A trade secret clause refers to a provision that prevents a company's trade secret from being disclosed to an unauthorized party. By keeping a trade secret confidential, such a clause enables a company to maintain an edge over its competitors.

While protecting a trade secret is important for the survival and success of a business, it also has certain limitations. It is essential that you carefully consider the pros and cons of a trade secret clause before you create one. Creating a non-disclosure agreement is one of the most common methods of protecting a trade secret.

What Is a Trade Secret?

A trade secret is a piece of information that a company considers valuable and wishes to keep confidential to gain and maintain a competitive advantage. Such information can be any of the following:

  • Formula
  • Business plan
  • Financial information
  • Client list
  • Unannounced product
  • Pattern
  • Device.

For a piece of information to be legally regarded as a trade secret, it must meet the following requirements:

  • It must be secret or shared confidentially among authorized parties.
  • It must provide commercial value as a result of being secret.
  • Its owner must have made reasonable efforts to keep it secret.

Many large companies take extreme measures to protect their trade secrets. For instance, it is believed that only two Coca-Cola executives know the secret recipe for the world-famous soft drink at any time. Regardless of whether this belief is true, the company certainly does not take the protection of its trade secret lightly.

Advantages and Disadvantages of Trade Secret Protection

When you are deciding whether to obtain trade secret protection, you should consider the pros and cons of doing so compared to other intellectual property tools.

Advantages

  • Does not involve any registration cost.
  • Does not have a time limit.
  • Becomes effective immediately.
  • Does not require registration with or disclosure to the government.

Disadvantages

  • Does not protect against reverse engineering if the secret is embodied in a product.
  • Not attainable if the confidential information is publicly disclosed.
  • Only valid against improper acquisition, use, or disclosure of the secret.
  • Provides weaker protection than a patent.
  • Does not provide protection against infringement by people or businesses that independently conceive the same idea.

How to Protect a Trade Secret

In today's world, the rapid rate at which information is duplicated and shared makes the task of protecting a trade secret significantly more challenging. To meet the challenge, you need to take the following actions:

  • Identify all your trade secrets and implement a policy and program to protect them.
  • Educate your employees about the purpose and importance of trade secrets, and clearly explain the policy and program to them.
  • Carefully decide which employees have to know or use your trade secrets, and restrict access to the information on a “need to know or use” basis.
  • Apply technological and physical restrictions to trade secret access.
  • Restrict and monitor public access to places where your trade secrets are kept.
  • Mark all documents that contain your trade secrets as “secret” or “confidential” to prevent accidental or inadvertent disclosure.
  • Sign confidentiality agreements with every employee or external party who has direct or indirect access to your trade secrets.

Using a Non-disclosure Agreement

Also known as a confidentiality agreement or a trade secret agreement, a non-disclosure agreement (NDA) is a legally enforceable agreement that obligates the parties involved to keep certain information secret. This type of agreement can be used as a tool for protecting a trade secret or ordinary confidential information.

However, an NDA may be void if it is considered a restraint of trade. Basically, a restraint of trade happens if the covenantor's future ability to conduct trade with parties who are not involved in the contract is restricted. Unlike a public policy, it is regarded as prima facie void and only rebuttable if there is evidence showing the restraint is reasonable.

The covenantee is the party responsible for proving reasonableness. He or she must show that the restraint of trade is in the interest of the contracting parties and the public and does not exceed the extent necessary to protect their interest.

You should include an NDA clause in all kinds of contracts, whether you are entering into an agreement with:

  • A customer
  • A shareholder
  • An employee
  • A temporary employee
  • An intern
  • Anybody else who may come into contact with your trade secrets.

If you need help creating a trade secret clause, 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, Stripe, and Twilio.