Most people think of patents and trademarks as ways to protect the intellectual property (IP) of companies. Patent and trademark laws keep us from copying IP like our favorite advertising slogans or smartphone designs, even when that information is publicly accessible.
But what happens when information is deliberately kept secret? How do companies protect information about the search engine algorithms, special products and even food recipes that we know and love? The answer is through trade secrets.
This article explains the basics of trade secrets, including what trade secrets are, why they're used and what kinds of legal protections trade secrets can offer companies.
What Counts as a Trade Secret?
Companies work with sensitive or secret information every day, but trade secrets are a special class of information. Generally, information qualifies as a trade secret if it meets these three fundamental requirements:
- The information is commercially valuable, specifically because it's a secret.
- The information is known only to a limited group of people.
- The information is kept secret through reasonable steps taken by the company or person in control of the information.
Trade Secrets are Commercially Valuable
In order for information to qualify as a trade secret, the protected information must be commercially valuable. In other words, the trade secret must provide an economic or strategic advantage over competitors.
Not all sensitive or confidential information counts as a trade secret. Employees' personal data and customers' credit card numbers are examples of sensitive data that don't qualify as a trade secret. However, keep in mind that the company may still be legally required to protect such sensitive data as if it were a trade secret, and leaking such data, even accidentally, could lead to harsh regulatory fines — not to mention serious reputational damage. Still, this data has no strategic commercial value, so it isn't a trade secret.
Trade Secrets are Known to a Limited Group
By nature, trade secrets are shared only on a need-to-know basis. Depending on what the secret information is for, companies may only choose to share trade secrets with senior managers, executives or trusted employees who have gone through special training and background checks.
In fact, many large companies are rumored to even divide full knowledge of trade secrets among different employees. That way, no single person has the full responsibility or legal liability of protecting the trade secret. This also makes it less likely that anyone can illegally share the information — trade secrets are usually only valuable when someone has access to all of the information.
Trade Secrets are Actively Kept Secret
In addition to keeping trade secrets limited to certain employees, companies must take reasonable steps to ensure that their trade secrets aren't revealed. Such steps include:
- Having employees sign a non-disclosure agreement (NDA) or similar confidentiality agreement prohibiting them from revealing trade secrets.
- Controlling digital access to secret information from both internal and external threats — for example, using advanced cybersecurity systems.
- Controlling physical access to secret information — for example, keeping trade secret-related documents and storage media in a safe or undisclosed location.
- Labeling secret information with appropriate stamps or watermarks.
How are Trade Secrets Different from Other Types of IP?
Trade secrets are a truly unique form of IP. Here are three major characteristics of trade secrets that set them apart:
- Trade secrets aren't public information.
- Trade secrets don't have to be formally registered.
- Trade secrets have limited protection.
Trade Secrets aren't Public Information
One defining characteristic of trade secrets is that they're kept private at all times. This is very different from other forms of IP such as patents, which are essentially public records of IP creation.
One well-known example is Coca-Cola, who decided to treat the formula for its world-famous beverage as a trade secret. That way, the formula ingredients could remain completely private within the company. Had Coca-Cola decided to patent its formula instead, the company would have had to submit complete details about the formula and creation process — all of which would have been made public by the US Patent and Trademark Office (USPTO).
With most other forms of IP protection, it's legal to know about and access the protected content — what's illegal is copying the IP and claiming it as your own. Trade secret protection works a little differently. Even gaining knowledge of the protected information of a trade secret could put someone in legal trouble with the IP owner.
Trade Secrets Don't Have to Be Registered
One major advantage of trade secrets is that they don't have to be registered with a central office or agency to enjoy legal protection. As soon as a company starts to take the right steps to protect its valuable intellectual property, then that IP immediately can be considered a trade secret — no applications, long processing times or renewals required.
In fact, in many cases, trade secrets can serve as a temporary protection for companies waiting to receive another form of protection like a patent. Until the patent is officially awarded, a company may choose to treat its IP as a trade secret by limiting access, having employees sign confidentiality agreements and taking steps to keep the IP physically and digitally secure.
Trade Secrets Have Limited Protection
Trade secrets seem to offer the best of both worlds: the ability to control and legally protect confidential information without having to disclose it to the public or any regulatory body. However, these unique benefits come at a cost.
First, a trade secret loses its special status as soon as the secret is made known to the public, even if it was revealed through illegal means. That said, the company can sue for compensation if the trade secret was illegally made public.
Trade secrets also don't protect against accidental disclosure. For example, if a trade secret is revealed because a fault or weakness in the company's own security systems, then the company likely will lose any legal recourse to protect the trade secret.
Finally, if it can be proven that a trade secret was discovered using publicly available information or through "fair and honest" means, then the trade secret is no longer protected. This includes obtaining trade secrets through reverse engineering and independent invention — discovering the trade secret without using any of the company's resources.
Unlike other forms of IP protection, with trade secrets, the burden is on the company to keep the information secure from IP theft.
How Long Have Trade Secrets Been Around?
When most people think of famous trade secrets, they think of relatively recent products and services that have been around for the last hundred years. But trade secrets and IP protection goes back centuries, perhaps even millennia.
One famous example of an ancient trade secret is a weapon known as Greek fire, which was invented in the 7th Century. The weapon involved a liquid substance that could be sprayed from pressurized nozzles and ignited on contact with any surface, including water. The Byzantines used Greek fire to protect their capital city — modern-day Istanbul — from constant attacks over the centuries.
As you can imagine, the recipe and process for making and using Greek fire was a closely guarded secret. Different people were trained in preparing, storing and shooting it so that no single person fully understood how to use Greek fire. In fact, the recipe was kept so secret that it was eventually lost. It would be another 500 years before the US developed a similar substance known as Napalm.
Some people even argue that trade secrets go back as far as Roman times, when people could be sued for bribing or coercing servants to share confidential information about the people or businesses they served. In other words, there's a history of protecting trade secrets that goes back much further than most other forms of intellectual property.
Examples of Trade Secrets
Modern trade secrets can include technical information, commercial information or a combination of both. Here are a few examples of trade secrets:
- Recipes and formulas: Coca-Cola, KFC, WD-40
- Algorithms and source code: Google's search engine algorithm, Netflix's movie recommender engine
- Customer lists and preferences: Amazon's product recommendation system
- Commercial processes: Academy Awards voting process, the New York Times Bestseller List
What Happens When a Trade Secret is Revealed?
Ideally, a company can keep their trade secrets from ever reaching the public. However, this isn't always the case. What companies can do when trade secrets are revealed depends on how the information was made public.
When a company is at fault for revealing its own trade secrets — for example, by accidentally publishing the data — then there's very little the company can do to protect its IP once it's made public. This is also true if someone figures out a trade secret through reverse engineering or other legal means.
If it turns out that a company's trade secret was illegally revealed, then the company has legal grounds to sue for compensation. Trade secrets are obtained illegally when a person or entity:
- Used illegal means to access the trade secret, such as bribery, theft or hacking.
- Got the information from someone whom they knew had no authority to reveal the trade secret.
- Breached an NDA or similar confidentiality agreement in revealing the trade secret.
- Accidentally obtained the information but reasonably should have known it was protected information.
Keep in mind that there's no way to re-establish a trade secret once it's made public, even if the information was revealed illegally. In the best case, a company can sue for compensation resulting from reputational damage, lost revenue and other negative monetary effects of illegally revealing the trade secret. But there's no way to re-establish the confidential information as a trade secret.
Should You Treat Your Company's IP as a Trade Secret?
Just like there are many forms of intellectual property, there are many forms of IP protection. Considering treating your IP as a trade secret if:
- Your IP is commercially valuable but doesn't qualify for a patent or trademark.
- You prefer to keep your IP secret from anyone outside the company, including regulatory agencies.
- You're willing and able to take the extra measures to ensure that your IP remains secret.
- Your IP is complex, and it's unlikely that someone else can figure out your trade secret on their own.
In short, trade secrets offer a relatively flexible, quick and straightforward form of legal protection for your IP, securing your advantage over the competition.