What is a Trade Secret?

A trade secret is any information about a business that could give a competitive advantage to another person or business. It is something that is not generally known or easily obtainable by others which can include confidential manufacturing, industrial, or commercial information.

A trade secret can also be described as valuable and exclusive knowledge that created by the work of a person or a company that has an economic interest in keeping it. This is usually because the owner gains a competitive advantage in the marketplace as a result of the trade secret.

A trade secret is defined very broadly and can include any of the following:

  • formulas
  • practices
  • processes
  • designs
  • instruments
  • patterns
  • algorithms
  • commercial methods, such as distribution or sales methods
  • advertising strategies
  • lists of suppliers or clients, or consumer profiles
  • physical devices
  • ideas
  • compilations of information

Almost all businesses have something that could be a trade secret. It is necessary for the business to take action to keep the public or competitors from finding out about the information.

If you are trying to decide whether something is legally a trade secret, there are six factors to consider.

  • How well is the information known outside the claimant's business?
  • How well is it known by employees and others within the business?
  • What actions have been taken to guard the secrecy of the information?
  • What is the value of the information to the business and its competitors? In other words, does it offer a competitive advantage?
  • How much money or effort has been expended by the business in developing the information?
  • How easily could the information be acquired or duplicated by others in a usual way?

When a trade secret is used without permission, that is unfair. Most legal systems protect trade secrets just as they limit unfair competition among businesses.

How are Trade Secrets protected?

Trade secrets have long been protected by the law. Under the "common law" (law developed through cases in the courts), it is a principle that a person or company may claim a remedy where there has been misappropriation of a trade secret.

In an increasingly technological world where industrial espionage is more and more common, it has become necessary to update the law on trade secrets.

The Uniform Trade Secrets Act developed and became law in the late 1970s and early 1980s, to offer a clearer and more consistent legal framework for protecting trade secrets and providing remedies against unfair actions.

The UTSA is in force in 40 states and the District of Columbia, although some states have slightly modified versions of the legislation. Still, it is generally consistent across the U.S.

How does the Uniform Trade Secrets Act work?

If you believe a trade secret has been stolen, it is possible to claim a remedy under the Uniform Trade Secrets Act.

To make a successful claim the holder of a trade secret must show three things.

  1. First, you have to show that there is a trade secret that qualifies for protection. It must meet the definition of a trade secret and it must not be generally known in the commercial world.
  2. Next, the owner or holder of the trade secret has to show they have taken reasonable care to stop the secret information from being revealed to others.
  3. Finally, it is necessary to show there has been "misappropriation" of the trade secret. In other words, the information has been wrongly acquired by someone else. This means acquiring the trade secret by "improper means".

Misappropriation is the acquisition or disclosure of a trade secret by "improper means". This is defined under the Uniform Trade Secrets Act as "theft, bribery, misrepresentation, breach, or inducement of a breach of duty to maintain secrecy or espionage through electronic or other means".

Misappropriation of a trade secret includes industrial or commercial espionage, breach of contract and breach of confidence, electronic surveillance, trespass, bribery, and fraud. It does not include "reverse engineering", where a company purchases a product and finds out how it works by laboratory analysis. Misappropriation also occurs when a trade secret is acquired through improper means and then told or shown to others.

Once it has been shown that there is a trade secret and that it has been misappropriated, the owner of the trade secret may be entitled to two types of remedy.

  • Payments of money ("damages") and/or
  • A court order preventing the trade secret from being used ("injunction")

An injunction is a court order restraining or forcing a certain action and may be issued to stop someone using a trade secret. The injunction may continue for some time into the future to prevent the person or company from gaining a commercial advantage.

There are several types of monetary payments the court can award. The person who has stolen the trade secret may have to:

  • Pay for the actual losses suffered by the owner
  • The court may make them pay any profits unfairly gained as a result of the misappropriation of the trade secret. This may include future payments that the thief may receive as royalties.
  • The court may order exemplary damages if it finds there has been a willful and malicious misappropriation of the trade secret. This can be up to twice the amount of the actual damages.

Where the misappropriation of a trade secret has happened, the court may also order payment of all the legal fees for the court case. This is only where the misappropriation has been "willful and malicious".

In some cases, misappropriation of trade secrets is a federal crime, such as where there has been economic espionage sponsored by foreign governments.

As with most legal situations, a person or business that brings a court action for the misappropriation of trade secrets only has a limited time to do this, called the "statute of limitations". For trade secret claims, this runs from the time when the misappropriation was discovered or should have been discovered. From that point, you have from three to five years to bring a claim, depending on the laws in the state where the action takes place.

How Can a Business Protect Trade Secrets?

It is necessary to show that you have taken action to protect the trade secret. All businesses have some trade secrets, even if they do not realize it.

What is a reasonable effort to keep information secret varies depending on the circumstances? One example might be keeping a secret formula locked in a vault, but it is not usually necessary to have perfect security. It is usually fine to share information with employees or agents that would ordinarily be trusted.

It may be necessary to protect trade secrets by putting confidentiality agreements in place with employees or agents to make it clear that the information must not be disclosed. Employees sign an agreement promising to keep business information confidential. In such a case, it doesn't matter whether the protected information is actually used but whether the person broke the agreement to keep the information secret. A confidentiality agreement also prevents the employee from using the information after they have stopped working for the company.

In some cases, there is an obligation on employees and agents to keep information secret even when there is no official confidentiality agreement. For example, some professions are bound by a duty of confidentiality or if an employee knows that information is valuable and should be kept secret.

Some trade secrets also qualify as intellectual property, which is something valuable that is the result of creativity but that cannot be touched. Intellectual property assets can be protected by applying for copyright, patents, or trademark registration.

It is often advisable that businesses do not rely simply on the trade secrets law if they can also get intellectual property protection for their assets.

However, trade secret protection only lasts as long as the information remains secret. Once it is public, such as through the registration of a patent, it is no longer protected by the trade secret law. Also, patents and copyright only last for a limited time so they may not be the best protection for a company's valuable information.

What is the Impact of the Defend Trade Secrets Act?

The Defend Trade Secrets Act came into force in 2016 and allows trade secret owners to bring lawsuits under federal law. Each state has its own trade secrets laws, although most are some version of the Uniform Trade Secrets legislation. A case can be brought under both the state and federal law, giving plaintiffs more options.

The aim of the new legislation is to strengthen trade secrets protection due to concerns about international corporate espionage and the actions of cyber criminals. The new law is a significant development in the area of intellectual property law.

The Defend Trade Secrets Act covers a broad range of business activities, including employment contracts, particularly those containing a non-disclosure or confidentiality clause. It also covers situations where employees talk about the company's business with a business partner, the public, friends, and family.

The law also offers a new remedy for businesses that think trade secrets were stolen. It is an "ex parte seizure provision" and allows trade secret owners get an order to seize back stolen trade secrets. This may involve a trade secret owner convincing a judge to essentially close a competitor's business until the matter is resolved.

Finally, the new law has a "whistleblower" clause, giving immunity to people who report legal violations of trade secrets to the government. Businesses must now include notice of this immunity in employment contracts.

If you're reading this because you want to learn more about trade secrets, check out the UpCounsel marketplace and forum to improve your understanding of business information protection today. UpCounsel accepts only the top five percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard and Yale Law and average 14 years of legal experience, including work with or for companies like Google, Menlo Ventures, and Airbnb.