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Seven Critical Mistakes Real Estate LLCs Make (and How to Avoid Them) — Mistake #6: Failing to Protect Trade Secrets

It’s not just technology companies that have intellectual property.  As I’ve written about before, real estate companies have I.P. too!

Trade secrets are a form of I.P. that almost every company owns.  Sadly, many companies fail to recognize, and capitalize on, their own trade secret assets.

MISTAKE #6: Failing to Protect Trade Secrets

Trade secrets are commonly associated with secret formulas (think Coca-Cola recipe) and computer algorithms.  But just as often, if not more so, trade secret cases feature whatever specific company information that is most closely tied to revenues from customers.

That’s because the definition of a “trade secret” is very broad.

“Trade Secret” Defined

Under California law, a trade secret is information that:

  1. is not generally known in the industry,
  2. has independent economic value, and
  3. is subject to reasonable efforts to maintain its secrecy.

The possibilities are endless!

The definitional elements are not always easily met (especially #3), but the elements cover a very broad spectrum of information.

“Quit and Compete” Cases

The typical time an LLC begins thinking about trade secrets is when it’s already too late to do optimal good.  A key employee or member has just quit, taken key investor/client/vendor information with them, and is now competing with the company.

Every LLC manager and member should think through these unpleasant possibilities in advance.  If a key player quits and competes against the company, what company information should be most closely guarded?

Whatever that information is, it should be treated as a trade secret from day one.  If efforts aren’t made to keep the information secret, then it will not be entitled to trade secret protection, no matter how valuable.

Contacts Cases and the Power of LinkedIn

If the information is “readily ascertainable,” it’s not a trade secret.

Many trade secret cases feature disputes over customer contact information.  In some older cases, employees taking their “rolodex” with them triggered trade secret misappropriation claims.  In the age of social media, these types of claims have lost some of their luster.  After all, basic contact information is now freely available on LinkedIn and other online resources.

The highest value trade secrets involving customer information go far beyond basic contact information, such as email addresses and telephone numbers — they involve more detailed data involving ordering habits, timing, pricing, and preferences.  (Information that cannot normally be gleaned from LinkedIn.)  This type of detailed information should be safeguarded at all costs.

Lesson

Treat company secrets like, well … secrets.

The Operating Agreement should address and limit access to trade secret information, and should include provisions triggered by termination of employment/membership (such as return of company computers and information).

If those precautions are followed, a company will be in a much stronger position to enforce its trade secret protections when it matters.

 

Next post in series (coming soon) … MISTAKE #7: Sinking Profits on Messy “Business Divorce” (Judicial Dissolution)

Prior posts in this series:

MISTAKE #1: Choosing the Wrong Business Partners

MISTAKE #2: Skimping on the Formation and Operating Documents

MISTAKE #3: Ignoring Member Rights and Duties

MISTAKE #4: Stepping into “Alter Ego” Liability

MISTAKE #5: Misunderstanding Secured Loan and Guaranty Rights / Liability

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