When working in a competitive industry, it becomes essential to protect a business’ confidential information.  If Coca-Cola® let its famously secret beverage formula slip to the public years ago, would it have had enjoyed the same success in the marketplace?  Maybe not.  Intellectual property law allows a variety of different means for protecting information.  For example, patents protect inventions, trademarks protect brand names and logos, copyrights protect authored works, and trade secrets can protect formulas and customer lists (among many other things).  Specifically, a trade secret, which lasts as long as the information remains a secret, protects information or ideas which derive independent economic value from the fact that they are not known by others.  For example, Coca-Cola® has used trade secret principals to protect its confidential soda formula and correspondingly preserve that formula’s economic value.

A recent criminal case in New York concerns the law of trade secrets and sheds light on the importance of maintaining confidentiality.  Two Sigma Investments LLC, a hedge fund with its head office in New York City, possesses trade secrets pertinent to confidential computer trading models.  In February, Manhattan District Attorney Cyrus R. Vance, Jr. charged one of Two Sigma’s now-former analysts, Mr. Kang Gao, with theft of the Two Sigma trading models protected by trade secret laws.  Two Sigma also filed suit against Gao (who allegedly resigned from his position after he was arrested) claiming that the hedge fund learned that Gao had “misappropriated confidential information as part of an apparent plan to take that information to a new employer.”  Gao’s contract with Two Sigma prohibited him from viewing trading models.  Gao allegedly breached that agreement (and misappropriated Two Sigma’s trade secrets) when he purportedly accessed computer files, used “decompiler” programs to view hidden and forbidden trading models, and sent confidential information to his personal e-mail account.  Gao was indicted on eleven felony counts and has pleaded not guilty.

District Attorney Vance stated that “the protection of trade secrets, such as computer source codes and trading methods, is critical to building and maintaining financial expertise.”  In addition, Two Sigma spokeswoman Kelly Howard said, “Two Sigma takes the protection of our intellectual property very seriously. We became aware of potential felony criminal activity of an employee, promptly informed the Manhattan District Attorney and terminated his employment.”  Both of the foregoing highlight the reason for trade secret protection.  Having the ability to shield confidential methods and formulas from competitors cam allow a company to grow and succeed with less worry of competitors stealing business by virtue of misappropriation.  As stated by Mr. Vance and Ms. Howard, this sort of activity ought to be punished and regarded as a very serious impediment to a company’s business.

Companies with valuable confidential information should require employees and independent contractors with that information to sign non-disclosure agreements (NDAs) to maintain the secrecy of their information.  The Two Sigma case should serve as a reminder for companies to take care to preserve and protect their trade secrets.  Once a secret is out, there is very little that can be done to “put the cat back in the bag.”  In addition, proper protection of confidential information is critical to being able to bring a claim for misappropriation of trade secrets. Some factors that contribute to determining whether an information or idea is entitled to protection under trade secret law are:

• The idea or information should not be well-known outside the particular business;
• The company should be very diligent in making sure the idea or information remains a secret; and
• The idea or information should be valuable enough to warrant trade secret protection.

As the Two Sigma case proves, taking proper measures to protect trade secrets becomes vital when one rogue employee attempts to sink the ship.

Do you have a question about protecting your company’s trade secrets and confidential information?  The McHattie Law Firm can help you develop a plan to help you protect that information.

(Neeraj Joshi)