How Businesses Can Identify and Prevent Trade Secret Theft

What Legally Qualifies as a Trade Secret?

Colleen McKnight explained that under both Texas and federal law, a trade secret can be information, a process, a method, or a system that is not publicly known and that provides economic value. The classic examples often referenced are Coca-Cola’s secret recipe or KFC’s signature blend of herbs and spices—formulas that remain highly guarded because once revealed, competitors could replicate them.

Colleen emphasized that trade secrets are not limited to famous brand recipes. Many businesses hold confidential client lists, proprietary data processes, or unique methods of service delivery that provide them with a competitive edge. The key legal factors are whether the company treated the information as secret and whether it was acquired improperly by another party.

How Do Companies Discover Trade Secret Theft?

Businesses often first realize their trade secrets have been taken when an employee leaves for a competitor and that competitor suddenly gains the ability to compete in ways it could not before. Colleen noted that forensic checks on company laptops and devices frequently uncover suspicious activity, such as employees plugging in external drives or emailing confidential files to personal accounts before departing.

While sometimes these discoveries happen too late, proactive monitoring can provide early warning. Companies that understand their trade secrets are “the key to the kingdom” often invest in security protocols to track unusual activity and require departing employees to certify deletion of confidential materials.

Is There a Registry of Trade Secrets?

Unlike trademarks, copyrights, or patents, trade secrets are not registered with the government. Colleen stressed that this lack of registration makes them uniquely vulnerable. A business cannot publicly file its confidential information without losing its secrecy, which means the burden is on the company to demonstrate that it actively protected its information.

She explained that proving secrecy is always part of litigation. If the information was made publicly available, whether in marketing materials, investor decks, or shared without restriction, it becomes much more difficult to claim it as a trade secret.

How Do Courts Determine What Counts as a Trade Secret?

Courts examine whether the business treated the information as confidential and whether it truly provided value. Colleen explained that employers strengthen their claims by requiring employees to sign confidentiality agreements that specifically identify trade secrets. These agreements not only demonstrate the company’s intent to protect the information but also create grounds for breach of contract claims if an employee later discloses it.

She acknowledged the tension between employees seeking career advancement and businesses trying to protect their investments. Non-compete agreements are one way companies attempt to balance these interests, though courts and lawmakers increasingly limit their scope to prevent unfair restrictions on workers.

Civil and Criminal Aspects of Trade Secret Theft

While trade secret theft most often leads to civil lawsuits, Colleen explained that it can also result in criminal prosecution under laws such as the Computer Fraud and Abuse Act. This can occur when trade secrets are obtained through hacking, unauthorized access, or corporate espionage. In such cases, individuals may face not only civil damages but also federal penalties, including prison time.

What Legal Steps Should Businesses Take If They Suspect Theft?

Colleen advised that the first step is to conduct a forensic review of company data and devices. Experts can identify whether files were transferred to external drives, personal email accounts, or other unauthorized locations. This evidence becomes critical in proving theft and taking legal action.

She also recommended ensuring that employees sign strong confidentiality agreements at the outset of their employment. In Texas, breach of such agreements can allow businesses to recover attorney’s fees in addition to damages for misappropriation.

How Can Businesses Prevent Trade Secret Theft?

Preventive measures are essential. Colleen recommended that companies:

• Require confidentiality agreements as part of employment contracts or handbooks.

• Tie agreements to compensation or bonuses to ensure enforceability.

• Limit disclosure of trade secrets in presentations to clients or investors.

• Implement electronic monitoring and offboarding procedures to review employee activity when they leave.

She emphasized that small and mid-sized businesses often overlook these steps because they are focused on day-to-day operations. However, failing to secure trade secrets can undermine years of work and innovation if confidential information walks out the door with a departing employee.

Why Protecting Trade Secrets Is Critical to Business Growth

According to Colleen, trade secrets often represent the innovation, processes, and data that give a business its competitive advantage. Without adequate safeguards, that advantage can disappear overnight. Courts will only recognize information as a trade secret if companies demonstrate that they treated it as one.

Ultimately, businesses must take proactive measures to secure confidential information before disputes arise. By treating trade secrets as valuable assets and protecting them with strong legal agreements and data security practices, companies position themselves to defend against theft and ensure long-term success.