Protect trade secrets to prevent ugly surprises

Protect trade secrets to prevent ugly surprise What's on your list of things you know you need to take care of but you never get accomplished? Do you worry about the day when your neglect will suddenly sink you?

For an individual, it might be something like losing weight or building a rainy-day fund.

For a business, consider putting the need to protect your trade secrets near the top of your worry list.

Just ask Bank of America about the importance of trade secrets. It recently suffered a painful lesson from its neglect.

A trade secret is information that has value because it has been kept confidential. For businesses, classic examples of potential trade secrets are customer lists and future business plans.

I emphasize the word "potential" because no information automatically is a trade secret just because of its subject matter. For something to be a trade secret, a business must have taken reasonable steps to keep it confidential.

If something is a trade secret, the business that owns the trade secret has legal remedies when someone absconds with it.

For example, if a Coca-Cola Co. employee managed to leak the secret formula for Coke to a competitor, Coca-Cola lawyers could get a court to order the return of and protection of that information. But that's only because Coca-Cola invests great effort in keeping the formula secret.

Unprotected bonus information

In Bank of America's case, it didn't plan ahead, so it got bitten.

Bank of America recently purchased a very distressed Merrill Lynch in a rush deal. Just before the merger closed on Jan. 1, Merrill paid more than $3.6 billion in bonuses.

After the deal closed, Bank of America purportedly discovered that Merrill's financial straits were much worse than it believed, so Bank of America threatened to undo the deal.

Yet Bank of America stuck with it under immense pressure from the federal government. As encouragement for Bank of America to keep the deal, the Feds put an additional $20 billion in aid into Bank of America and entered into $118 billion in Merrill loss-sharing protections.

As recent events with AIG and General Motors demonstrate, when the Feds own a piece of you, they run your life. And populism can run the Feds.

In mid-March, when bonus outrage swept the land, New York Attorney General Andrew Cuomo subpoenaed records of the Merrill bonuses. Merrill's new owner, Bank of America, tried to stop the embarrassing disclosure.

Eventually, Cuomo and Bank of America reached a deal in which the identity of the bonus recipients would be kept confidential pending a court ruling on whether Cuomo could publicly release the information.

One argument Bank of America made in favor of confidentiality was that information regarding what Merrill and it pay their employees, including bonuses, is trade-secret property.

The court shredded Bank of America's contention. Key officials from Merrill and Bank of America testified they didn't know of any company policy prohibiting disclosure of compensation information.

Bank of America had circulated a message to employees asking them to keep their compensation confidential but never enforced the policy. It never had employees sign an agreement to keep the information confidential.

Bank of America admitted it was permissible for employees to disclose their compensation to prospective new employers.

In the end, the court held Bank of America hadn't taken reasonable steps to keep its compensation information confidential, so it wasn't a trade secret. Thus, Cuomo was free to publish the information as he pleased.

Eight days after the ruling, the Wall Street Journal ran a list of 25 senior Merrill employees who recently quit to pursue other opportunities.

A lesson for others

It's fairly obvious that Bank of America's fight to keep the bonus information confidential was an after-the-fact regret for failing to focus on the sensitivity of the information and failing to protect it.

Yet, that's the way it is with many trade-secret cases. No one sees the crisis coming, so taking legal precautions to protect sensitive information just doesn't happen.

Excuses abound. It's a hassle. It's a distraction from making money. It will cost money, such as lawyers' fees, that the business doesn't want to spend.

Then, like a thief in the night, the crisis hits. Often a formerly trusted employee leaves to join a competitor, or a contractor proves to be a double agent.

Then the company flails frantically to try to reclaim the sensitive information -- such as the computer product's source code, the list of key customer contacts, or the internal cost-to-manufacture information.

But it's too late. In the blur of everyday events, the company never took reasonable steps to guard the information. So it can't be pulled back as a trade secret. It's gone.

When the big one strikes your company, will it be prepared?

John B. Farmer is a lawyer with the Leading-Edge Law Group PLC, which specializes in intellectual property and e-commerce law. He can be reached via www.leadingedgelaw.com.