Key Takeaways

  • Trade secrets include confidential business information such as formulas, processes, algorithms, and customer lists.
  • Protecting trade secrets requires both internal policies (confidentiality agreements, restricted access, training) and external safeguards (NDAs with third parties, physical security, and IT controls).
  • U.S. law protects trade secrets under the Defend Trade Secrets Act (DTSA) and state-level Uniform Trade Secrets Acts (UTSA).
  • Trade secret protection is indefinite as long as secrecy is maintained, unlike patents which expire after a set term.
  • Misappropriation of trade secrets can lead to civil lawsuits and criminal penalties, highlighting the importance of proactive protection.
  • Companies should regularly audit and update their trade secret protection policies to adapt to new technologies and workplace risks.

You should know how to apply for trade secret protection if your company possesses valuable information that could damage the business if it becomes known to others. A trade secret must consist of previously undisclosed information with commercial value, and the business must have taken reasonable steps to protect the secrecy of this information. In the U.S., trade secrets are protected by federal and state criminal statutes, state civil statutes, and common law.

What Is Considered a Trade Secret?

Trade secrets commonly fall into two main categories. The first is technical information, including the processes you use for manufacturing, business and financial information, product formulas and designs, and unique computer code. The second is customer information, including lists of clients and their preferences, marketing and business plans, and information about pricing.

Common examples of trade secrets include product formulas and recipes, algorithms, and distinctive formulation and production methods.

Ask the following questions when determining whether a piece of information constitutes a trade secret:

  • Do others outside of the company know the information?
  • Has the information been widely shared with employees, vendors, and others within the company?
  • Have you already taken steps to keep the information secret?
  • What value does the information have for your business?
  • What value would it have for your competitors?
  • How much time and money did your company spend to create or gather the information?
  • How challenging would it be for others to obtain or copy the information?

Legal Framework for Trade Secret Protection

Trade secrets are primarily protected under two legal frameworks in the U.S.:

  • Federal Law (DTSA): The Defend Trade Secrets Act of 2016 created a federal cause of action for trade secret misappropriation, allowing companies to file cases in federal court. This law also provides remedies such as injunctions, damages for losses, and in some cases, exemplary damages and attorney’s fees.
  • State Law (UTSA): Most states have adopted the Uniform Trade Secrets Act, which harmonizes the definition of trade secrets and remedies across jurisdictions.
  • Criminal Penalties: Under the Economic Espionage Act, theft of trade secrets can lead to fines and imprisonment.

Companies should understand that trade secret protection is not automatic; courts will only enforce protection if the business can show it took reasonable steps to keep the information secret.

What Steps Can I Take To Protect Trade Secrets?

Every company should have a written policy in place about how employees and other stakeholders handle confidential information. Establish a policy to protect your trade secrets and make sure all your employees know about and comply with the policy. The goal of the policy is to keep competitors from accessing the secret information.

A trade secret policy is critical because employees are often the source of revealed trade secrets, whether they do so inadvertently or for personal gain. They are less likely to reveal this information if they understand the inherent risks of doing so.

The policy should also delineate a system for marking documents that contain trade secrets. This prevents employees from unveiling trade secrets accidentally and allows you to prove that a document was purposefully disclosed. The most valuable trade secrets should be isolated with limited access. This is especially important for computer files that contain trade secrets.

Distribute a copy of the trade secret protection policy and explain its contents to all new employees. Be clear that exposure of trade secrets on the employee's part will result in legal action and termination of employment. Employees with access to trade secrets should also be required to sign confidentiality agreements.

When working with third parties, including vendors, computer programmers, financial advisors, and other consultants, require them to sign a confidentiality agreement. This allows you to share the trade secrets they need to assist and advise your business without risking an information leak.

You may want to keep the public from entering your facilities if trade secrets are visible there.

Practical Strategies to Safeguard Trade Secrets

In addition to written policies, businesses can take several practical measures to strengthen trade secret protection:

  1. Employee Training: Conduct regular training to remind employees of their confidentiality obligations and update them on evolving risks.
  2. Digital Security: Use encrypted storage, multi-factor authentication, and role-based access controls for sensitive data.
  3. Physical Security: Restrict entry to areas where trade secrets are visible or stored. Surveillance and visitor logs can further reduce risks.
  4. Vendor and Contractor Controls: Always use NDAs and clearly limit the scope of access granted to outside partners.
  5. Exit Protocols: During employee offboarding, remind departing staff of their confidentiality obligations and recover devices or materials that may contain trade secrets.

By combining legal safeguards with practical controls, companies can show courts that they exercised “reasonable efforts” to maintain secrecy—an essential requirement for trade secret protection.

Why Should I Protect Trade Secrets?

Your company's trade secrets contribute to your edge in the marketplace. Keeping this information confidential can also drive innovation and increase profits by attracting investors who are interested in your intellectual property.

Unlike other forms of IP, trade secrets do not need to be legally registered to be legally protected. Instead, you should use internal classification systems to avoid the public disclosure associated with patents and other forms of IP protection.

To understand the difference between trade secrets and other types of IP, consider Google's PageRank algorithm. The algorithm itself is considered a trade secret, while the process the site uses to rank pages is patented and the name of the software is trademarked.

Patent protection can only be obtained for certain designs, processes, and inventions. Trade secret protection is available for any information or idea that is secret and gives your company a competitive edge. While trade secret protection is indefinite, patent protection only lasts for 20 years in the U.S. Having a trade secret doesn't protect others from independently developing the same information, unlike a patent.

Risks of Trade Secret Misappropriation

Failure to secure trade secrets can result in serious consequences, including:

  • Loss of Competitive Advantage: Once disclosed, a trade secret loses protection and competitors may replicate it without consequence.
  • Financial Harm: Misappropriation can result in lost revenue, diminished market share, and reduced investor confidence.
  • Reputational Damage: Public disclosure of confidential information can erode customer trust.
  • Legal Liability: Companies may face costly litigation if accused of failing to properly protect sensitive third-party information.

High-profile cases demonstrate that even well-known corporations are vulnerable if safeguards are inadequate. For example, courts have awarded multimillion-dollar judgments in disputes over stolen formulas, software code, and client lists.

Frequently Asked Questions

  1. What qualifies as a trade secret?
    Any confidential information that gives a business a competitive edge, such as formulas, methods, algorithms, or customer lists, can be a trade secret.
  2. How long does trade secret protection last?
    Trade secret protection lasts indefinitely as long as the information remains secret and reasonable measures are taken to protect it.
  3. Do I need to register trade secrets with the government?
    No. Unlike patents or trademarks, trade secrets are protected through confidentiality and security measures, not registration.
  4. What happens if someone steals a trade secret?
    Victims can sue under the DTSA or state law, seeking injunctions, damages, and sometimes attorney’s fees. Theft may also result in criminal charges.
  5. How do trade secrets differ from patents?
    Patents require public disclosure and last 20 years, while trade secrets remain protected indefinitely without disclosure, provided secrecy is maintained.

If you need help with trade secret protection, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.