What is a Trade Secret?

It is common for people to discuss patents, trademarks and copyrights, but there is a fourth kind of intellectual property which can be just as important – trade secrets.

Definition of a Trade Secret:

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as “confidential information”, but are generally not referred to as “classified information” in the United States, since that refers to government secrets protected by a different set of laws and practices. (-Wikipedia)

Since the definition states “In some jurisdictions” – that actually means that the exact definition can vary from state to state. Most states also include that it should be treated in a way so that it can reasonably be expected to prevent the public or competition from learning about it (except being stolen or improperly acquiring). In other words, steps must be taken to protect or guard the trade secret.

The precise definition may vary by jurisdiction, but in general, an easy way to identify a trade secret is to see if it answers the following three questions:

  1. Is it not generally known to the public?
  2. Does it convey an economic benefit to the holder (not the value of the information itself, but the value that it is a secret)?
  3. Is it subject to reasonable efforts to keep it secret?

Trade Secret Examples

  • A drink formula
  • A recipe (the famous seasoning blend used for Kentucky Fried Chicken for instance).
  • A computer algorithm or program.
  • A manufacturing technique.
  • A marketing strategy or process.
  • A customer list that cannot be created from general available sources.

A new invention that has not been filed for a patent yet could be considered a trade secret. Also, a new trademark that a company is planning to use could be considered a trade secret – until it is publically used.

What is the Value of a Trade Secret?

A trade secret is an important part of a company’s intellectual property portfolio. Unlike trademarks, copyrights, and patents – they are invisible in the sense they are not publically known. Not only are the secrets not known, but even the fact that there is a secret may not be known.

Since a trade secret is such an unknown, it becomes difficult to value. Other forms of intellectual property have visible, measurable contributions – for instance, royalties received off a patent. Another example is the licensing of a trademark. These create measurable value but a secret could be immeasurable.

What are the Benefits of a Trade Secret vs. a Patent?

Some businesses may have a trade secret and at some point decide to protect themselves with a patent. The problem is the patent process involves disclosing the information publically, so it is no longer a secret. The inventor has to provide detailed and enabling disclosure about the invention to keep others from the invention for a limited time period. This public disclosure has many negative possibilities. Other companies may illegally create knock-off processes or products. Others may try to slightly change or enhance the process and file for a different, better patent.

Since patents expire (after 20 years) the information becomes no longer protected. Trade secrets can be protected for an unlimited time period.

Unlike patents, trade secrets are protected without a formal registration process. There is no need to file for a patent and await approval. There is also no need to pay for the costs in applying for a patent. Trade secrets are immediate, patents take time. The trade secret can still be legally protected as long as someone tries to reasonably keep it a secret. Patents do not require secrecy to be maintained.

In some cases, there may be an argument for both. A patent may be filed and during the time of awaiting approval the information could be kept as a trade secret. The processes could undergo improvement and more during the waiting process and this information can be kept secret.

So which is better? It really becomes a business decision and an intellectual property lawyer may be needed. If it is possible that someone could independently make the same discovery, a patent may be in order. It may be possible the trade secret isn’t even eligible to become a patent. There are pro’s and con’s for each type. The best way to remember it is, a patent is “Do It Yourself” protection.

How Do You Protect and Defend Trade Secrets?

The first step in defending a trade secret is… to keep it a secret. If reasonable effort is not made to do so, a court may find that it doesn’t qualify as a trade secret. If the secret holder fails to maintain secrecy, or the information is independently discovered or becomes release, the protection of the secret is lost. That said, in business it often becomes necessary to share the secret with others in order to perform work.

Enter the confidentiality agreement – the first line of defense for a trade secret. Most trade secrets are abused or stolen by former employees. A confidentiality agreement should expressly make known that the trade secret is a secret. All parties involved should know that they are receiving secret knowledge that is not to be shared outside the company. It should also be clear that even after the party leaves employment the secret is not to be used for their benefit – a non-compete agreement. State laws vary on what can be put into a non-compete agreement.

Similar agreements may also be required of other parties, such as board members, licensees, and vendors.

If a party violates a confidentiality agreement it is considered “misappropriation”. Misappropriation is considered a violation of a trade secret. Trade secret misappropriation is usually considered a type of unfair competition.

Trade secrets can also be discovered through improper means. These are defined by The Uniform Trade Secrets Act as “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”

Though these are improper, it is important that reasonable effort is made. For instance, some secret documents are stored in a safe. Obviously putting a trade secret on a computer that is potentially publically accessible would be a mistake. Reasonable efforts would involve computer security such as firewalls, changing passwords, limited accessibility, etc.

To maintain trade secret protection, special procedures for handling it, as well as technological and legal security measures need to be in place. You can do your best to protect against employee poaching and improper methods like industrial espionage, but you cannot protect your secret against lawful reverse engineering (and then subsequent patenting). If your product or formula could be discovered through such means, it may be advisable to seek a patent for greater protection.

How Do You Prosecute a Trade Secret Violation?

First you have to prove that the trade secret was misappropriated, infringed, or wrongfully acquired by someone else. One done there are several legal remedies. A court may order one or more of the following: damages, court costs, attorney fees, profits, royalties, and an injunction. In some circumstances, misappropriation is even considered a federal crime.

Is There a Negative Side to Trade Secrets?

Unfortunately, trade secrets can have a potentially dark side too. Trade secret regulations allow for the masking of certain chemical agents in consumer products considered trade secrets. The producers have been criticized for not revealing the presence of toxic or possibly harmful substances. It can be argued that the public is not being presented a clear picture of the safety of these products. For example, in 2004, the National Environmental Trust tested 40 common consumer products; in more than half of them they found toxic substances not listed on the product label.

Also, under some circumstances trade secrets may be disclosed. This is done mainly to protect whistleblowers. The DTSA for instance contains whistleblower immunity provisions that provide immunity (civil and criminal) for employees and even contractors who disclose trade secrets under specific circumstances. History has shown us that though some whistleblowers have the public’s best interest in mind, others have less noble purposes.

Should I have a Trade Secret or a Patent?

At Williams IP Law, we are more than happy to consult with you on the solution that works best for you. Please feel free to contact us for a meeting or email us. We are more than happy to help answer any questions you may have.

Author: Jeff Williams

Jeff Williams is an experienced mechanical engineer and lawyer that consults closely with clients in a strait forward and clear manner. He brings a particular set of strengths and unique perspectives to the firm.

Jeff received a B.S. in Mechanical Engineering from Arizona State University in 2005. He was an engineer for a number of years at a number of large corporations before pursuing his law degree. He graduated from Texas A&M University School of Law (formerly Texas Wesleyan University School of Law) with a J.D. in 2010. By combining his education and prior work experience into the field of intellectual property law, Jeff has developed key skills to fully assist clients.