Keeping Trade Secrets Secret to Improve Profitability in the Cannabis Industry

Competitors in the burgeoning cannabis industry, like any fast-growing industry, should endeavor to protect their trade secrets—namely the recipes, formulas, methodologies and other information that gives them a competitive edge over the competition. Each proprietor should have a basic understanding for what a trade secret is, how to protect their trade secrets, and what to do if they learn that a trade secret has been stolen as the loss of such information can upend an otherwise profitable business.

Here’s an overview of how to incorporate trade secret protection into your business.

First, What Is a Trade Secret?

A trade secret is information that derives economic value from not being known to the public—or to competitors who can obtain their own economic value from the secret—and is maintained in secrecy through reasonable methods. 

Unlike other intellectual property that is protected from being copied under trademark, patent or copyright law, the information that is subject to trade secret protection is not available publically and can exist inside people’s heads in addition to other storage devices. There are many aspects of any cannabis business that may be protectable, including: agricultural methodology, manufacturing and processing methods and techniques, anything akin to a recipe or formula for the preparation of final product, as well as internal financial information, personnel information, customer information, pricing information and vendor and supply information. 

Are There Laws That Protect Trade Secrets?

Many states, including California, and the broader federal government in the U.S. have laws that protect a careful proprietor who makes reasonable efforts to protect their trade secrets. California and many states employ a version of the Uniform Trade Secrets Act, and the U.S. enacted the Defend Trade Secrets Act. Both of those laws allow the owner of a trade secret to pursue a civil claim, including a powerful injunction against a competitor or former employee who steals a trade secret. Moreover, these laws provide for double damages and the recovery of attorneys’ fees in certain conditions. 

What Do I Do to Protect My Trade Secrets?

Unfortunately, many trade secrets walk out the door with employees who are hired by competitors or who decide to start their own businesses.

Employers should make efforts to ensure that prospective employees either agree to protect any secrets that they might learn during interviews or that prospective employees are not exposed to such information. As part of the employment onboarding process, employers should be certain to have up-to-date confidentiality agreements in place with all employees, and provide some training as to the confidential aspects of their business, including the agreement to post-employment certification that they have not improperly used trade secret information. Further, employees should not be allowed to conduct company business on the employees’ personal phones and other devices that involves the company’s trade secret information.  

RELATED: What is an Onboarding Process? 

Another area where trade secrets may be lost is when dealing with vendors and suppliers. A proprietor that has confidential and secret agricultural methods, for example, should make efforts to enter into non-disclosure agreements with vendors and suppliers that not only to protect any favorable pricing that is negotiated but to protect any agricultural techniques that a vendor or supplier might learn about or see on a visit or delivery. Likewise, pricing agreements with customers may include confidentiality provisions.

Furthermore, when any employee who had access to important trade secret information departs or is terminated, a review of their email and data usage is recommended to evaluate whether they were sending information to a competitor’s or personal email account. It is often helpful to have an exit interview where the employee is reminded about their continuing obligations to maintain an employer’s confidences.

What Do I Do If I Think a Former Employee Stole Trade Secret Information?

Hire experienced counsel. The decision as to how to proceed could impact the life or death of the company. Prompt retention of counsel to investigate the potential theft is critical to minimizing damages, protecting against future losses, and, preserving evidence for a potential trial. 

Counsel should help create an investigative plan, retain forensic experts to preserve electronic evidence of any trade secret and restore deleted evidence of trade secret theft and explain the steps and costs of different avenues of pursuit. Many times, outside counsel, as part of the investigation will send a “cease and desist” letter to the former employee demanding an accounting and the return of trade secret information and threatening litigation. Other times, it may be more desirable and powerful to sue, without a warning, the former employee and the new employer and seek a Temporary Restraining Order against continued use or possession of the stolen trade secret information, followed by an injunction. 

Whatever conclusion the business comes to, if it takes no action to protect what it believes to be stolen trade secret information, a subsequent thief will claim that the business failed to take reasonable action after the first theft in an attempt to strip the important information of trade secret status.

Case Study

 In the beer industry, one with many similarities to the cannabis industry, Anheuser-Busch prosecuted one of its former employees, Mr. Clark, for breach of contract and trade secret theft. Months after Clark was no longer employed, he had a colleague send him sensitive recipe or formulary information that Clark knew was protected by his confidentiality agreement with his former employer. 

The Court supported Anheuser-Busch’s right to sue Clark under breach of contract and misappropriation of trade secret theories. Clark breached his contract by refusing, post-employment, to certify that he had not used his employer’s trade secret information after leaving employment and concluded that the brewery’s recipes and methodologies were viable trade secrets worthy of protection and that Clark’s cajoling a former colleague to send him the confidential information without checking with his supervisor constituted a misappropriation. And, while the Court did not determine the amount of damages, it concluded that the brewery had been damaged at Clark’s hand.

Conclusion

While many upstart enterprises have a high degree of confidence and trust in their employees, they should take important precautions to expressly enlist their employees’ written agreement to confidentiality to protect against the potential loss of trade secret and other important confidential information down the road. 

This is particularly crucial for those in the cannabis industry. Keeping your trade secrets hush is critical for your business success.

About Dan Forman

Dan M. Forman, Chair of CDF’s Unfair Competition & Trade Secret Practice Group, has extensive experience counseling and litigating over trade secrets, covenants not to compete, executive compensation and severance, as well as wide range of experience with other aspects of employment and labor law. He is Martindale-Hubbel AV Preeminent rated and can be reached at dforman@cdflaborlaw.com or (213) 612-6300 where he is the Managing Partner of CDF’s Los Angeles office.