A food product formula is a quintessential example of a trade secret. Maintaining the distinctiveness and authenticity of a food product is the center of gravity for a successful food business.
In our experience, food businesses chronically underestimate the economic value of product formulas and their other intellectual properties. Unless a food product can be patented, it cannot be protected by resorting to national registries like trademark and copyright. To protect trade secrets, food businesses need to resort to comprehensive confidentiality agreements with everyone they do business with. Non-disclosure agreements, non-circumvention agreements, non-solicitation agreements, and non-competition agreements are a family of documents called confidentiality agreements.
The Difference Between Trade Secrets and Confidential Information
A “trade secret” is any information, like a food product recipe, that:
- Derives economic value from not being generally known to the general public; and
- Is the subject of reasonable efforts to maintain its secrecy.
“Confidential Information”, on the other hand, has no fixed definition at law. Most agreements define for themselves what “confidential information” means. They generally define it as “all the information shared by the parties during the course of their business dealings”, or some type of omnibus definition like that.
Trade Secrets and Confidential information are not mutually exclusive terms, and this lack of precision is detrimental to those with trade secrets to protect. The law requires that trade secrets be treated differently than information that is merely confidential. The law requires holders of “trade secrets” to take reasonable efforts to perpetually safeguard the information from disclosure. Trade secrets erode the minute the holder begins to fail to protect them.
How to Protect Trade Secrets
Maintaining trade secrets requires a thorough blend of practical and legal protections. For practical controls, we suggest information management and compartmentalization. For legal protections, we deploy coordinated legal agreements with employees and contractors.
The Practical. Share trade secrets only when absolutely necessary to conduct a compelling business arrangement. Confidentiality agreements are great, but no one can leak information that they do not have. We encourage information compartmentalization as a routine, best practice for information control. There is no reason for the sales team to know the product formula, just its specifications. A food safety consultant does not need to know the elements of the company’s SEO strategy.
The Legal. If you have to share the information due to business necessity, deploy crisply-written confidentiality agreements. There are two fundamental features that every nondisclosure agreement needs:
- A distinction must be made between information that is merely confidential and information that is identified by the parties as trade secrets; and
- A term of perpetual confidentiality for the items of information described as “trade secrets”.
A nondisclosure consultation is a great introduction to trade secret law and trade secret management for a food business leader. Once the basic parameters are established, a more comprehensive strategy can be implemented for the long term protection of trade secrets.
The Comprehensive Approach
Third Party Service Providers. Nondisclosure agreements needs to be established with every outside contractor that will require access to confidential information or trade secrets, prior to any negotiation. If the parties agree to do business, the terms of the commercial relationship should include enhanced terms of confidentiality, if applicable. This is the opportunity to use non-competition clauses and non-circumvention clauses.
Employees. Employees that need access to trade secrets in order to do their jobs must have nondisclosure terms in their employment agreements. Other kinds of restrictive covenants, particularly those that affect the post-employment opportunities of the employee, are trickier. State employment laws can limit an employer’s ability to impose restrictions on post-employment opportunities. This makes it difficult, for instance, to prohibit an employee from moving to another job in a competing organization. Employee restrictions that protect trade secrets are always supported by law, but anything more aggressive, such as non-compete terms, must be run through employment law counsel.
In any case, it never hurts to conduct an exit interview with an outbound employee and review the nondisclosure agreement they signed while employed, as a gentle reminder of their continuous obligation of confidentiality.
Special Considerations for Food Businesses Using Copackers.
- Anticipate How Trade Secrets Can Mutate. This is a special food industry consideration. Product formulas are often modified by copackers during scaling. It is important to address how product modifications will be treated in a copacker agreement. If copackers make modifications to the recipe, ownership of those potentially new trade secret rights must accrue to the benefit of the food business. In a copacker agreement, these rights to modifications are “assigned” to the food business.
- Think About the Supply Chain. If a product distributor creates a relationship with your copack manufacturer, say during the weekly product delivery, it may create a very tempting opportunity for the manufacturer and the distributor to cut the marketer out of the picture and go into business together with a competing product. If your distribution scheme requires contact between manufacturers and distributors, think about enhancing the copack agreement with non-competition and non-circumvention clauses.
Our subscription service
Clients realize the greatest value out of our services when they stack them together comprehensively. Our subscription-based service plans enable our clients to weave our services into the fabric of their businesses at affordable and predictable rates.