Trade Secret Agreement Clauses and Legal Protections

Key Takeaways

• A trade secret agreement protects confidential business information from unauthorized disclosure or misuse.
• Effective agreements clearly define what constitutes a trade secret, outline obligations, and specify duration and enforcement terms.
• Trade secret protection does not extend to information discovered independently or through reverse engineering.
• NDAs and confidentiality clauses are critical tools to enforce trade secret agreements with employees, vendors, and partners.
• Courts consider reasonableness, scope, and duration when assessing the enforceability of trade secret clauses.

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.

Trade Secret Agreement vs. Patent Protection

While both patents and trade secret agreements protect valuable business information, they serve different strategic purposes:

A business may opt for trade secret protection when the innovation cannot easily be reverse-engineered and when indefinite protection is more valuable than limited exclusivity.

Trade Secret Clauses in Employment and Vendor Agreements

Trade secret clauses are commonly embedded within broader agreements, including:

• Employment Contracts: Prevent current or former employees from disclosing or using proprietary information gained during their employment.
• Independent Contractor Agreements: Extend similar protections to freelancers, consultants, and temporary workers.
• Vendor and Supplier Agreements: Protect proprietary processes or shared materials during product development or service delivery.
• Joint Venture or Licensing Agreements: Ensure both parties protect each other's confidential data throughout the business relationship.

To remain enforceable, these clauses must be narrowly tailored, avoid overly broad restrictions, and be supported by legitimate business interests.

Enforcing a Trade Secret Agreement

Enforcement of a trade secret agreement often hinges on demonstrating that:

• The information qualifies as a trade secret under applicable law (e.g., the Defend Trade Secrets Act or state Uniform Trade Secrets Act).
• Reasonable measures were taken to keep the information secret.
• The opposing party misappropriated the trade secret through breach, theft, or unauthorized disclosure.

Courts may grant injunctive relief to prevent further misuse, monetary damages for losses, or even punitive damages in cases of willful misappropriation. Employers are advised to document protective measures, track access to sensitive information, and act quickly upon discovering a breach.

Key Elements of a Trade Secret Agreement

An effective trade secret agreement should clearly define the scope of protection and set enforceable boundaries for parties. Core elements include:

• Definition of Trade Secret: Specify what information is deemed confidential—such as formulas, algorithms, marketing strategies, or customer lists.
• Obligations of the Receiving Party: Outline duties not to disclose, use, or reproduce trade secrets except as permitted.
• Duration of Obligations: Establish how long confidentiality obligations apply—often beyond the end of employment or a business relationship.
• Permitted Disclosures: Clarify exceptions, such as disclosures compelled by law or already publicly known.
• Remedies for Breach: State the legal remedies available if the agreement is violated, including injunctive relief, monetary damages, and legal fees.
• Jurisdiction and Venue: Identify which state’s laws govern the agreement and where disputes will be resolved.
• Return or Destruction of Materials: Require the return or certified destruction of all trade secret materials upon termination of the relationship.

Frequently Asked Questions

1. What is the purpose of a trade secret agreement?
   It legally obligates individuals or entities to keep specific confidential information secret, protecting a company’s competitive edge.
2. Can a trade secret agreement protect all types of information?
   No. Only information that is secret, provides economic value from that secrecy, and is subject to reasonable protective measures can be protected.
3. How long does a trade secret agreement last?
   It varies but often lasts as long as the information remains a trade secret. Some agreements define specific post-termination durations.
4. Are trade secret agreements enforceable in court?
   Yes, if the agreement is well-drafted and the information meets trade secret criteria, courts can enforce it through injunctions and damages.
5. What happens if trade secret information becomes public?
   Once public, the information typically loses its trade secret status, and the agreement may no longer provide enforceable protection.

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, Menlo Ventures, and Airbnb.