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What is a Trade Secret and Why Do I Want One?

A “trade secret” is the label that American law gives to the legally-protectable, confidential business information you have developed or acquired–information that gives your business its competitive advantage.

You may be sitting on a lot of different types of information that can qualify as a “trade secret.” Assuming you have taken precautions to lock it down, the law can help if someone tries to steal it from you.

Trade Secrets You May Have Known and Loved

You’ve almost certainly interacted with some very famous products and services that are protected as trade secrets, like:  

  • Coca-Cola’s formula;  
  • KFC’s original blend of 11 herbs and spices recipe;
  • Google’s search algorithm; and
  • the process for making WD-40, a well-known rust-removal spray.

Unlike patented inventions, which the law protects only after they are publicly set out and deemed worthy by the U.S. Patent & Trademark Office, trade secrets are protectable because their owners took steps to keep them safe from prying eyes. 

English author G.K. Chesterton famously wrote, “Strike a glass, and it will not endure an instant; simply do not strike it and it will endure a thousand years.” This fragile-resilient paradox applies, in its way, to trade secrets. 

If you take the proper precautions—precautions that courts deem good enough, when compared to other businesses in your field and the available technology—you can keep your business information confidential indefinitely. In this way, it can give you its competitive advantage for longer than American patents can protect you. 

But once your business trade secrets get out, you may not be able to rein them back in or stop a competitor from profiting off of them (or the hard work that you put into developing them). 

So it is in your best interests to familiarize yourself with the legal protections that the law gives to trade secrets and what the law asks of trade-secret owners, in return. 

How does your confidential information get protection as a trade secret?

If your business has a collection of data, a process, a formula, or some other information that: 

  1. is worth something to your business (in legal speak, “has economic value”); 
  1. isn’t widely known outside your business; and 
  1. has been locked down by your using “reasonable measures,” then …

Congratulations, you have a trade secret! 

But how exactly do you keep it?

Like so many other legal concepts, the answer is, “it depends.” Courts want to see that you’ve taken “reasonable” steps – as measured against others in your field – to keep your business information protected from unnecessary sharing both inside and outside your company. Remember that the courts will never put a stronger lock on your confidential information than you use yourself to protect your business secrets.

Examples of “reasonable measures” a court would look for are: 

  • non-disclosure agreements (“NDAs”) not just with necessary outsiders (like potential investors or collaborators) but also with contractors, and even your own employees, to keep them from walking off with the crown jewels of your business;
  • indications that you have given some thought to which employees or vendors absolutely “need to know” your business secrets and which do not, and that you have put limits on how to keep the non-essential folks from accessing your information, for example, 
  • putting in writing your employee policy against unauthorized access and distribution of your business secrets; 
  • employee training sessions about the importance of preserving secrecy; 
  • posted reminders about not discussing business secrets in common spaces;
  • employee onboarding that includes signing an NDA and emphasizing the seriousness of the company’s confidentiality needs;
  • employee exit interviews that collect access cards, passwords, and emphasize the ex-employee’s continuing obligation to keep the company’s confidential information confidential from the public and any new employer;
  • restricting access to categories of confidential information based on employee job tasks, e.g., your Chief Chemist needs access to all of the formulas and technical data for your products, but does not need access to your customer lists or shipping records, while the opposite is true for your Shipping Manager;
  • written manuals to control distribution / return of files containing your business secrets, keycards allowing employee access to rooms containing business secrets, devices that have access to those secrets; and
  • always getting a signed NDA with a new vendor or business partner before disclosing your confidential information;
  • physical security measures like placing your business secrets in locked rooms or cabinets, and keeping non-essential folks from accessing those spaces;
  • digital safeguards such as password-protecting the computer systems that contain your secret business information, partitioning your systems, segmenting access, and using encryption, firewalls, and virus protection to protect yourself from outside hackers/interceptors as well as curious employees who do not “need to know.”  

Should I try to protect my business advantage by using trade-secret protection or should I just tell the government everything to get a patent? 

Let’s go over the differences between trade secrets and patents once more:

Trade secrets are not registered with the government and so do not require a formalized application process, payment of fees, or back-and-forth with the U.S. Patent & Trademark Office to get your legal rights recognized; this means you skip the:

– 2-5 years of legal work to get your patent application examined and issued,
– requirement that you prove your invention to be “novel” and “non-obvious,”
– publication of your secret idea/concept/business method so that everyone knows what makes your product or service special or profitable;
– payment of fees to get the patent issued as well as to keep it in force at the 3 1/2, 7 1/5, and 11 1/2 year anniversaries of the patent issue date,
– loss of your rights after 20 years (when most patents expire); 

Instead:

  • Trade secrets last for as long as you keep them secret (potentially decades longer than a patent) and no one else figures it out on their own (you can’t stop someone from using your secrets if they invest time and money and discover your secret process / formula / data set independently).
  • Trade secrets can include categories of information that the U.S. Patent & Trademark Office says may not deserve a patent (instance, the secret recipe that might be “obvious” to a trained chef, a database of client information you painstakingly assembled, the particular steps you took to make your product which makes it less expensive to produce).

Bottom line: When you are deciding whether to apply for a patent or keep a trade secret, ask yourself: 

  1. Is this information patentable?
  1. Is my business secret something my competitors can reverse-engineer or is it hard to figure out? 
  1. Will my business secret still be valuable 2-5 years from now (when a patent may issued)?
  1. Will my business secret still be valuable more than 20 years from now, after a patent will expire?
  1. Do I have the funding to pay for the patent application process, or is that money better spent on reasonable measures to maintain secrecy and to further develop the business?

An experienced trade secret attorney can guide you in answering these questions, but in the end, its your business asset, and your decision.

What if someone steals my trade secret? 

Trade secret “misappropriation” is when someone improperly acquires, discloses, or uses your confidential business information without your consent. This can include actions like as stealing documents, breaching NDAs to use your trade secrets without your permission, disloyal employees taking and giving your trade secrets to a competitor, or hackers accessing and publishing them. 

If you suspect misappropriation, it is crucial to act swiftly to minimize damage. Legal remedies may be available under state and federal laws, such as the “Defend Trade Secrets Act” (DTSA), which allows businesses to sue both the person who stole your trade secrets and the business that uses your trade secrets when they knew or should have known your business secrets were taken without your consent. 

Key provisions of the federal DTSA law include the ability to seek money damages, ban use of your trade secrets, and even seizure of property to prevent your stolen trade secrets from being further distributed. 

Keeping meticulous records of your trade secrets and how you have tried to protect them, as well as being able to identify who took them can strengthen your case. 

Additionally, working with a trade secret attorney can help you assess the situation and take steps to enforce your rights effectively.

Conclusion

Protecting trade secrets is essential for maintaining a competitive edge in today’s business environment. Using robust safeguards, staying vigilant, and having a plan in case you are violated can limit your business’ risks and protect your right to use and monetize your secrets for decades to come.


 

Lapple Ubell IP Law is an intellectual property law firm based in Irvine, California, dedicated to helping clients protect, manage, and enforce their innovations and creative assets. The firm provides strategic counsel on patents, trademarks, copyrights, and related IP matters for businesses of all sizes.

The author, Matt Lapple, is an experienced intellectual property attorney and a past-president of the Orange County Intellectual Property Law Association. If you have questions please contact Matt at matt@lappleubell.com or 949-756-4889.

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