Trade secrets are a type of intellectual property that includes formulas, practices, processes, designs, instruments, patterns, or compilations of information that have inherent economic value because they are not generally known or readily ascertainable by others, and which the owner takes reasonable measures to keep secret. Intellectual property law gives the owner of a trade secret the right to restrict others from disclosing it. In some jurisdictions, such secrets are referred to as confidential information.
Trade secrets are an important, but invisible component of a company’s intellectual property (IP). Their contribution to a company’s value, measured as its market capitalization, can be major. Being invisible, that contribution is hard to measure. Still, research shows that changes in trade secrets laws affect business spending on R&D and patents. This research provides indirect evidence of the value of trade secrecy.
In contrast to registered intellectual property, trade secrets are, by definition, not disclosed to the world at large. Instead, owners of trade secrets seek to protect trade secret information from competitors by instituting special procedures for handling it, as well as technological and legal security measures. The most common reason for trade secret disputes to arise is when former employees of trade secret-bearing companies leave to work for a competitor and are suspected of taking or using valuable confidential information belonging to their former employer. Legal protections include non-disclosure agreements (NDAs), and work-for-hire and non-compete clauses. In other words, in exchange for an opportunity to be employed by the holder of secrets, an employee may sign agreements to not reveal their prospective employer’s proprietary information, to surrender or assign to their employer ownership rights to intellectual work and work-products produced during the course (or as a condition) of employment, and to not work for a competitor for a given period of time (sometimes within a given geographic region). Violation of the agreement generally carries the possibility of heavy financial penalties which operate as a disincentive to reveal trade secrets. Trade secret information can be protected through legal action including an injunction preventing breaches of confidentiality, monetary damages, and, in some instances, punitive damages and attorneys’ fees too. In extraordinary circumstances, an ex parte seizure under the Defend Trade Secrets Act (DTSA) also allows for the court to seize property to prevent the propagation or dissemination of the trade secret. However, proving a breach of an NDA by a former stakeholder who is legally working for a competitor or prevailing in a lawsuit for breaching a non-compete clause can be very difficult. A holder of a trade secret may also require similar agreements from other parties he or she deals with, such as vendors, licensees, and board members.
As a company can protect its confidential information through NDA, work-for-hire, and non-compete contracts with its stakeholders (within the constraints of employment law, including only restraint that is reasonable in geographic- and time-scope), these protective contractual measures effectively create a perpetual monopoly on secret information that does not expire as would a patent or copyright. The lack of formal protection associated with registered intellectual property rights, however, means that a third party not bound by a signed agreement is not prevented from independently duplicating and using the secret information once it is discovered, such as through reverse engineering.
Companies often try to discover one another’s trade secrets through lawful methods of reverse engineering or employee poaching on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws, and penalties can be harsh. The importance of that illegality to trade secret law is: if a trade secret is acquired by improper means (a somewhat wider concept than “illegal means” but inclusive of such means), then the secret is generally deemed to have been misappropriated. Thus, if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for having acquired it improperly this notwithstanding, the holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret, as under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.
Economic Value from Secrecy
A trade secret must derive economic value from not being generally known in the industry. To determine whether such information has economic value resulting from secrecy‚ factors such as the value of the information to the trade secret holder‚ the value to competitors‚ and the amount of effort or money expended in developing the information may be considered. If information is valuable to a business because it is kept out of the hands of competitors‚ it may be protected as a trade secret.
For example‚ if a paper manufacturer had a machine‚ method‚ or process that could recycle used paper into new paper more quickly‚ efficiently‚ and with less expense than its competitors‚ it could sell its post-consumer paper products for a lower price while still maintaining a profit. Such information would be highly desired by competitors and uniquely valuable to the paper manufacturer‚ allowing it to overcome the competition and dominate the market. By maintaining the information as a trade secret‚ the paper manufacturer could capitalize on its invention. Were the paper manufacturer to elect to patent the invention‚ it would have to disclose the information and would forfeit the opportunity to monopolize it after the patent term expired.
Not Generally Known or Readily Ascertainable
In order to maintain a valid trade secret‚ the information may not be widely known or easily discoverable by another using proper means. Not only must the information be secret‚ it must also be capable of remaining secret. For example‚ if the process used to manufacture a product can be discovered simply by looking at the product‚ the process will not qualify for trade secret protection as it is easily ascertainable. In that case‚ the inventor would be advised to seek patent protection.
Reasonable Efforts to Maintain Secrecy
Finally‚ and perhaps most importantly‚ the holder of a trade secret must at all times expend reasonable efforts to maintain the secrecy of its trade secrets. To ensure that reasonable efforts are maintained‚ a company should enact a combination of protective measures including but not limited to restricting access of trade secrets to only essential personal‚ marking documents as confidential‚ marking sensitive areas as restricted‚ placing physical barriers such as walls‚ locked doors‚ and security guards around sensitive areas‚ restricting computer access through the use of passwords and other measures‚ and requiring confidentiality agreements for all employees who may come across trade secrets at work. A literal lock and key is the best policy for trade secrets. By enacting sufficient security measures‚ a trade secret holder will be better able to prove this element in a trade secret misappropriation action should it be necessary.