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How to protect secrets
March 6, 1995
4 Min Read
Assume that your company has a secret widget-making process which is faster and better than your competition's. If you had to decide, how would you protect that process?
First, you should decide whether to obtain a patent on it or to qualify it as a trade secret. A patent, basically a limited monopoly granted by the government for 17 years, turns any secrets into public information. Companies seek patent protection where a careful inspection of the product reveals its uniqueness. If the product can be reverse engineered, for example, a patent makes sense. No law prevents competitors from reverse engineering your products-absent patent protection.
However, when protecting a generally unknown manufacturing process which cannot be reverse engineered, the company has a more difficult decision. If it chooses to seek protection as a trade secret, it must attempt to preserve that secrecy. If such attempts succeed, a trade secret's lifetime is indefinite.
One company's choice. Pete Balsells faced this same choice when his company, Bal Seal Engineering Co., developed a manufacturing process for canted coil springs, which are used in countless applications. He knew that his proprietary process could not be reversed engineered, that patents have a limited life, and that enterprising inventors can invent around patent restrictions. Therefore, he chose to keep his technology a secret. As the company grew, it implemented increasingly stringent security measures.
However, in 1985, two Bal Seal employees left the company to work for a competitor. By 1988, Bal Seal felt certain that its spring-making technology had been misappropriated by its former employees, and that its competitor, American Variseal, was using it. Bal Seal took the issue to the courts, endured six years of litigation, and settled in November 1994. Variseal and its parent company, Busak + Shamban, paid $10 million in a settlement to Bal Seal, is required to destroy by prescribed date all of its canted coil spring-making equipment related to Bal Seal design, and cannot use any equipment derived from the Ball Seal design in the future.
As Bal Seal's legal counsel in the case, we had to prove that the company had taken reasonable measures to preserve the secrecy of its technology so as to defend its right to trade-secret protection. While that issue was never determined because of the settlement, the question of adequate secrecy measures remains a principal hurdle facing any company wishing to preserve its trade secrets.
Generally people should gain access to confidential information only on a need-to-know basis. A company's ongoing security program should enforce restricted access and be reasonably implemented.
Suggested reasonable measures. Ask each employee to sign a written non-disclosure agreement when hired. Identify, in writing and in general terms, the company's confidential information. Do not claim that "everything" in the plant is confidential and risk your credibility. Stamp all confidential documents in a conspicuous place and control the location and access to such documents with a library checkout procedure.
Failure to implement and maintain such security measures invites misappropriation. Anticipating and then preventing this problem is the best solution.
Q: Is it important for management to view legal issues within a larger business context?
A: It's paramount for them to do so. The decision by management to pursue a legal issue is a business decision that should be made within the framework of a company's goals and objectives. As the legal environment in which we operate becomes more complex, business strategies increasingly involve legal facets. As an executive, you must be comfortable dealing with the details of legal issues and not blindly put these aspects of your business into the hands of independent legal counsel.
Q: What level of involvement with the company's legal counsel should management have?
A: Management must take a hands-on role in managing legal resources. In an age when current management theory preaches the art of delegation, this is one area where the opposite tactic should be employed.
*Answers supplied by Jon Stillman, president of Bal Seal Engineering Co.
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