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What Is a Trade Secret?
A trade secret is any practice or process of a company that is generally not known outside of the company. Information considered a trade secret gives the company an economic advantage over its competitors and is often a product of internal research and development.
To be legally considered a trade secret in the United States, a company must make a reasonable effort in concealing the information from the public, the secret must intrinsically have economic value, and the trade secret must contain information. Trade secrets are a part of a company’s intellectual property. Unlike a patent, a trade secret is not publicly known.
- Trade secrets are secret practices and processes that give a company an economic advantage over its competitors.
- Trade secrets may differ across jurisdictions but have three common traits: not being public, offering some economic benefit, and being actively protected.
- US trade secrets are protected by the Economics Espionage Act of 1996.
Understanding Trade Secrets
Trade secrets may take a variety of forms, such as a proprietary process, instrument, pattern, design, formula, recipe, method, or practice that is not evident to others and may be used as a means to create an enterprise that offers an advantage over competitors or provides value to customers.
Trade secrets are defined differently based on jurisdiction, but all have the following characteristics in common:
- They are not public information.
- Their secrecy provides an economic benefit to their holder.
- Their secrecy is actively protected.
As confidential information (as trade secrets are known in some jurisdictions), trade secrets are the “classified documents” of the business world, just as top-secret documents are closely guarded by government agencies. Because of the cost of developing certain products and processes is much more expensive than competitive intelligence, companies have an incentive to figure out what makes their competitors successful. To protect its trade secrets, a company may require employees privy to the information to sign non-compete or non-disclosure agreements (NDA) upon hire.
If a trade secret holder fails to safeguard the secret or if the secret is independently discovered, released, or becomes general knowledge, protection of the secret is removed.
Trade Secret Treatment
In the United States, trade secrets are defined and protected by the Economic Espionage Act of 1996 (outlined in Title 18, Part I, Chapter 90 of the U.S. Code) and also fall under state jurisdiction. As a result of a 1974 ruling, each state may adopt its own trade secret rules.
Some 47 states have adopted some version of the Uniform Trade Secrets Act (USTA). The most recent legislation addressing trade secrets came in 2020 with the Defend Trade Secrets Act, which gives the federal government cause for action in cases involving the misappropriation of trade secrets.
The federal law defines trade secrets as “all forms and types of” the following information:
Such information, according to federal law, includes:
- Program devices
The above includes, according to federal law, “tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”
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The law also provides the conditions that the owner has taken reasonable measures to keep such information secret and that “the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
Other jurisdictions may treat trade secrets somewhat differently; some consider them property, while others consider them as an equitable right.
Examples of Trade Secrets
There are many examples of trade secrets that are tangible and intangible. For example, Google Inc.’s search algorithm exists as intellectual property in code and is regularly updated to improve and protect its operations.
The secret formula for Coca-Cola, which is locked in a vault, is an example of a trade secret that is a formula or recipe. Since it has not been patented, it has never been revealed. The New York Times Bestseller list is an example of a process trade secret. While the list does factor in book sales by compiling chain and independent store sales, as well as wholesaler data, the list is not merely sales numbers (books with lower overall sales may make the list while a book with higher sales may not).
Trade Secret Basics FAQ
What every business owner should know about trade secret law.
What is a trade secret?
Trade secrets are a form of intellectual property. According to the law of most U.S. states, a trade secret may consist of any formula, pattern, physical device, idea, process or compilation of information that both:
- provides the owner of the information with a competitive advantage in the marketplace, and
- is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.
Some examples of potential trade secrets include:
- the formula for an energy drink
- survey methods used by professional political pollsters
- recipes for cookies
- a new invention for which a patent application has not yet been filed
- marketing strategies
- manufacturing techniques, and
- computer algorithms.
Unlike other forms of intellectual property, such as patents, copyrights, and trademarks, which generally require registration in order to be fully effective, trade secrets are essentially a “do-it-yourself” form of protection.
You do not register with the government to secure your trade secret; you most simply keep the information under wraps. Trade secret protection lasts for as long as the secret is kept confidential without any statutory limitations period. However, once a trade secret is made available to the public, trade secret protection ends.
What types of information can trade secrets protect?
Copyright, patents, and trademarks are fairly well-known forms of intellectual property protection. But trade secrets are another extremely useful form of protection that often protects valuable technical or confidential information. Here’s a sampling of what trade secrets can protect:
- Ideas that offer a business a competitive advantage, thereby enabling a company or individual to get a “head start” on the competition. This might include, for example, an idea for a new type of product or marketing approach.
- Competitors’ knowledge that a product or service is under development and its functional or technical attributes including, for example, the workings of a new software program.
- Valuable business information such as marketing plans, cost and price information, and customer lists.
- So-called “negative know-how,” meaning information learned during the course of research and development on what not to do or what does not work optimally. Often, this information is almost as valuable as the products or techniques that do work.
- Virtually any other information that has some value and is not generally known by competitors. This might include, for example, a list of customers ranked by the profitability of their business.
What rights do trade secrets confer?
A trade secret owner can prevent the following groups of people from copying, using, or benefiting from its trade secrets or disclosing them to others without permission:
- People who are automatically bound by a duty of confidentiality not to disclose or use trade secret information, including any employee who routinely comes into contact with the employer’s trade secrets as part of the employee’s job. This would include, for example, a member of the Board of Directors or leadership team of a company.
- People who acquire a trade secret through improper means such as theft, industrial espionage, or bribery.
- People who learn about a trade secret by accident or mistake, but had reason to know that the information was a protected trade secret.
- People who sign nondisclosure agreements (sometimes used called confidentiality agreements” or “NDAs”) promising not to disclose trade secrets without authorization from the owner. This may be the most effective way for a trade secret owner to establish a duty of confidentiality. To learn more, see Using Nondisclosure Agreements to Protect Business Trade Secrets.
There is one group of people that cannot be stopped from using information that’s protected under trade secret law. These are people who discover the “secret” independently, that is, without using illegal means or violating agreements (such as NDAs) or state laws.
For example, it’s not a violation of trade secret law to analyze (or “reverse engineer”) any lawfully obtained product and determine its trade secret.
Imagine, for example, that XCEL Glue is a popular adhesive that is made from a trade-secret-protected formula. Phil, a chemist, analyzes the contents of XCEL, determines its composition, and recreates the formula. Phil can legally use this information to make and sell his own glue. Similarly, Phil could attempt to determine XCEL’s customer list based on publicly available information, such as the names of people who follow XCEL on Facebook.
How can a business protect its trade secrets?
Simply calling information a “trade secret” will not make it so. A business must affirmatively behave in a way that proves its desire to keep the information secret. This means taking certain precautions over secrecy. Some companies go to extreme lengths.
The formula for Coca-Cola (perhaps the world’s most famous trade secret) is kept locked in a bank vault that can be opened only by a resolution of the Coca-Cola Company’s board of directors. Only two Coca-Cola employees ever know the formula at the same time; their identities are never disclosed to the public and they are not allowed to fly on the same airplane.
Fortunately, extraordinary trade secrecy protection measures are seldom necessary. Although you should take reasonable precautions to protect any information you regard as a trade secret, you do not have to turn your office into an armed camp to do so.
Sensible precautions include marking documents containing trade secrets “Confidential,” locking trade secret materials away after business hours, maintaining computer security and providing access to secret information only to people with a reasonable need to know. These actions would show a court that you intend to maintain secrecy.
The most common and most effective way to protect trade secrets is through use of nondisclosure agreements (NDAs). Courts have repeatedly reiterated that the use of nondisclosure agreements is the most important way to maintain the secrecy of confidential information. Learn more about nondisclosure agreements, or create an NDA online.
How can a business enforce its rights if someone steals or improperly discloses confidential information?
Every state has a law prohibiting theft or disclosure of trade secrets. Most of these laws are derived from the Uniform Trade Secrets Act (UTSA), a model law drafted by legal scholars. A list of states that have adopted some version of the UTSA is provided at the end of this FAQ.
A trade secret owner can enforce rights against someone who steals confidential information by asking a court to issue an order (an injunction) preventing further disclosure or use of the secrets. A trade secret owner can also collect damages for any economic injury suffered as a result of the trade secret’s improper acquisition and use. Here are some examples of incidents that can lead to trade secret lawsuits:
- Sarah, a former employee of C-com, discloses C-com trade secrets to her new employer (whether orally or in writing).
- Mary hacks her way into the network for a computer company and downloads the specs for a new silicon chip. She sells the information to a rival computer company.
- Sheldon is a software programmer who works as an independent contractor for Diskco. Sheldon signed a nondisclosure agreement with Diskco, but later discloses Diskco secrets to a rival.
To prevail in a trade secret infringement lawsuit, a trade secret owner must show:
- that the information alleged to be confidential provides a competitive advantage, and
- the information really is maintained in secrecy.
In addition, the trade secret owner must show that the information was either improperly acquired by the defendant (if the defendant is accused of making commercial use of the secret) or improperly disclosed by the defendant (if the defendant is accused of leaking the information).
The “Inevitable Disclosure” Doctrine
In some cases, a company may prevent a former employee from working for a competitor if the company can demonstrate that employment with the competitor will inevitably lead to disclosure of trade secrets.
What makes disclosure “inevitable”? In a 1995 case, PepsiCo successfully argued that a former executive could not work as Chief Executive Officer of Gatorade/Snapple because the executive could not help but rely on PepsiCo’s trade secrets as he plotted Gatorade and Snapple’s new course, giving the competitor an unfair advantage over PepsiCo.
Some states have rejected the inevitable disclosure doctrine because it challenges an employee’s basic freedom to switch employers. In many cases, courts will refuse to apply the doctrine unless there was additional showing of bad faith, underhanded dealing, or employment by a competitor lacking comparable technology. Ultimately, this will be a highly fact-specific question for the court to determine based on the particular circumstances surrounding the employee’s knowledge.
Is stealing trade secrets a crime?
Intentional theft of trade secrets can constitute a crime under both federal and state laws. The most significant federal law dealing with trade secret theft is the Economic Espionage Act of 1996 (EEA).
The EEA gives the U.S. Attorney General sweeping powers to prosecute any person or company involved in trade secret misappropriation and punishes intentional stealing, copying or receiving of trade secrets. Penalties for violations are severe: Individuals may be fined up to $500,000 and corporations up to $5 million. A violator may also be sent to prison for up to ten years. All property used and proceeds derived from the theft can be seized and sold by the government.
The EEA applies not only to thefts that occur within the United States, but also to thefts outside the U.S. if the thief is an American citizen or corporation, or if any act in furtherance of the offense occurred in the U.S. If the theft is performed on behalf of a foreign government or agent, the corporate fines can double and jail time may increase to 15 years.
Many states have also enacted laws making trade secret infringement a crime. For example, in California it is a crime to acquire, disclose or use trade secrets without authorization. Violators may be fined up to $5,000, sentenced to up to one year in jail, or both. Under Cal. Penal Code Section 499(c), trade secret theft is categorized as essentially a form of larceny.
Frequently Asked Questions: Trade Secrets
Trade secrets are intellectual property (IP) rights on confidential information which may be sold or licensed. In general, to qualify as a trade secret, the information must be:
- commercially valuable because it is secret,
- be known only to a limited group of persons, and
- be subject to reasonable steps taken by the rightful holder of the information to keep it secret, including the use of confidentiality agreements for business partners and employees.
The unauthorized acquisition, use or disclosure of such secret information in a manner contrary to honest commercial practices by others is regarded as an unfair practice and a violation of the trade secret protection.
In general, any confidential business information which provides an enterprise a competitive edge and is unknown to others may be protected as a trade secret. Trade secrets encompass both technical information, such as information concerning manufacturing processes, experimental research data, software algorithms and commercial information such as distribution methods, list of suppliers and clients, and advertising strategies.
A trade secret may be also made up of a combination of elements, each of which by itself is in the public domain, but where the combination, which is kept secret, provides a competitive advantage.
Other examples of information that may be protected by trade secrets include financial information, formulas and recipes and source codes.
Depending on the legal system, the legal protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.
While a final determination of whether trade secret protection is violated or not depends on the circumstances of each individual case, in general, unfair practices in respect of secret information include breach of contract breach of confidence and industrial or commercial espionage.
A trade secret owner, however, cannot stop others from using the same technical or commercial information, if they acquired or developed such information independently by themselves through their own R&D, reverse engineering or marketing analysis, etc. Since trade secrets are not made public, unlike patents, they do not provide “defensive” protection, as being prior art. For example, if a specific process of producing Compound X has been protected by a trade secret, someone else can obtain a patent or a utility model on the same invention, if the inventor arrived at that invention independently.
Protection and legal framework
Contrary to patents, trade secrets are protected without registration, that is, trade secrets require no procedural formalities for their protection. A trade secret can be protected for an unlimited period of time, unless it is discovered or legally acquired by others and disclosed to the public. For these reasons, the protection of trade secrets may appear to be particularly attractive for certain companies. There are, however, some conditions for the information to be considered a trade secret. Compliance with such conditions may turn out to be more difficult and costly than it would appear at a first glance.
In order for information to be protected as trade secret, it shall meet the following criteria. The information must be secret (i.e., it is not generally known among, or readily accessible, to circles that normally deal with the kind of information in question). Absolute secrecy is not required. For example, trade secrets can be kept by several parties, as long as it is not known to other persons working in the field. It must have actual or potential commercial value because it is secret. It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements). While the “reasonable” steps may depend on the circumstances of each case, marking confidential documents, placing physical and electronic restrictions to access trade secret information, introducing a systematic monitoring system and raising awareness of employees are the measures taken to safeguard trade secrets.
A company develops a process for the manufacturing of its products that allows it to produce its goods in a more cost-effective manner. Such a process provides the enterprise a competitive edge over its competitors. The enterprise in question may therefore value its know-how as a trade secret and would not want competitors to learn about it. It makes sure that only a limited number of people know the secret, and those who know it are made well aware that it is confidential. When dealing with third parties or licensing its know-how, the enterprise signs confidentiality agreements to ensure that all parties know that the secret information must not be disclosed. The company should also take reasonable measures to keep the know-how secret, such as putting access control and security measures in place and establishing internal procedures for systematic controlling and monitoring of trade secret information. In such circumstances, the misappropriation of the information by a competitor or by any third party would be considered a violation of the enterprise’s trade secrets. However, such measures will only be effective if the products could not easily be “reverse engineered” by competitors.
In general, trade secret protection confers owners the right to prevent the information lawfully within their control from being disclosed, acquired or used by others without their consent in a manner contrary to honest commercial practice.
While the determination of such practices depends ultimately on the circumstances of each individual case, in general, unfair practices in respect of secret information include industrial or commercial espionage, breach of contract, breach of confidence and inducement to breach. It further includes the use or disclosure of a trade secret by a third party who knew, or was grossly negligent in failing to know, that such practices were involved in the acquisition of the confidential information.
In consequence, the use of a trade secret by a person who acquired that information in a legitimate business transaction without negligence is not deemed illegal. For example, a competitor may purchase a product, examine the construction or composition of the product and extract the secret knowledge embedded in the product (so-called reverse engineering). Such act is not violation of trade secret protection.
Trade secrets are property rights and can be assigned or licensed to other persons. The holder of trade secret has the right to authorize a third party to access and use the trade secret information.
However, due to the secret nature of trade secret information, it is not always easy for others to determine whether the information concerned meets the conditions for trade secret protection. Therefore, compared with a patent, it is more difficult to transfer and license confidential information and to resolve disputes which may arise. Since a potential licensee needs to access the trade secret information in order to assess its value or utility, a non-disclosure or confidentiality agreement needs to be signed between the potential licensor and licensee. Further, in order to maintain the secrecy of trade secret information, a trade secret licensor should require a licensee to take reasonable steps to keep that information secret.
Most countries provide for remedies in criminal, administrative, commercial and/or civil law, in particular, tort law, contractual law and specific legislation on unfair competition.
In general, a trade secret owner can collect damages from the person who violated the trade secret for the economic injury suffered. The trade secret laws of some countries might also permit the use of injunctions, which requires the cessation of the use of any products that have been created through the use of trade secret information contrary to honest commercial practices. In some countries, for particular cases of trade secret violation, criminal penalties are available.
According to Article 10bis of the Convention for the Protection of Industrial Property (Paris Convention), member States have to provide effective protection against unfair competition. However, the Paris Convention does not mention or define trade secrets beyond the general protection against any act contrary to honest commercial practices.
While the conditions for trade secret protection vary from country to country, some general standards on trade secret law are found in Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). According to that Article, trade secret protection is available if the following conditions are met:
- The information must be secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
- It must have commercial value because it is secret; and
- It must have been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
WIPO Lex provides easy access to legislation with respect to trade secrets from a wide range of countries and regions.
In countries with market economy systems, both in the developing and developed world, fair competition between enterprises is considered as the essential means for satisfying the supply and demand of the economy, and serving the interests of the consumers and the society as a whole. Further, competition is one of the main driving forces of innovation. The law of unfair competition, including trade secret law, is considered necessary to ensure the fair functioning of the market and to promote innovation by suppressing anti-competitive business behaviors.
Business and practical considerations
There are essentially two kinds of trade secrets. On the one hand, trade secrets may concern valuable information that do not meet the patentability criteria, and therefore can only be protected as trade secrets. This would be the case for commercial information or manufacturing processes that are not sufficiently inventive to obtain a patent (though the latter may qualify utility model protection). On the other hand, trade secrets may concern inventions that would fulfill the patentability criteria, and therefore, could be protected by patents. In that case, the company will face a choice: to patent the invention or to keep it as a trade secret.
Some advantages of trade secrets include:
- trade secret protection is not limited in time (patents last in general for up to 20 years). It may continue indefinitely as long as the secret is not revealed to the public;
- trade secrets involve no registration costs (though keeping the information confidential may entail high costs in certain cases);
- trade secrets have immediate effect; and
- trade secret protection does not require compliance with formalities or public disclosure.
There are, however, some concrete disadvantages of protecting confidential business information as a trade secret, especially when the information meets the criteria for patentability:
- If the secret is embodied in an innovative product, others may be able to inspect it, dissect it and analyze it (i.e. “reverse engineer” it) and discover the secret and be thereafter entitled to use it. Trade secret protection does not provide the exclusive right to exclude third parties from making commercial use of it. Only patents and utility models can provide this type of protection.
- A trade secret may be patented by someone else who developed the relevant information by legitimate means, for example, inventions developed independently by others.
- Once the secret is made public, anyone may have access to it and use it at will. The more people know about the trade secret, the more difficult it will be to keep it secret. Trade secret protection is effective only against illicit acquisition, use or disclosure of the confidential information.
- A trade secret is more difficult to enforce than a patent. Often, it is quite difficult to prove the violation of trade secrets. The level of protection granted to trade secrets varies significantly from country to country, but is generally considered weak, particularly when compared with the protection granted by a patent.
- Due to their secret nature, selling or licensing trade secrets is more difficult than patents.
While patents and trade secrets may be perceived as alternative means of protecting inventions, they are often complementary to each other. Often trade secret law complements patent law in earlier stages of the innovation process by allowing inventors to work on their ideas until they become a patentable invention. Moreover, valuable know-how on how to exploit a patented invention in the most commercially successful manner is often kept as a trade secret.
- When the subject matter which has been kept secret is not patentable.
- When the likelihood is high that the information can be kept secret for a considerable period of time. If the secret information consists of a patentable invention, trade secret protection could be attractive if the secret can be kept confidential for over 20 years (duration of patent protection) and if others are not likely to come up with the same invention in a legitimate way.
- When the trade secret is not considered to be of such great value to be deemed worth a patent (though a utility model may be a good alternative in countries where utility model protection exists).
- When the secret relates to a manufacturing process rather than to a product, as products would be more likely to be reverse engineered.
- Before filing a patent and during the patent prosecution process until the patent application is published by the patent office (generally after 18 months from the filing date or the priority date).
It is important to bear in mind, however, that trade secret protection may be more difficult to enforce in most countries, that the conditions for, and scope of, its protection may vary significantly from country to country and that significant and possibly costly efforts to preserve secrecy may be required. Further, it has to be kept in mind that, once the secret is made public, the protection ends. WIPO Lex provides easy access to national and regional legislation on patents, utility models, competition and undisclosed information (trade secrets).
Trade secrets are widely used by business. In fact, many companies rely heavily on trade secrets for the protection of their intellectual property (although in many cases, they may not even be aware that trade secrets are legally protected). Known examples are the Coca Cola formula and sources codes for software. It is important, therefore, to make sure that enterprises take all necessary measures to protect their trade secrets effectively. This includes:
- Firstly, considering whether the secret is patentable and, if so, whether it would not be better protected by a patent.
- Secondly, making sure that a limited number of persons know the secret and that all those who do are well aware that it is confidential information. For example, such steps can include restricting access to buildings, marking confidential documents and establishing IT security.
- Thirdly, including confidentiality agreements within employees’ contracts. Under the law of many countries, however, employees owe confidentiality to their employer even without such agreements. The duty to maintain confidentiality on the employer’s secrets generally remains, at least for a certain period of time, even after the employee has left the employment.
- Fourthly, signing confidentiality agreements with business partners whenever disclosing confidential information.
The business that holds the trade secret is responsible for making every effort it can to keep it confidential. Employees can be required to sign agreements that protect trade secrets. In particular, when contractors or employees leave, it is important to make sure that they will not compete with the business after they leave, in addition to signing a confidentiality agreement. Those agreements are known as confidentiality, non-disclosure and non-compete contracts. If those agreements are violated, an employee might face penalties, along with damages to the company. However, it has to be kept in mind that those contracts should not restrict the contractor’s or employees’ rights to earn a living.
It is possible that more than one person or entities can claim rights to the same trade secret on the same technology or commercial information if both independently developed that technology and both take reasonable steps to keep it a secret, as long as the technology is not “generally known”.
If you couldn’t find an answer to your question on this page or through the Trade Secrets homepage, then feel free to contact us.
Disclaimer: The questions and answers provided on this page serve a purely informative purpose and are not a legal point of reference. They do not necessarily represent the official position of WIPO or its member states.
Trade secrets: the hidden IP right
By Prajwal Nirwan, Associate, Miller Sturt Kenyon, London, United Kingdom
Our world is becoming ever more open and inclusive. New ideas are widely shared on public platforms and more research is being published than ever before. In this increasingly complex, highly competitive, hyper-connected world, some things that might ordinarily be protected by traditional intellectual property (IP) rights such as patents, trademarks and design rights are best kept secret.
Some of the world’s most famous trade secrets – including the Coca-Cola recipe and Google’s search algorithm – have immense value. These companies quickly recognized that the value of these particular intellectual assets lay in their secrecy, and by treating them as trade secrets they could maintain their competitive advantage.
What exactly are trade secrets?
Trade secrets are secrets that add value to a business. A generally less well-known form of intellectual property right, for many years trade secrets have been in the shadows, but today they are gaining traction as an effective way to protect certain intellectual assets. Any commercially valuable and sensitive information – a business strategy, a new product roadmap, or lists of suppliers and customers – can qualify as a trade secret. And unlike other IP rights, trade secrets can protect a much wider range of subject matter and are not limited to a set term of protection. Trade secrets are not exclusive rights like patents, and therefore cannot be enforced against anyone who independently discovers the secret. However, any unlawful acquisition or misuse of a trade secret either under breach of confidence or theft is actionable. And the proprietor of the trade secret can get compensation and an injunction in respect of such unlawful acts.
Trade secret laws around the world
Like other IP rights, trade secrets are subject to the national laws of the country in which they are protected. Unlike patents and trademarks, there are no formal requirements to register trade secrets with an official authority, but most countries have laws that deal with the misappropriation or unauthorized acquisition of trade secrets. For example, in the United Kingdom no formal definition of a trade secret exists and there is no restriction as to the type of information that can constitute a trade secret. The legislation around trade secrets is largely drawn from case law relating to breach of confidence, with effective remedies for instances in which trade secrets have been improperly acquired, disclosed or used.
In the United States, the policy on trade secrets states that they consist of information that may include a formula, pattern, compilation, program, device, method, technique or process. And to qualify as such, a trade secret must be used in business and give an opportunity to obtain an economic advantage over competitors who do not know or use it. The Defend Trade Secrets Act of 2020 strengthens trade secret protection in the United States and offers parties the option of settling disputes under either state or federal laws. While they differ in some respects, there is a great deal of similarity among state laws because almost all of them have adopted some variation of the Uniform Trade Secrets Act.
In Europe, policymakers took a major step forward in codifying trade secret laws in all countries of the European Union (EU) in June 2020 with the adoption of the EU Trade Secrets Directive. The Directive covers the unlawful acquisition, use and disclosure of trade secrets. EU member states are required to bring their domestic laws into line with the objectives of the Directive by mid-2020. According to Article 2(1) of the Directive:
“‘trade secret’ means information which meets all of the following requirements:
- “it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
- “it has commercial value because it is secret;
- “it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”
The recent adoption of policies on trade secrets by the world’s strongest economies underlines the growing significance of trade secrets in the current business climate.
Trade secrets and patents
When it comes to protecting an intellectual asset, one tough decision businesses have to make is whether to protect it with classical IP rights, for example by filing for patent protection, or to keep it as a trade secret. While in some cases the answer may not be quite so straightforward, in many instances answering the following questions can clarify a company’s thinking on the best way forward.
- Is the technology in question a patentable invention? Note that most countries do not grant patents for business methods, software (which is typically protected under copyright law), mathematical formulas, presentation of information, and the like. However, any of these assets may be protected as a trade secret!
- Is the asset in question commercially valuable and worth keeping secret?
- What are the chances of competitors being able to find out how your asset works by reverse engineering or other means?
- Is there a high risk of someone else patenting your asset?
- Is your asset something that could remain valuable for a much longer term of protection than that which is provided by a patent (usually 20 years)?
- Would the company be able to ensure its secrecy?
There are, of course, other considerations that need to be taken into account, such as costs of protection and investor interests. Both patents and trade secrets are effective forms of IP protection, but one may be more suitable than the other depending on the subject matter and circumstances. It is important that those taking decisions about IP strategy are aware that trade secrets can potentially be as valuable as patents (if not more so), if they are protected diligently and used strategically.
When it comes to protecting an intellectual asset, one tough decision businesses have to make is whether to protect it with classical IP rights or to keep it as a trade secret (photo: gorodenkoff / iStock / Getty Images Plus). Photo: pixdeluxe / E+ / Getty Images
Trade secrets: a boon for small businesses
While most large multinational companies have the resources and funds to invest in the patenting process, which can be costly and time-consuming, small and medium-sized enterprises (SMEs) often struggle with it. Trade secrets, on the other hand, are relatively straightforward, entail no registration costs or lengthy legal processes and can add real value for small businesses. That is why it is so important to raise awareness among SMEs about the value of trade secrets and how to protect them effectively. To benefit directly from trade secrets, an SME may:
- Consider keeping undetectable manufacturing techniques or hidden components in their products as trade secrets.
- Consider keeping lists of suppliers and customers as trade secrets, especially if operating in a niche business.
- Consider keeping patentable inventions as trade secrets if they are short of funds, and only file for patent protection when funding becomes available or a keen investor is identified.
- Consider licensing their trade secrets, but ensure a confidentiality agreement and enforceable contracts are in place before revealing the secrets to third parties.
- Educate their employees and decision makers about trade secrets.
Various intellectual property authorities and educational institutions around the world are reaching out to the business community to improve awareness of the usefulness and value of trade secrets, but there is still a long way to go to raise their profile and strengthen the laws surrounding them.
The WIPO Magazine is intended to help broaden public understanding of intellectual property and of WIPO’s work, and is not an official document of WIPO. The designations employed and the presentation of material throughout this publication do not imply the expression of any opinion whatsoever on the part of WIPO concerning the legal status of any country, territory or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. This publication is not intended to reflect the views of the Member States or the WIPO Secretariat. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by WIPO in preference to others of a similar nature that are not mentioned.
Trade Secrets: 10 of the Most Famous Examples
Trade secret, also called intellectual property or proprietary information, is the term used for any method, formula, device, process, or any information that gives the business a unique competitive advantage over its competition. Anything that gives you an advantage against a competitor is highly valuable and worth protecting.
Trade secrets come in an endless array of types, for example:
- R&D information
- Software algorithms
Here are some examples of famous trade secrets, many of them well-known in popular culture.
Famous Trade Secrets
The Google Search Algorithm
Google developed a search algorithm and continues to refine it. Some changes are announced but many are not. Google continues to modify its top secret algorithm to keep businesses and people from gaming the system.
It is the top search engine today and shows no signs of giving up its place.
Kentucky Fried Chicken
The secret ingredients for KFC’s original recipe were originally kept in Colonel Sanders’ head. He eventually wrote the recipe down, and the original handwritten copy is in a safe in Kentucky. Only a few select employees know the recipe, and they are bound by a confidentiality agreement.
For better protection, two separate companies blend a portion of the herb and spice mixture. Then it is automatically processed to standardize the blending before it is sent to the restaurants.
There are rumors of other requirements about the secret recipe. One says when KFC updates its security systems, the recipe is temporarily moved to secure location in an armored car escorted by a high-security motorcade.
Does your business have trade secrets that you want to protect? Not sure what to consider a trade secret? Contact an experienced intellectual property attorney today.
Coca-Cola made a choice to brand the recipe a trade secret instead of patenting it, which would have lead to the disclosure of the ingredients. Since one of those ingredients may have been cocaine, Coca-Cola decided to keep the recipe as confidential information.
This trade secret has spawned rumors of its own. One is that the recipe contains bugs or insects. Another is that two employees each know only half the recipe or that only two people know the combination to the safe where it is stored.
In case you doubt it, corporate espionage is real. In 2006, and employee and two accomplices stole the formula and tried to sell it to Pepsi. Pepsi blew the whistle and let Coke officials know what was happening. The employee and friends were arrested.
Lena Blackburn’s Baseball Rubbing Mud
Lest you think all trade secrets have to do with food, Blackburn’s Baseball Rubbing Mud is an example that does not.
The rubbing mud was developed to dull the surface of new baseballs, making them easier to grip. All the mud comes from the same place, but the business assures everyone it is on public land. It is a trade secret passed on to new generations to prevent people from walking on the source.
New York Times Bestseller List
The New York Times has the most influential book list in the country, and it will not divulge its definition of a best seller. It apparently is not merely the number of books sold since a book that has sold fewer copies than another can make the list while the better selling book does not.
It is known that the Times gets information from chain stores, independent book bookstores, and wholesalers about sales figures, but that is the extent of the knowledge. The Times refuses to release its system because it fears publishers would then use the information to manipulate sales data to their advantage.
Employees provide a non-answer when asked; they say there are “official” best sellers and “unofficial” best sellers.
Listerine is a popular example of a trade secret used in law schools.
The inventor licensed the secret formula to Lambert Pharmaceuticals. Lambert (now Pfizer) made royalty payments to the inventor’s family for over 70 years, even though the formula was revealed during that time.
Pfizer tried to stop payments after paying over $22 million for a formula that was no longer secret. It sued, saying it was no longer responsible for licensing fees. The court ruled that the contract did not stipulate that payments could be stopped if the trade secret was legitimately discovered by others, especially since Pfizer had acquired the formula when it was still secret and derived competitive advantage from it.
Originally WD-40 was developed to prevent corrosion. The chemist kept the formula secret and sold it a few years later. Even now, it is the company’s only product.
Like Coca-Cola, the secret formula has never been patented, so competitors could not discover what is in it. The company does reveal what is NOT in the formula, including a statement that there are no known cancer-causing agents.
The formula has been in a bank vault for years, only taken out to change banks, and, once, to be carried by the company’s CEO to celebrate its 50th anniversary. The CEO wore armor and rode on horseback.
The formula is mixed in three different cities around the globe before being given to the manufacturing partners. The formula has been reverse engineered, but the trade secret is kept for marketing purposes.
Rather than a marketing ploy, the recipe for Twinkies is kept as a trade secret because the company fears consumers will not understand what the ingredients really are and stop eating them or giving them to kids. Many of the constituents are harmless but have chemical names that sometimes sound hazardous to those outside the food industry.
Krispy Kreme Doughnuts
While the recipe for the Krispy Kreme Doughnut has been a trade secret for 70 years, it is not really the source of competitive advantage. Still, only a few employees have access to the recipe, and it is locked in a safe at company headquarters.
The real secret of the taste of Krispy Kreme Doughnuts is the process by which it is made. The company designed a process where the fluffy doughnuts roll out of the kitchen on an assembly line, still warm, to be sold quickly after being made.
McDonald’s Big Mac Special Sauce
The special sauce recipe was a trade secret so secret it got lost in the 1980s during reformulation. Nobody noticed it missing until an executive wanted to bring the original back. Fortunately, McDonald’s was able to retrieve the recipe from the original person or company that originally produced the sauce, as the recipe was still in the records.
Trade secrets confer a competitive advantage in a free market. Some of those secrets are no longer secrets but still function as marketing devices. Other secrets would probably seem very mundane if revealed to the public. Occasionally, as with Twinkies, the trade secret is language that could be off-putting to the intended buyer.
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