Trade Secrets—Protecting Intellectual Property by Contract

How Do You Create Trade Secret Protection? What Does Infringement Look Like?

When you have proprietary information that is essential to the success of your company, it’s critical that you take available legal steps to safeguard it, so that competitors won’t unfairly benefit from your hard work. With many types of proprietary information, such as computer programs, methods, designs, techniques, formulas, and processes, you can apply for protection under the patent laws. However, the process for obtaining a patent can be long, arduous, and expensive. Furthermore, the criteria for eligibility for a patent are very strict, and you may not qualify. A better alternative might be protecting your information as a trade secret.

What Is a Trade Secret?

Though the precise definition of a trade secret can differ from one jurisdiction to another, there are three characteristics of a trade secret that are consistent throughout the United States. A trade secret is any information about a person or company, or held by a person or company that

• is not known by or available to the general public,
• provides economic value or benefit to the holder because it remains confidential, and
• that has been subject of intentional efforts by the holder to be kept confidential.

How Is a Trade Secret Created? What Is the Source of Trade Secret Law?

As a general rule, trade secrets are protected almost exclusively by contract. In most situations, companies that have valuable trade secrets require key employees, vendors, and others with access to sign nondisclosure or confidentiality agreements. The agreements bind those parties to not disclose any trade secret to an unauthorized party. A party who does so can be sued for breach of contract.

What Types of Intellectual Property Can Be Protected as a Trade Secret?

Trade secret law can protect many types of intellectual property not covered by copyright, patent, and trademark law, such as:

• Ideas, either spoken or written
• Customer lists, marketing plans, price sheets, and other important business information
• Information that would inform or lead a competitor to conclude that new products or services were under development
• Information about failed product development or about what will not work or is less effective in the development of a product

The Importance of Trade Secrets

Trade secret protection offers many benefits:

• Unlike a patent, which provides protection for only 20 years, a trade secret can provide indefinite protection—the formula for Coca-Cola has been a trade secret since 1886.
• Trade secret protection may be available for intellectual property that doesn’t qualify for a patent, copyright, or trademark—Other types of intellectual property have very specific eligibility requirements, whereas a trade secret can be just about anything, provided it’s been kept confidential and confers an economic benefit because of that confidentiality.
• Protecting information as a trade secret is far less complicated, time-consuming, and expensive than protecting it under patent law.

Real-World Examples of Trade Secrets

Many of the world’s best-known products involve some type of trade secret:

• The “special blend of 11 herbs and spices” in Kentucky Fried Chicken
• The formula for WD-40
• Google’s search algorithm
• The ingredients in a Twinkie
• The special sauce used for a McDonald’s Big Mac

Elements of a Trade Secrets Claim

To successfully recover compensation with a trade secret claim, the owner of the trade secret must show that:

• The information wrongfully disclosed, used, or misappropriated qualified for trade secret protection;
• The owner took reasonable measures to prevent the disclosure, use, or misappropriation of the trade secret; and
• The trade secret was wrongfully taken or misappropriated.

As a defense to a trade secret claim, a person or entity may successfully argue that the trade secret was obtained through independent discovery or reverse engineering or may allege that the owner of the trade secret did not take reasonable measures to protect it.

Trade Secrets Compared With Trademarks

Trademarks are significantly different from trademarks:

• The protections afforded by a trade secret require that the information be kept confidential. It’s the opposite with a trademark—a significant part of the value of a trademark comes from its recognition by the public and the association of the mark with a business enterprise.
• While trademarks can be established and protected by use only, most of the value that comes from a trademark stems from the federal registration of the mark. Trade secrets do not have to be disclosed to any government agency to have legal protection.
• Continued registration and protection of a trademark require use in commerce. A trade secret can be protected even if it is never used in commerce; it need only have the potential to confer an economic benefit.
• To qualify for trademark protection, a mark must either be inherently distinct or have obtained “secondary meaning.” Almost anything can be protected as a trade secret, provided it confers an economic benefit and has been kept confidential.

Trade Secrets and Patents

Though trade secrets and patents can offer protection for the same types of intellectual property, there are some distinct differences:

• To obtain a patent, you must file an application with the U.S. Patent and Trademark Office. The application must be filed within 12 months of the first offer to sell the invention or of the first public use/disclosure of the invention. In addition, to qualify, your invention must be new, be functional, and not be obvious. There are no filing requirements for a trade secret, and almost anything that confers an economic benefit can be protected as a trade secret, provided it has been kept confidential.
• Even if your patent is granted, you must still pay maintenance fees every 3.5 years. The only costs associated with a trade secret are the preparation of the nondisclosure agreement and any costs of enforcement.
• A patent will protect you for a maximum of 20 years. A trade secret can potentially protect you forever, as long as you maintain the confidentiality of the secret.
• A patent will protect you from any unauthorized use or copying of your invention. A trade secret prevents only misappropriation; it won’t confer any rights when there has been independent creation or reverse engineering.

A History of Trade Secrets in the United States

Though the concept of a trade secret did not get legal recognition in the United States until the first half of the 19th century, there is evidence that the principle of trade secrets existed during the Roman Empire. In the United States, trade secrets were protected exclusively under state contract law for nearly two hundred years, from 1837 until 2016, when Congress enacted the Defend Trade Secrets Act. As early as 1979, though, a number of states adopted the provisions of the Uniform Trade Secrets Act (UTSA). Congress passed a federal law in 1996 providing criminal penalties for the theft or misappropriation of trade secrets, but a person or company could not seek financial compensation for such an infringement until the 2016 legislation.