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WHAT IS A TRADE SECRET?

A trade secret is any information that derives economic value from not being generally known, has been maintained in confidence, and is not known by competitors. A company that owns trade secret may petition a court for a relief against those who have obtained or used its trade secret through improper means. The trade secret owner can also institute an action against those who wrongfully publicly disclose the trade secret in violation of legal obligations such as conditions set out under a non-disclosure agreement (“NDA”).

TRADE SECRET LAW

Each state has its own statute or regulations that govern trade secrets. Most states, however, have enacted the Uniform Trade Secret Act (UTSA). Although the majority of states have adopted the UTSA, the enacted versions and judicial interpretations of the UTSA may also differ from state to state. In Washington State, Uniform Trade Secret Act is set out in Chapter 19.108 of the Revised Code of Washington (RCW).

TRADE SECRET PROTECTION

Trade secret law requires maintenance of secrecy, and it is a type of intellectual property law. Whereas patent law protects inventions, processes or useful business methods for a number of years in return for the owner’s full disclosure of the information to U.S. Patent and Trademark Office (USPTO). On the contrary, a trade secret can be protected permanently so long as it is not disclosed to the public and reasonable steps are undertaken to preserve secrecy.

Companies need to consider whether they seek protection under trade secret law or another type of intellectual property law such as copyright or patent law. A typical example for this choice is the Coke® recipe. The Coca-Cola Company protects the Coke® formula as a trade secret, which allows for indefinite protection so long as the company takes reasonable efforts under the circumstances to maintain secrecy.

Compare protection under patent law, which gives the owner the exclusive rights to make, use and sell the protected item for a limited period of time. Patent rights are more comprehensive for a finite period, but require patent filings with the USPTO. Patents can also be very expensive to prosecute. On the other hand, the trade secret owner does not have to file a trade secret application or registration with any government office.

The fact that no registration is needed does not mean that obtaining trade secret protection is easy. Trade secret protection requires significant efforts by setting up a program to create and administer reasonable measures to keep the information secret. Moreover, a trade secret owner does not command exclusive use of the trade secret. Any competitor may lawfully use the subject of the trade secret so long as it is independently developed and implemented.

TRADE SECRET PROTECTION METHODS

Since the key in determining whether information is deemed to be a trade secret is the confidentiality of the information, it is essential to institute a preventive program to protect the company’s confidential information.

1. Physical Measures. Companies need to develop a variety of physical measures to protect their proprietary information. Reasonable security measures are required for trade secret protection. Reasonableness may require that areas in which the information was being used or store were made physically inaccessible to others (for example, one is personally escorted to another floor where all the doors are locked and monitored). For trade secrets stored electronically, reasonable efforts may require adequate IT security measures such as commercially reasonable firewalling, access control and use of encryption technologies.
   
   
2. Contractual Measures. Under many circumstances, someone receiving a company’s trade secret takes it subject to an implied obligation not to disclose. However, having a written agreement has several benefits for the trade secret owner. The existence of a NDA provides evidence that the owner of the trade secret is taking confidentiality measures. The formality of an agreement also ensures that the recipient of the trade secret is expected to protect the information and it warns of possible consequences if it is not implemented. A written agreement also makes available a remedy for breach of the agreement as well as trade secret liability.

TRADE SECRET PROTECTION LIMITATIONS

While a patent, for example, gives the patent owner the exclusive use of the patent, trade secret protection does not protect against independent development of a product or process that is the subject of the trade secret. Moreover, trade secret law does not protect information that is in the public domain.

TRADE SECRET LITIGATION

The owner of the trade secret harmed by trade secret theft can commence by filing of a complaint describing the defendant’s wrongful conduct. Such action should be done as soon as the leakage of the trade secret is discovered.

Litigation between a company and its former employee is the most common trade secret case. This situation typically arises where an employee departs from the former employer and starts their own business or joins another company, either of which is a competitor of the former employer. Employers often file a trade secret action, claiming that the former employee is using the employer’s trade secret. Memorization of trade secrets is typically is not a defense. A successful plaintiff can obtain injunctive relief to prevent further leakage of the information and monetary damages to compensate the owner of the trade secret.

Labels: Non-Disclosure Agreement, Trade Secret

WHAT IS A CORPORATION?

A corporation is a legal and tax entity separate from any of the people who own, control, manage or operate it. Once formed the corporation assumes an independent legal existence separate from its owners. The separate legal existence leads to several corporate characteristics as described below.

• Limited Liability Protection. As a legal entity, a corporation is responsible for its own debt. Corporations are owned by shareholders, but shareholders are not responsible for corporate debts. The shareholders stand to lose only the money that they have invested and the creditors cannot pursue shareholders' personal assets. There are some exceptions to the "limited liability veil" provided by corporations. The corporate limited liability veil can be pierced when shareholders do not respect the corporation's separate existence and if shareholders personally guaranty corporate debts. Additionally, corporate directors and officers will be personally liable for personally committed torts or for certain statutory violations such as tax underpayment.
  
• Free Transferability. Ownership interests in a corporation are represented by shares, which are freely transferable (subject to compliance with state and federal securities laws). Unless the shareholders otherwise agree, any shareholder may at any time sell or give his or her shares to anyone else without consent by the other shareholders.

TAXATION

A corporation is a legal entity separate from its shareholders and files its own tax return and pays corporate income taxes. In other words, if corporation has profits or losses, it files its own tax return, and pays its own independently of the tax position of the shareholders.

One consequence of the corporation's status as a separate tax payer is that there will be often be so-called "double-taxation." The corporation pays a corporate income tax on its profits. If the profits after corporate tax are allocated to the shareholders as dividends, the individual shareholders pay a separate tax on these dividends. (A regular corporation is referred to "C" corporation as compared to "S" corporation below.)

"Subchapter S" corporations are taxed differently. An S corporation is a corporation that qualifies for special tax treatment under the Internal Revenue Code (and also under some state corporate tax statutes). In order to form an S corporation, one must file articles of incorporation with the state and then elect S corporation tax status (or convert an existing C corporation) by electing S corporation tax treatment. All shareholders must sign and file an S corporation tax election.

There is no difference between C and S corporations from a corporate state law perspective. Therefore, choosing S corporation status is a tax matter, not a legal election with respect to state corporate law. Once a corporation chooses an S corporation, its profits and losses pass through the corporation and are reported on the individual tax returns of the S corporation's shareholders.

If the business has pass-through tax treatment, the corporation will file a tax return and the shareholders will pay income tax on their share of business profits on their individual income tax return. These profits are taxed even if they are kept in the business and not actually paid out to the owners.

The conditions for electing and maintaining an S corporation tax election are as follows:

1. The corporation may not have more than 100 shareholders;
   
2. The corporation may not have more than one class of stock; and
   
3. The shareholders must be individuals who are U.S. citizens or residents.

Forming S corporation was formerly the only way that all owners of a business could obtain personal liability and retain pass-through taxation of business income. However, since the arrival of the limited liability company ("LLC"), business owners have a choice of legal entity when seeking pass-through taxation and limited liability protection. There are fundamental differences in structure, management and taxation of LLCs and S corporations. For example, active S corporation shareholders must pay themselves a reasonable salary from the corporate profits rather than having all allocated profits being attributed as reported dividends.

CORPORATE MANAGEMENT

Corporations follow the principle of centralized management. The corporation is managed under the supervision of the board of directors and corporate officers charged with daily control.

1. Shareholders

Shareholders generally have no power to either participate in management or to direct corporate policy. Consequently, shareholders have no authority to act on the corporation's behalf. Shareholders in closely-held corporations, however, generally also hold director and officer positions.

2. Directors

The business affairs of the corporation are managed by a board of directors. The directors, in fact, do not direct the corporation's daily business, but perform the important functions of appointing those who do (officers) and monitoring their performance. Some corporate decisions are required by statute to be approved by the board of directors. Otherwise, the directors make broad grants of their statutory authority to manage the corporation's affairs and execute on corporate policy set by the directors. Directors are elected by the shareholders, generally for annual terms.

3. Officers

Since the directors do not meet often enough to implement their decisions, this task is assigned to officers. Officers are agents of the corporation. Officers report to the board of directors or such official as the board may designate. Officers may have various titles, but tradition titles include Chief Executive Officer, President, Vice-President, Secretary, and Treasurer. The major corporate officers are appointed by the board of directors and serve at the board's pleasure, subject to state corporate statutes and the corporation's articles of incorporation and bylaws.

CONTIUNUTY OF EXISTANCE

A corporation has perpetual existence. In other words, the corporation's existence continues notwithstanding the death or incapability of its shareholders or a transfer of its shares.

FORMATION AND OPERATION

Corporations are formed by filing Articles of Incorporation with an agency in the state of incorporation, which is typically the state where the corporation maintains its principal place of business. If raising capital or tax issues are involved, a corporation may incorporate in a state where it has no physical presence. Some corporations charter themselves under Delaware law due to the well-developed corporate laws and a judiciary that is experienced in corporate matters. No matter where incorporated, the corporation must also register as a foreign corporation in each state where it is "doing business."

Typical organizational documents include Articles of Incorporation and Bylaws that address corporate governance. Most closely held corporations also have shareholder agreements between shareholders addressing issues such as voting, restricting sales of stock (aside from restrictions imposed under state and federal securities laws) and other matters of importance to shareholders. Corporations also require a certain level of formality, such as documented meeting of the board of directors at least annually and required annual reports to the state agencies where incorporated and where registered as a foreign corporation.

CORPORATE CAPITAL AND STRUCTURE

A Corporation issues stock to its shareholders in exchange for capital they invest in the business. Corporate stock is also very useful way to fund employee stock option or bonus plans, provided securities laws are complied with. Furthermore, a corporation can use it to fund a buyout of another business or exchange or alter it into the share of another corporation to effect a merger or acquisition ("M&A").

COMPARISON AMONG DIFFERENT BUSINESS FORMS

Characteristic	General Partnership	LLC	Corporation
Liability of Owners	Partners are personally liable for obligations of the partnership	Members are not personally liable for LLC's obligations	Shareholders are not personally liable for corporate obligations
Transferability of Ownership (all subject to securities laws compliance)	Partners cannot transfer their full ownership interest without unanimous consent	Members can freely transfer their financial rights, but cannot transfer their management rights without unanimous consent	Shareholders are free to transfer their ownership interests
Taxation	Partnership pass-through taxation	Pass-through taxation by default (sole proprietorship or partnership); Members may also elect C or S corporation taxation	C corporation: Firm-taxation S corporation: Pass-through taxation
Management	Partners manage and each partner may bind the partnership	Members may manage (default) or appoint managers	Managed by officers who are controlled by directors; shareholders have no management rights
Formation Requirements	Partnership can be formed through oral or written agreement or through conduct	Members must file Certificate of Formation with state	Incorporator files Articles of Incorporation with state

Labels: Business Entities, Corporations, Subchapter S Corporations

WHAT IS A TRADE NAME?

A trade name is a name that is commonly used by a business that does not use the full legal name of the business. Although it is usually registered with a state government agency and is commonly referred to as a “doing business as” or “DBA,” it is a “shorthand” business name used for commercial purposes. The state government does not give companies a trade name with a prospective right as granted for a trademark. A trade name is protected only if it is functioning as a trademark to identify and distinguish the company’s goods from those of others.

TRADE NAME REGISTRATION

Although the procedures to register a trade name vary from state to state, registration of a trade name does not involve any complicated process to be approved by a state government. Applicants simply list the name they want to register on the application and pay for the processing fee and the registration fee. There is generally no “clearance” performed by the state agency other than to deny registration for a trade name already registered.

WHAT IS THE DIFFERENCE BETWEEN A TRADE NAME AND TRADEMARK?

A trade name is a “shorthanded” name to identify a business other than by its legal name, such as ABC (trade name) instead of ABC Inc. (legal name). A trade name may also be used to identify a company’s products or services just like a trademark but in order to receive trademark protection, the trade name that is used as a trademark must be protected as a trademark. As mentioned in an earlier trademark article, trademark law gives the most protection to distinctive names, logos, and other marketing devices. In decreasing order of distinctiveness are marks that are: (1) arbitrary and fanciful; (2) suggestive; (3) descriptive; and (4) generic. A business should not assume that its registered trade name gives the company the right to use the trade name for any business purpose and is legally fully protected.

TRADE NAME INFRINGEMENT

The test used to determine whether one company’s trade name infringes that of another is whether the use is likely to cause confusion, mistake, or deception among the relevant consuming public just as the test used for trademark infringement. Therefore, if a company’s trade name is sufficiently similar to another’s registered trademark, the test of “likelihood of confusion” is applied to such confusing trade name and a trade name may infringe on a trademark. Misuse of a trade name could also expose a company to liability under federal and state unfair competition laws and consumer protection acts.

Although trade name registration is not a complicated process, companies should be careful about selecting a trade name. If the trade name is infringing another’s trademark, the company using the infringing name might ultimately have to change it and spend extra costs on reparative advertising in addition to defending and paying damages from a trademark infringement lawsuit by the trademark owner. In other words, the business should approach trade name adoption with similar care as it would create trademarks.

Labels: Trade Name

In Trademarks 101 (Part 1 of this series), trademarks, servicemarks and the registration process briefly explained. In this installment, trademark limitations, infringement and importance of registration are explored.

COMMON INSTANCES WHERE A COMPANY CANNOT ACCQUIRE TRADEMARK PROTECTION

· Abandonment. Abandonment is a situation in which the owner of a mark does not use the mark for a significant period of time, fails to protect the unauthorized use or lets others use the mark without adequate supervision. If a mark is abandoned, the owner might lose its exclusive rights to the mark. For example, if the owner of a mark for an apartment closed its business and failed to use the mark for twenty years the owner would have abandoned the mark.

· Generic Terms. Generic terms are common words or terms which the relevant purchasing public identify products and services and are not specific to any particular source. For example, the term “cola” is a generic term.

· Likelihood of Confusion. The terms “likelihood of confusion” or “confusingly similar” refer to the foundation of trademark law. It is the standard required to prove infringement of a trademark. The likelihood of confusion test is also one of several examinations conducted by the USPTO in determining whether or not to approve an applicant’s trademark application. Intent to infringe is not necessary as an innocent infringement is just as damaging to a trademark owner as an intentional one. Although the defendant’s intent to infringe may play a role in assessing damages, there is no requirement that defendant have intended to infringe another’s mark.

· Descriptive Trademark. A descriptive trademark is a mark that is descriptive or suggestive of the product or service and entitled to a lesser degree of protection than a stronger mark (i.e., one that is arbitrary or fanciful). A descriptive trademark will not be protected unless the owner of the mark can prove that consumers are aware that the mark is associated with their product or service. If an applicant attempts to register a weak mark, the USPTO will not approve a mark unless the applicant proves distinctiveness.

· Functional Design. Trade Dress is the totality of elements in which a product or service is shaped or packaged, such as the shape and appearance of a product or container. Trademark law will not protect functional aspects of a product or packaging. For example, an electric guitar body can be made with various designs. The guitar designs may be trademarked because the guitar's design is not required for it to function properly. The design may be also protected as a design patent.

TRADEMARK INFRINGEMENT

Infringement may occur when a mark is identical or confusingly similar to a trademark of its owner. Once it is determined that another mark may be confusingly similar, a trademark owner should take aggressive action. Failure to take steps to protect a mark can be held to constitute a waiver of any rights in the mark. If a mark is federally registered, the registrant may initiate a civil action in federal court against anybody who used the mark without the registrant’s consent in a manner likely to cause confusion.

If the mark is infringing, the registered mark’s owner may be able to recover the infringer’s profits, the mark owner’s damages, treble damages, costs and attorney’s fees. On the contrary, if the trademark’s owner has not been damaged, the court has discretion to allow the competitor to use the mark under very limited circumstances in order to avoid the possibility of consumer confusion.

IMPORTANCE OF TRADEMARK REGISTRATION

Registration of a trademark with the USPTO gives constructive notice nationally that trademark belongs exclusively to the registrant. The registrant is also allowed to use the symbol ® to indicate that the trademark has been registered. Once a mark is registered with the USPTO, an infringement action can be initiated in federal court, a variety of remedies can be granted, including damages. A mark owner does not need to have federally registered a trademark with the USPTO to initiate a lawsuit for competing use of the infringing mark, but would rely on unfair competition laws. Moreover, the unregistered mark owner’s right of enforcement may also be geographically limited to one or more states, rather than nationwide had the mark been registered with the USPTO. Most states also provide for some means registering trademarks with a state agency and allow for some remedies in case of infringement.

Labels: Servicemark, Trade Dress, Trademark

WHAT IS TRADEMARK?

A trademark is a “word, name, symbol, device, or combination” of these that an entity uses to identify and distinguish its goods from those of others. A service mark is similarly defined, but is used to distinguish services. The term “mark” includes both trademarks and service marks. Titles, character names, or other distinctive features of movies, television, and radio programs can also serve as marks when used to promote a product or service. Once a mark is established, the owner is entitled to its exclusive use. For example, the name “Chanel” and the overlapping double “C” symbol have value because people associate them with Chanel’s products and all of the luxury and quality and trust that the company has built over the years.

TRADEMARK REGISTRATION

To register and obtain benefits of registration under federal trademark law, an applicant files an application with the U.S. Patent & Trademark Office (“USPTO”). A mark can be registered if it is currently used in commerce. An applicant can also file an intent to use application if the applicant intends to put mark into practice within six months, although subsequent extensions are available and registration is required. A registration is effective for ten years and renewable every ten years. After the initial registration, however, the mark’s owner must file an affidavit demonstrating continuous use in commerce between fifth and sixth years after the initial registration. World-wide trademark registration and management is complicated because trademark rights are solely territorial in scope. Each country has its own laws and registration systems. Some countries, for example, grant trademark rights based on a first to use in commerce basis and other countries on a first to file basis. Generally, to obtain global trademark protection, the rights have to be acquired individually on a country by country basis, although treaties, such as the Madrid Protocol, provide a means to coordinate registrations.

TRADEMARK LAW

Trademark law gives the most protection to distinctive names, logos, and other marketing devices. In decreasing order of distinctiveness are marks that are: (1) arbitrary and fanciful; (2) suggestive; (3) descriptive; and (4) generic. Arbitrary marks can be commonly used words that have no relationship to the goods or services they are associated with. Fanciful marks are typically made-up names. Suggestive marks suggest a good or service without actually describing them. Descriptive marks describe a product or service, such as the purpose, quality or geographic origin. Generic marks merely describe the type of product or service. Distinctive marks include arbitrary, fanciful and suggestive marks, which are registerable with the USPTO without demonstrating that the mark has acquired a “secondary meaning” in the market. Descriptive marks, however, may only be registered if a “secondary meaning” has developed through sales and advertising and can be demonstrated by the applicant’s substantially exclusive and continuous use for five years.

Competing uses of marks are generally resolved in favor of the owner to first to use the mark in a category or within a geographic area. The test used to determine whether one company’s mark infringes that of another is whether the use is likely to cause confusion, mistake, or deception among the relevant consuming public. In the test, actual confusion is not necessary. It is likelihood of confusion that is measured.

In Trademarks 102 (Part 2 of this series), trademark limitations, infringement and importance of registration will be explored.

Labels: Servicemark, Trademark

WHAT IS NON-DISCLOSURE AGREEMENT?

A Non-Disclosure Agreement is a contract to protect information considered to be confidential or proprietary and disclosed in an employment relationship or in business transactions. It is sometimes called “Confidentiality Agreement” or “NDA.”

WHY IS A NON-DISCLOSURE AGREEMENT NECESSARY?

• To Protect Trade Secrets. A Non-Disclosure Agreement is used to protect trade secrets. A trade secret is any type of information that is not generally known by the public and from which actual or potential economic value can be derived. The owner of a trade secret must use reasonable efforts to maintain secrecy. By using Non-Disclosure Agreement, a trade secret owner can maintain the trade secret status, while preventing the recipient of the information from further disclosing the information to a third party and retaining control over use of that information. In many circumstances, a NDA can be specifically enforced judicially through injunctive relief.

• To Create A Business Relationship. A Non-Disclosure Agreement is also used in common business transactions where any confidential or proprietary information is shared. For example, when companies expand their business or create a strategic alliance such as a joint venture, development agreement or outsource business processes, the strategic partner receiving the confidential information needs limits on use and further disclosure of the confidential information. A Non-Disclosure Agreement allows the disclosing party to share its proprietary and confidential information with others without unduly jeopardizing the information.


NON-DISCLOSURE AGREEMENT CONSIDERATIONS

1. Definition of Confidential Information. The definition of “Confidential Information” plays a very important part of a Non-Disclosure Agreement because it determines the scope of information disclosed and protected under the NDA. The definition of confidential information needs to be specifically defined such as the forms of confidential information (e.g,. tangible or intangible). In most cases, the agreement includes the provision where orally disclosed information is protected if the disclosing party confirms the confidential nature of the disclosure in writing within a certain period of time. Indeed, the form of confidential information is irrelevant to its status as a trade secret. The Washington Supreme Court held that a memorized customer list did not lose its trade secret protected status merely because a former employee did not take the list in a tangible form.

2. Non-Disclosure Agreement Types. A Non-Disclosure Agreement is often categorized as either mutual or one-way, but it is also used among multiple companies such as for the purpose of a strategic alliance.

3. No Use or Disclosure of Confidential Information. Typically the disclosing party seeks to limit the recipient from disclosure to any third party or restrict use of the confidential information other than the purpose described in the NDA. Indeed, a typical requirement is that the confidential information is allowed to be provided to the disclosing party’s employees on a need to know basis. Generally, where confidential information is sought by a governmental body or requested by subpoena or other court order, the recipient must resist such request, notify the disclosing party and cooperate with the disclosing party in challenging the request.

4. Limits on Confidential Information. A Non-Disclosure Agreement generally puts some limits on the type of information such as information already in public domain, possessed by the recipient before being disclosed by the discloser or independently developed within the recipient’s organization. Another purpose to limit confidential information is to make sure that the Non-Disclosure Agreement is not extended too much and to comply with the Uniform Trade Secret Act.

5. Term of Non-Disclosure Agreement. A Non-Disclosure Agreement is usually meant for a specific purpose and should be documented for each purpose. Generally, the protection of confidential information remains even after the relationship of the parties ceases, so long as the confidential information remains a secret.

Labels: Confidentiality Agreement, NDA, Non-Disclosure Agreement, Trade Secret