A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information that is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. The scope of trade secrets is virtually unlimited.
A trade secret is therefore defined as any information that is:
- Not generally known to the relevant business circles or to the public. The information should also not be readily accessible.
- Confers some sort of economic benefit on its owner. This benefit must derive specifically from the fact that it is not generally known, and not just from the value of the information itself. It must have commercial value because it is a secret. Commercial value encompasses potential as well as actual value.
- It must have been subject to reasonable steps by the rightful holder of the information to keep it secret. What is reasonable can vary depending on the specific circumstances.
A trade secret continues for as long as the information is maintained as a trade secret. However, information may no longer be considered to be a trade secret once it becomes easily accessible, is no longer properly protected, or has no commercial value.
Trade secrets can be one of the most important assets in the intellectual property portfolio of an organization. Trade secrets are at least on a par with other forms of intellectual property such as patents and trademarks. Some would argue that trade secrets are the crown jewels of any intellectual property portfolio.
Trade secrets vs confidential information
Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. However, not all confidential information within an organization qualifies as a trade secret.
Within an organization, there may have multiple levels of confidential information, with trade secrets being at the highest level of confidential information. A distinction should be drawn between widely accessible (internal) confidential information and trade secrets that require special governance. This means that the normal processes to manage confidential information may not be considered adequate for managing trade secrets.
Although the terms confidential information and trade secrets, as well as proprietary information and even know-how, are often used interchangeably, these terms are interpreted differently and the remedies for the unauthorized revelation of such information may also differ.
Although there is substantial overlap between trade secrets and confidential information, they are in fact different things.
The law on trade secrets
Generally speaking, any confidential business information which provides a business with a competitive edge may be considered a trade secret. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret.
Depending on the jurisdiction, the 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.
A trade secret is a valuable piece of information for an enterprise that is treated as confidential and that gives that enterprise a competitive advantage. European companies are increasingly exposed to the misappropriation of trade secrets. The European Commission is working to harmonize the existing diverging national laws on the protection against the misappropriation of trade secrets so that companies can exploit and share their trade secrets with privileged business partners across the EU, turning their innovative ideas into growth and jobs.
In the United States there is already a unified trade secrets law, the Uniform Trade Secrets Act, or UTSA. Interestingly, trade secret law is predominantly governed by state law. However, every state except Massachusetts and New York has adopted some version of USTA. The language of USTA, and the state statutes that have adopted it, are very similar to the language in TRIPS. TRIPS is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members.
The US however may strengthen trade secret law. The Defend Trade Secrets Act of 2015 (DTSA), for which identical bills were proposed with bipartisan support in both the House and Senate in July 2015, would significantly enhance US federal protections to curb trade secret theft and secure the value of trade secrets.
There are also two major US federal laws that govern certain aspects of trade secrets. The Computer Fraud and Abuse Act is the federal statute governing computer hacking. The Economic Espionage Act targets industrial espionage.
Shortly after the start of the 2014 Chinese New Year, China’s State Administration for Industry and Commerce (SAIC) announced the opening of a discussion regarding a revision to the 1993 Anti-Unfair Competition Law (AUCL). Since the AUCL includes provisions governing trade secret misappropriation, the upcoming revision may potentially bring important changes to the current regulatory and statutory channels for the protection of trade secrets in China. Regardless of the jurisdiction, clearly unfair practices in respect of trade secrets include industrial or commercial espionage, breach of contract, and breach of confidence. However, it is not a misappropriation of a trade secret to independently discover the secret information or to reverse engineer it from a properly obtained source.
Legal protection is not sufficient
Depending on this legal protection of trade secrets alone is not sufficient. Organizations possessing trade secrets need to take reasonable efforts to protect these assets, such as via some administrative and technical measures.
Administrative measures may include having robust trade secret policies and procedures in place. At a minimum, a reasonable policy should require that a company identify trade secret material as just that, with a big ‘Trade Secret’ stamp on the document itself. Then limit the number of people who have access to the trade secret. Educate the employees about the trade secret policy of the organization. Insist that employees with access to trade secrets sign a confidentiality, or nondisclosure, agreement.
Technical measures may include various access control and security measures to make it difficult for the trade secrets to be stolen. With the increase in cybersecurity threats, hacking, electronic espionage, malware, etc. trade secrets that are stored in electronic format must be properly protected. Various reports indicate that organizations are increasingly vulnerable to theft of trade secrets, whether due to activities by current or former employees, from corporate espionage, or from hackers or cybercriminals. It is therefore most important that organizations take reasonable steps using both administrative as well as technical measures to protect their trade secrets.
The subject matter of trade secrets
The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, marketing plans, supplier lists, client details, and manufacturing processes. Trade secrets may encompass manufacturing or industrial secrets and commercial secrets.
Perhaps the most famous trade secret is the Coca-Cola formula reputedly stored in a vault in the city of Atlanta. Google’s proprietary search algorithm; KFC’s blend of eleven herbs and spices; the compound WD-40, that distinctive spray with thousands of uses, are other famous examples of trade secrets. Trade secrets can even protect negative know-how, for example, the results of failed experiments.
A final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, but it is clear that the subject matter is very broad indeed. Trade secrets often protect valuable information that cannot be protected under other forms of intellectual property law.
Advantages of trade secrets
There are many forms of intellectual property. The advantages of trade secret protection are as follows:
- Trade secrets involve no registration costs. Obviously, there may be costs associated with the administrative, technical, and/or legal barriers the company puts in place to protect its trade secrets.
- Trade secret protection does not require disclosure or registration, unlike for example a patent which becomes public information
- Trade secret protection is not limited in time, unlike for example a patent which only lasts for twenty years;
- Trade secrets have an immediate effect, unlike for example a patent which may take a few years to be granted.
Trade secret management
It varies greatly from one company to another how they actually manage their trade secrets. Good practice however suggests:
- Assign ownership of trade secret management process to someone senior in the organization.
- Have a trade secret policy and associated procedures in place.
- Utilize confidentiality agreements as these play an important role in protecting trade secrets.
- Have an awareness and education program to ensure that all employees are aware of this trade secret policy and associated procedures. This can be included within a broader intellectual property awareness and education program.
- Determine which types of information should be deemed as trade secrets within the organization, and the qualifying criteria.
- Identify all of the trade secrets across the organization and mark these documents in the proper and professional manner. Of course, this inventory of trade secrets will change over time as new trade secrets are identified and perhaps some older trade secrets no longer warrant being treated as such.
- Classify these trade secrets in terms of the nature of the secret, the date created, responsible person(s), etc. Plus of course the value of the trade secret to the business.
- Determine the administrative, technical, and legal measures that are needed to properly protect each trade secret. The exact measures may differ from one trade secret to another.
- Ensure fit-for-purpose access control measures are in place.
- Ensure IP issues in general and trade secret issues specifically are addressed in both entry interviews of new employees and exit interviews of departing employees.
- Develop contract provisions and working mechanisms in relationships with outside business partners, including joint venture partners, to protect trade secrets.
- Conduct regular trade secret audits.
Trade secret management process & system
Trade secrets are valuable assets for any business, possibly among the most important that it possesses. It is therefore imperative that whatever trade secret management process is taken into use is fit for purpose, and adds some value to those using the process. Whatever trade secret management system or tool taken into use should properly underpin the processes, and the process, system and associated data all need to be synchronized.
A process can be seen as an agreement to do certain things in a certain way and the larger the organization, the greater the need for agreements on ways of working. Processes are the memory of the organization, and without them, a lot of effort can be wasted by starting every procedure and process from scratch each time and possibly repeating the same mistakes. A first-class trade secret process facilitates good communication between the information originator and the information receiver because they help to set and manage expectations and the consistency of the information being given.
The trade secret process defines what and how tasks are done and by whom, to ensure repeatability. This is especially important as a trade secret may originate in one part of the organization but be utilized elsewhere in the organization or even externally. The trade secret process also enables an organization to set performance criteria and measurements, which can be utilized when identifying the source or root cause of any problems.
The trade secret process must never be allowed to become static because it is there to serve the organization and not vice versa. Ways and means to take identified improvements systematically into use should exist within the organization and well-established processes can be used as a tool to accomplish this aim.
If the organization only has a handful of trade secrets to manage, then it is possible to live with some handcrafted approach. However, once the number of trade secrets increases, then it is best to put a trade secret management system in place to underpin the process. Such a software system helps ensure that the company is managing its trade secrets in an efficient and effective manner. Such a system can help to manage the trade secret management process, even if the trade secrets themselves are captured in a non-electronic format.
Trade secret audits
You typically get what you measure. It is, therefore, crucial that there are regular audits conducted. It is strongly recommended that regular audits of the trade secrets policy and procedures are conducted as well as of the trade secrets themselves and the associated protection measures in place. Companies generally gain tremendous value by taking a proactive, systematic approach to assessing their trade secret assets, trade secret policy, and associated procedures through regular audits. A proper trade secret audit should involve people with business, technical and legal skills and competencies, knowledge and experience, given the unique nature of trade secrets. The findings of these regular trade secret audits should be reported to and discussed with senior management in the organization.
Not an island
It is indeed possible to maintain a trade secret yet share it with others, so long as this sharing is well managed and the trade secret is not dispersed broadly. In today’s business environment, valuable business information must be shared with employees across diverse organization functions, plus externally with key suppliers and customers as well as with other collaboration partners. Technology transfer licenses, joint venture agreements and other contractual arrangements can provide for trade secrets to be assigned or shared on a limited basis.
It is also important to realize that the trade secret management process is not an isolated process, disconnected from other processes or activities across the organization. Good trade secret management means having a good understanding and appreciation of the links with other organizational functions and their key processes or procedures.
Some of the links worth considering are:
- Human Resources – given their role with employees.
- Sourcing & Procurement – given their role with key suppliers.
- Technology Licensing – given their role with key collaborative innovation partners.
- Research & Development – given that many trade secrets originate here.
- Document Management – for example the technical document management process of the organization.
- Legal – given the legal underpinning of trade secrets.
- Intellectual Property – given that the organization’s trade secret activities and patenting activities should be in sync.
- IT – given that many trade secrets are now in digital form and various technical solutions must be deployed to protect such trade secrets from theft by for example hackers.
- Finance – given that these trade secrets are valuable assets and impact the financial performance of the business, now or in the future.
- Facilities – given their responsibilities for the physical buildings occupied by the organization, and such issues as access and security.
- Corporate Communications – as some organizations may wish to advertise and promote the fact that they possess important trade secrets.
Trade secrets are an important, but invisible component of a company’s intellectual property portfolio of assets. They can add tremendous business value, so they need to be properly and professionally managed, and looked after. Trade secrets should be on the agenda of any in-house intellectual property function as well as on the agenda of any Legal or IP Firm advising organizations. As stated earlier, trade secret legislation is likely to strengthen in key jurisdictions, interestingly at a time when patents seem to be weakening in some locations.
Trade secrets can be the crown jewels in an organization’s intellectual property portfolio. As listed earlier, they possess some clear advantages over other forms of intellectual property. However, trade secrets only work if managed properly and they have well looked after.
Trade secrets also have some disadvantages which need to be properly understood. It is not misappropriation of a trade secret to independently discover the secret information or to reverse engineer it from a properly obtained source. An organization should therefore take a broad holistic approach to intellectual property and consider how to leverage all of the different forms that exist, such as trade secrets, patents, publications, etc. as each form has different pros and cons.
Proper and professional trade secret management requires a thorough understanding of this particular form of intellectual property, a fit-for-purpose trade secret management process underpinned by a robust trade secret management system, plus a good governance process together with regular trade secret audits.
Trade secrets are fragile and therefore require some TLC.
Donal O’Connell, IPEG Consultancy (www.ipegconsultancy.com)
This article first appeared on the IPEG blog in 2016. Some of the information contained in the article may be outdated. Check the IPEG blog regularly on the topic, search for “trade secret”.