Protecting Your Startup's Trade Secrets

December 26, 2013

In October, NetApp Inc. sued its rival, startup Nimble Storage Inc., in the U.S. District Court for the Northern District of California, alleging unfair competition, misappropriation of trade secrets, breach of contract, and five other counts related to the hiring by Nimble of former NetApp employees. NetApp accuses Nimble of recruiting its employees and encouraging them to steal confidential information, including sales materials, pricing models, and details about customers. According to the complaint, about 15 percent of Nimble's employees - or 55 employees - and half of its executives are former NetApp employees. The suit was filed just weeks after Nimble filed to raise up to $150 million in an initial public offering. The company went public on December 13, and is led by former NetApp executive Suresh Vasudevan. Both Nimble and NetApp are in the business of providing data storage.

This lawsuit raises a very important issue for startups: Keeping secrets - particularly trade secrets - private. Startups should understand that there are four types of intellectual property that can and should be protected: (1) trademarks; (2) copyrights; (3) patents; and (4) trade secrets. A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. Examples of trademarks include McDonald's golden arches symbol. Figures or characters, such as Geico's talking gecko, can also be a trademark. A copyright protects works of authorship, such as writings, music, and works of art that have been tangibly expressed. A patent is a limited duration property right relating to an invention, granted by the United States Patent and Trademark Office (PTO) in exchange for public disclosure of the invention (we have discussed patent trolls many times in previous articles). A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. Examples of trade secrets include the recipe for Coca-Cola and KFC's fried chicken. Both recipes are allegedly stored in secret safes and known only by a few select employees.

The problem for startups is that they often need to share information with potential business partners. In the case of trademarks, copyrights, and patents, companies are relatively free to disclose the underlying information to third parties once the PTO has granted them the proper protections. But, what about trade secrets, which can never be protected by the PTO. How can startups protect their trade secrets and/or other information that has not yet been protected by the PTO? The best way to protect your startup is to have a third-party sign a non-disclosure agreement (NDA), also known as a confidentiality agreement. An NDA is a signed formal agreement in which one party agrees to give another party confidential information about its business or products and that party agrees not to share this information with anyone else for a specified period of time. A good NDA will spell out (1) the specific categories or types of information covered and the method of transmission, i.e., in writing, orally, or electronically; (2) the duration of the duty to maintain confidentiality; and, (3) the persons provided access to the information.

One problem faced by startups is that most venture capitalists will not consider companies that require NDAs. In that case, you and your startup must use common sense to determine what information can or cannot be disclosed. Keep in mind that most venture capitalists know much about the industries in which they are investing and do not need to know everything about your business.

The Law Office of Kristina M. Reed is committed to helping startups and all small businesses achieve their dreams by providing the foundation needed for success. Our goal is to help you grow into a successful business. We are highly experienced in all phases of business law, from startup to profitability, and we can help guide your young company through all phases of its growth and success. If you have questions about your company's intellectual property and what information and/or trade secrets need to be protected and how you can go about obtaining that protection, please contact us.