One of the most important things that a company can do to maintain its value is to take thoughtful steps to protect its intellectual property, its “secret sauce,” so to speak, that sets the product or company apart and makes it valuable to consumers and investors. There are four main types of protection for intellectual property: patents, copyrights, trademarks, and trade secrets. The type of intellectual property protection used depends on a variety of factors, but most importantly on the type of asset that a company is looking to protect. For instance, copyrights apply to original works of authorship such as poetry, films, or books, but can also cover things like computer software or architecture. Trademark protects slogans, logos, and brand names that help users identify the source of goods. Patents and trade secrets, on the other hand, protect an inventor’s ideas.
This post provides an overview of trade secrets–what they are, how they differ from patents, and what can be done to protect and maintain them.
What is a Trade Secret?
A trade secret can be nearly anything you find to be valuable that you keep secret and is not generally known by others—it could be a formula, code, product specifications, a manufacturing technique, supplier information, customer information, or other information about your product or service. Examples of well-known trade secrets include the Google search algorithm and the recipes for Coca Cola—which the company famously keeps hidden in a vault—and the eleven herbs and spices of Kentucky Fried Chicken. Trade secrets could also be source code, chemical formulas, information learned in research and development, or computing processes.
Trade secrets are protected under both state and federal law. The most important criteria for qualification as a trade secret is, unsurprisingly, secrecy. Under federal law, and in nearly every state, in order to claim a “trade secret” the owner must show “reasonable” efforts to maintain the secrecy of the information and that the information derives value from its secrecy. What constitutes “reasonable” efforts will vary considerably based on the circumstances, but some examples include the use of non-disclosure agreements, encrypted storage, encrypted message systems, or physical barriers such as a locked safe. In some scenarios, information that is not known to the public but can be readily ascertained, for instance, by reference to trade journals, reverse engineering, or similar processes, may not be protectable as a trade secret.
Another important aspect of a trade secret is its value. It is not enough for information to be secret, it must also be valuable and derive value from the fact of its secrecy. For instance, the Google search engine algorithm is enormously valuable to Google because it is a secret and Google’s competitors (or even individual web surfers) cannot copy it and offer their own versions of the search engine—they are forced to use Google or develop their own algorithm.
What is the difference between a Trade Secret and a Patent?
Patents and trade secrets are on opposite ends of the intellectual property spectrum, although both protect their owners’ ideas and inventions. While a trade secret derives its value from the fact of its secrecy, a patent derives value from detailed public disclosure of the process, invention, or other information, vis a vis the patent. In exchange for public disclosure, a patent gives its owner, effectively, a monopoly over the material disclosed in the patent for 20 years in the United States. This allows a patent holder to commercialize the disclosed invention with protection against the invention being copied and sold by others. On the other hand, a trade secret gives its owner similar protection from third parties making use of the secret, but only if the owner has kept the information out of the public domain. The trade secret owner must establish that the trade secret meets the definition of a “trade secret” under applicable law and demonstrate that the third party actually learned the trade secret from the owner. This leaves room for independent development of the same or similar ideas. In contrast, with a patent, the patent holder is protected even from others’ independent development within the scope and region covered by the patent. While patents might provide greater certainty in terms of the scope of an invention, the benefit to trade secret protection is that it can last for as long as the invention is valuable provided that secrecy is maintained over time.
What Can I Do to Create and Protect a Trade Secret?
If you have information that you consider to be a trade secret, the most important thing to do is to take measures to limit and safeguard access to that information. For instance, if there are certain employees who do not need to know the information to do their job, you can prevent those employees from gaining access to it using firewalls, or even physical barriers. For employees that do need access, you can use confidentiality agreements, or build confidentiality provisions into the employee’s contract. When dealing with third parties, make sure never to disclose the information without the protection of a non-disclosure or other enforceable confidentiality agreement. You can also implement cyber security to ward of cyber-attacks and hacking. It is also prudent to document the measures you have taken to protect the secrecy of your trade secrets—if you are ever involved in litigation, that information may be invaluable. To learn about some of the key mistakes to avoid in protecting your trade secrets, please see this Cooley GO post.