evolved over time as determined by judges deciding similar cases before them.
What is confidential information, and why do you need to protect it?
Although you might think only software developers, biotech companies and the Coca-Cola Co. have valuable trade secrets that need legal protection, all businesses have information they have bought, created, developed, improved, enhanced, and hopefully benefited from. And this information is worth something, particularly if you are licensing it to third parties or selling your business outright. So in the “information age,” ensuring the confidentiality of your own information isn’t something that’s limited to big companies with magic formulas locked up in vaults.
For example, if you’re a franchisor (or you own and operate a chain of retail outlets), you’ll have an “operations manual,” which is normally a collection of written or electronic documents that sets out the policies and day-to-day procedures for running the business.
All franchisors have, or should have, operations manuals that, in the franchised fast-food context, might explain how long the fries should be cooked and when they’re stale and must be thrown out, forms for sales and other financial reporting to the franchisor, policies and procedures for cleanliness in the kitchen, and dozens of other topics that have to be “taught” by the franchisor to the franchisee and its managers. That franchisee will in turn have to educate its own staff on how to “run the business.” And “how to run the business” should be in the manual. How else will franchisees or their employees know to do their jobs?
The fact all this information might be protected by copyright is a bonus, legally, but the real issue is this: it took a long time for the franchisor to develop its business system and its manual. Not everyone in the world has access to the manual, you have to be a franchisee first, and at some expense. So it’s a trade secret. And it’s confidential. You don’t want someone selling it or running away to start another business using your intellectual property. So there has to be a covenant to that effect in your franchise agreement that all the information disclosed to the franchisee about the operation of the business is confidential and not to be published or disclosed to others unless specifically authorized.
Here are other good examples of your confidential information:
• Your customer list: It will cause you immense damage if used by a former employee who’s left you to start a new venture with it.
• Your supplier contact list and the pricing and rebates you receive from those suppliers: They need to be protected legally.
• Your financial statements, the terms of your other contracts, and perhaps an option-to-purchase on some very valuable land: They also constitute confidential trade secrets you don’t want others knowing about or stealing.
