Credit: Robert Ullman

The three ABC Home Improvement employees all left the company the same week. Within a month they turned up at a local home show as “XYZ Home Improvements.” Not only that, but their scripts, brochures, and contracts were virtually the same as those used by ABC. Then XYZ yard signs began popping up on property that belonged to people listed as unsold leads in the ABC Home Improvement database. And XYZ bids were always a few hundred dollars under competing bids from ABC.

If you were the owner of ABC Home Improvement your recourse would be to sue for intellectual property appropriation — and that wouldn't come cheap. R. Mark Halligan, of Peabody Nixon in Chicago, a legal expert on the subject, estimates that in Illinois, where he practices, it would cost about $25,000 to initiate such a suit. The alternative, he says, is to do nothing, “in which case you're losing your company” as those new competitors use what you created to gain unfair advantage.

NEED TO KNOW You may not think of your financial plan, pricing formula, marketing scripts, and other information as trade secrets. Most small businesses, like ABC Home Improvement, are “woefully unprepared” when it comes to protecting their intellectual property, says William DeGenaro, of DeGenaro & Associates, a consulting firm in Sarasota, Fla., that specializes in competitive intelligence. A first step to take, he says, is to define what constitutes “trade secrets” for your business.

Under U.S. law, trade secrets consist of information that “derives value from not being publicly known” and which the owner has “taken reasonable efforts to protect.” Once you've defined this, employees, DeGenaro says, “should be put on notice” that that's what they're handling. “So if somebody walks off with [that material], you can bring an action.” It can be as simple, he says, as labeling documents “Company Confidential.”

Halligan says that two steps can shield you from about 80% of potential liabilities when it comes to trade-secret theft. First, “restrict access to such information on a need-to-know basis.” Second, structure your company so that no one but the owner and a few key employees have access to all the proprietary information.

AGREEMENTS Stealing trade secrets is far more easily accomplished in the electronic age. Non-disclosure and non-compete agreements (in some states) can help you protect intellectual assets, but asking employees not to disclose your business secrets or use them to competitive advantage against you won't do much good if you haven't defined what those secrets are, Halligan says.